That is what Cliff Robson learned as an investment expert with financial services firm State Street a few years ago. His study of hundreds of firms announcing Lean strategies indicated that 98 percent had no discernable improvement in their results five years later.

The matter of sustaining the improvements from Lean was tackled by a handful of folks back in 2005 at what has evolved into the annual Lean Accounting Summit. Those experts, from a wide range of companies, along with a handful from academia and consulting, correctly identified traditional financial practices as the greatest barrier to Lean Manufacturing . The issue is management—not anything happening on the shop floor. How you manage the business determines results, and companies turning Robson’s gloomy data around are those that recognize that running the business as a Lean enterprise is what makes the difference.

The annual gathering of manufacturing managers and Lean enterprise experts has taken on a life of its own, and more than 500 people attended last year’s Summit, including people ranging from huge organizations such as Boeing and Parker Hannifin to smaller companies that are rapidly gaining a reputation for generating extraordinary results. This latter group includes Wahl Clipper Corp., Sterling, Ill., a grooming products maker, and Buck Knives, a knife manufacturer based in Post Falls, Idaho.

The common thread among the Lean enterprise companies (other than their tendency to make more money than the rest of the pack) is a conviction that all management—especially financial management—has to get in the game and contribute to the Lean transformation. These companies are doing away with old accounting methods, such as standard costs and annual budgeting, and replacing them with strategic pricing, target costing and ongoing cost management through a process called SOFP—Sales, Operations and Financial Planning.

Breaking silos

They also organize themselves differently, breaking up the old functional silos and replacing them with value streams—cross-functional management teams focused on providing superior value to their customers while rooting out all of the spending that does not add to that value. They have taken on the culture shock of disbanding their manufacturing, engineering, sales and supply chain departments, and instead are organizing around how they go to market.

Lean enterprises measure total spending on more of a cash basis, and evaluate their machine performance by OEE—Overall Equipment Effectiveness; they toss out old metrics having to do with labor efficiency and machine utilization. In a broader sense, they have adopted the Pogo adage—“We have met the enemy...and he is us.” After years of expecting the factory floor to change radically to meet global, low-cost competition, they have come to the inescapable conclusion that the factory floor is merely an extension of management. Manage the same way and you will get the same results. And it all begins with redefining cost and profits.

As the Lean enterprise manufacturers grow and make money in the teeth of the steepest economic downturn since the Great Depression, the necessity for rethinking how manufacturing is managed is becoming unavoidable. The traditionally managed companies—those still operating under the illusion that inventory is an asset, that standard costs are valid, that pounding on direct labor and suppliers is a worthwhile use of management time, and that setting prices based on cost rather than value is the correct approach—stand no chance against the Lean enterprises focused squarely on their value propositions for their customers.

Bill Waddell , bill@bill-waddell.com, is a consultant at Manufacturing Leadership Support, in Sterling, Ill.

Subscribe to Automation World's RSS Feeds for Columns & Departments