Applying Lean to the Accounting Process

Introduction

Danaher’s Jake Brake division was an old line New England manufacturing company. It was wrought with inefficiencies: high inventory turns, poor quality, delivery and productivity. Profitability was declining, and the company’s patent on its product opened the door to competition, many of whom were Jake’s angry customers. Senior management needed drastic action in order to right the ship.

In 1988, the principles of the Toyota Production System (TPS) were adopted in its manufacturing operations. Over the course of two years, drastic improvements were made to the operations, greatly improving Jake’s quality, delivery and cost position. Profitability was on the rise, and this traditional manufacturing company had a shot at survival.

The company’s senior management soon realized that by solely focusing TPS on the shop floor, there were many opportunities that were being left on the table. In fact, many of the inefficiencies on the shop floor resonated from other areas, particularly in administration. For example, Jake Brake had a commitment to deliver product within five days from receipt of order, however in some cases it took seven days for the order entry department to process a standard customer order. So the Lean focus was expanded to the entire enterprise, including the accounting function.

This case study will deal with the Lean changes made to Jake’s Accounts Payable (AP) process. The AP process was operated by three AP clerks. The department in 1988 was unorganized, cluttered, and wrought with inaccuracies and inefficiencies. Note the following data from the AP process before Lean was applied:

Productivity was extremely low due to the fact that the AP clerks were dealing with quality issues, primarily 1st pass defects. 1st pass defects are defined as any voucher that cannot pass through the AP system the first time entered without some sort of manual intervention.

As indicated above, 65% of the vouchers were deemed defective given this definition. A Pareto analysis of the defects is shown in the following exhibit:

As the data suggests, a majority of the quality errors were due to two primary reasons: (1) missing purchase orders and (2) incorrect units of measures on the purchase order vs. the invoice. For example, the purchase order may have indicated that an item was to be ordered in gallons, but is invoiced in pounds. It was determined that if these top two quality defect modes were addressed, a significant impact could be made to headcount and productivity, duplicate payments and overall efficiency.

Kaizen Process

A cross functional kaizen team was assembled to begin to look at the overall process.

The team consisted of representatives from accounting, purchasing, receiving, manufacturing, engineering and marketing. It was important to get as many cross functional representatives involved in this process; otherwise this would be viewed as an accounting exercise. So, the team members represented both suppliers and customers of the process. The team also thought it might be a good idea to bring in some of their key suppliers; however this decision was tabled until the team first looked at the problem and had a better understanding of the current situation.

Before diving into the data, it was first decided that the AP process needed to be stabilized. All three AP clerks utilized different processes and procedures when processing a voucher. A look at the pre-kaizen process is described in the following diagram:

A look at some of these processes revealed the following:

Mail Sorted: The responsibilities of the three AP clerks were divided based on the letters of the alphabet. For example, clerk #1 handled a suppliers beginning with the letters AH, while clerk #2 handled suppliers I-P and clerk #3 handled suppliers Q-Z. This sorting was deemed non-value added, as it did nothing to contribute toward the processing of the invoice.

Learn More

If you would like to know more about this Feature, its subject or the author, then please complete the form below:

Name: *

Email Address: *

Company/Organisation:

Message: *

CAPTCHA

This CAPTCHA form prevents spam

What code is in the image?: *

Enter the characters (without spaces) shown in the image.