By John Povhe.
To many business leaders, the phrase lean finance is an oxymoron. And to other professional accountants, it can be downright foreign.
Seven years ago, I found myself in the same boat. I was the new CFO of a struggling company in a sector I knew little about — manufacturing kitchen cabinets. Lean wasn’t in my vocabulary, nor was it on the radar of management. Fortunately, our operations leadership group could see opportunity where we didn’t.
Manufacturing on the Prairies is less of an industry than it is a community. Everyone knows everyone, and employees tend to transition within seemingly dissimilar environments with relative ease. So, it should be no surprise our lean program at Superior Cabinets was actually kick-started by a handful of employees who had migrated over from the farm implement world. They saw the benefit of a culture that looked at problems differently, valued grassroots input, and captured savings to do things better. In many ways, it was a natural process that allowed us not only to survive, but thrive.
For me personally, it served as a re-education — in more ways than one. I even have my Lean Green Belt Certificate hanging on the wall to prove it. But it was also an exercise in re-evaluating my own processes and how I was adding value.
There are three main reasons why corporate accounting exists: To measure profitability (monthly and yearly); to inform shareholders, as well as the Canada Revenue Agency; and, to provide timely financial information to help guide business decisions.
Before I jumped into lean with both feet, the latter suffered from virtual paralysis. It would take us roughly 30 days to close off the previous month-end, which forced us to make decisions based on data that was, at best, a month old. We were always looking in the rear-view mirror, and consequently seldom had the appetite to change the direction we were heading. We just waited for next month’s financials on the hope and prayer things would improve.
Moving to continuous flow accounting was the big first adjustment we had to make. As opposed to waiting for the end of the month to begin working on month-end, we now do the work required for reporting daily. This means we are executing processes more frequently, leading to increased familiarity, improved efficiency and timeliness, and better information that enables smarter decisions.
Of course, we could not do this in isolation, as we rely on many different areas of the business to feed us information. We found a high level of support with our team, and valued their ideas to assist with making the process better. Through collaboration, we removed processes that did not add value, and are now able to complete our month-end in three business days with a finance team of only four.
How we manage our inventory is another example of doing a lot with a little.
Our manufacturing operations are located in a 55,000-square-foot facility, with a very fixed footprint, producing highly customized products. We have no physical room to expand, so space is at a premium.
This is a challenge we continually need our vendors to help us solve. We utilize 19 rigorous criteria for supplier assessment and, for those that are still standing, bring into place strategic partnership agreements to help us control delivery schedules and demands on storage.
Sure, we probably aren’t the easiest customer to do business with at first; but we are one of the few manufacturers I know able to turn inventory over 60 times per year. Yes, 60. That is Toyota-class inventory management. Think of the cash flow that frees up. At the moment, we produce 25 kitchens each day — roughly twice as many per square foot as other cabinetmakers.
When you hear lean experts speak (and I don’t claim to be one of them), you repeatedly hear how lean is all about empowering staff to drive continuous improvement. Until you see it for yourself first-hand, it can be a difficult concept to fully understand or — for that matter — believe.
A few months into our lean journey, one of my staff approached me with the idea of going paperless in our purchasing and payment process. She mentioned a friend working in a nearby business, who had effectively digitized records and invoicing processes. Knowing full well my own technological limitations, I sent her off to learn more. That simple cycle of conceptualize, listen, learn, trust, and improve has helped us chisel 22 physical boxes of paper records retained each year down to two, and payment of virtually all invoices has transitioned from paper cheque to electronic transfer.
These are not isolated stories. You can look at every aspect of our business and visually see the difference lean has made.
In our administrative offices, we have reduced our leased space by 43 per cent. We have added hundreds of thousands of dollars’ worth of automated, more productive machinery and equipment, many with proven paybacks of less than 16 months. All savings are not based on estimates from equipment suppliers — we work with our manufacturing leaders to build visual scorecards that track reduced spending and result in bottom-line benefit. These outcomes are then shared with staff, suppliers, and business stakeholders.
Although our plant is in the best, most organized shape it has ever been in, we are constantly looking at changes to make us even better. All in, we’ve saved somewhere in excess of $1 million to date.
For many people, accounting is an absolute practice. While numbers are finite, not all indicators of success are. Senior executives, CFOs included, must be adamant about measuring as many key performance indicators as possible in a lean implementation, but — at the same time — trust their eyes and ears (and people) to recognize the impacts that cannot be measured.
Engagement precedes improvement. Put faith in your people and the profit will come.
John Povhe is the chief financial officer of Superior Cabinets — an award-winning manufacturer of premium kitchens and cabinets, with showrooms across Alberta and Saskatchewan.