Establishing Measurements Will Help To Define Movement
The potential of Lean/Green Accounting, Part 2
 

By Jean Cunningham, Founder and President, Jean Cunningham Consulting

In Part 1 of this series,  Jean Cunningham introduced the concept of Lean/Green Accounting. In Part 2, she discusses ways to measure Lean/Green Accounting..

Sustainability Index

Why should the establishment of Lean/Green Accounting start with a sustainability index? With the definition of green sustainability still amorphous, the idea of an index might seem absurd. It is not the only place to start, but having a concrete goal will help to excite participation, and it builds an obvious bridge to the greater sustainability field via Glenn Marshall’s scorecard, which I discussed in Part 1. Further, through such attempts to measure and the experience and insights gained therein, we can help to define the relationship between accounting and sustainability and perhaps we will help to refine the definition of sustainability itself.

Several constituents for this measure are:

• Producing product at the rate to match customer consumption; avoiding over production.

• Reusability of materials.

• Energy consumption.

• Processing errors.

• Capital and resources committed to non-lean activities (seven wastes).

• Physical waste reduction.

• Full product life cycle impact to the environment.

The idea of a single sustainability index may not prove viable or even be beneficial. Therefore, development of each of these constituents (and probably others not listed here) is useful.

What is the value of an index or measure?

1. To communicate from management to workers what is important.

2. To parse value-add data for specific management levels, departments, job cells, and individuals that aid in decision making.

3. To communicate progress toward an established objective or goal.

4. To provide communications summarizing enterprise achievements and goals.

5. To flag negative exposure points based on predefined metrics.

6. To provide historical perspective of the current state versus the past state.

7. To define a baseline for forward-looking discussions and planning.

The accounting practice is effective at recording an entity’s activities in financial terms. This is the recording of revenues, expenses, assets, and liabilities. But accounting does not have any tools to record an activity that does not happen. This failure is what often marginalizes the accounting function from the improvement efforts of a company and keeps it more focused on consumption of resources.

For instance, accountants can measure to the minute how much time manufacturing “direct labor” spends in producing product. However, they do little to measure the sale that was not made, or the accident that did not happen, or the goods that did not have to be scrapped.

The accounting response to measuring these “non-activities” is either performance to a budget or measuring trends over time. For instance, if the budget allows for $100,000 in scrap, and only $90,000 is spent, it is perceived as an improvement. (But even that conclusion may be wrong depending on the budget methods or the overall volume of activity.) An accounting trend over time might reveal that last year scrap costs were $80,000, and this year scrap costs are $90,000. While this is factually correct, it does not provide a 360-degree view of that data that would best help a company to make correct decisions to reduce scrap. There are many permutations of this “narrow perspective” theme in traditional accounting measurements.

This weakness in accounting methods is the very reason Lean/Green accounting will be challenging. In this case, accounting will always be attempting to measure the cost of activities to create an improvement, and the improvement is nearly always in terms of what was not done.

• Did manufacturing not overproduce?

• Did the work cell not make quality errors?

• Did engineering not specify non-sustaining materials?

• Did purchasing not cause our suppliers to perform wasteful activities at our request?

• Did the company not consume too much energy?

This is why it is a good idea to start with an index, or a trend, or a relationship, so what is not done is made visible.

There are some exceptions to these “not done” measurements, such as Did we ride bikes to work?; Did we buy carbon tradeoffs?; and Did we add energy to the power grid? But, most of these at the current level of practice and understanding are outside the scope of the internal workings of a company.

Cascading Box Scores

Box scores, metrics, and balanced score cards are increasingly prevalent in business. In Lean, the box score cascades throughout the organization with measures that are appropriate to the activities occurring at different points in the organization.

For instance in the financial measures, the top-level measure might be ROI (Return on Investment). Since this measure is a combination of many, many factors, the cascading box score elements within the organization might be the sub-elements. For instance, the measure in the sales function might be new orders, or lead follow-up, or other factors that help improve ROI though sales activity. Or, in operations the box score element might be batch size or lead-time reduction that might reflect the amount of inventory invested.

Likewise, if the top-level sustainability measure is green-house-gases (GHG) produced, then the box score would have elements that are actionable at different points in the organization. For instance, an element might be the measurement of renewable components used in product development. Or, the measurement of the reduction in scrap materials or energy used on non-value add activities in operations. 

Within these box scores, there are also potential sustainability measures that are actionable at different points of the organization. For instance, ROIC (Return on Invested Capital) is a common top-level measure. At many places in the organization, there are associated processes and activities that can be improved through waste elimination or improving sustainability factors. If the results of any of these improved processes are included in measures, it will positively impact ROIC at the top level. At the operating level, the measure might be based on first-pass yield, machine set up time, or batch size. These measures are increasingly based on the performance of the process, not just the end result. Similarly, if the top-level sustainability measure is based on the carbon footprint, the operational measures in the organization might be:

• Square footage.

• Pounds of paper consumed.

• Units of scrap material.

• Number of people not driving a car to work.

These are some of the measures that might be under control of the operating group, which — when performed consistently well — will result in a reduced carbon footprint.

One type of cascading box score is a SQDC (Safety, Quality, Delivery, and Cost) board, typically found on the Lean factory floor. Change this board to a SQDCG board adding “Green” as a key measure and encourage the creativity of the cell/factory to find ways to encourage sustainable business practices.

Cascading Box Scores

Below are samples of sustainability index ideas.

1. Produce to Takt Time (excess production  X  material cost  X  1.75% =
    excess cost)

a. Takt is the rate of customer demand

b. 1.75% is a macro number that represents the total cost of
    purchasing and managing materials; if you have a closer estimate
    for your company, use that, but remember to include all the
    indirect material cost of transportation, storage, insurance, etc.
    (Reference: M. Harding and M. L. Harding, “Purchasing”, 2nd
    edition, Barron’s, 2001, p. 198)
 

2. Materials Reuse Index

a. Resolves to natural
    state = 110%

b. Reuse = 100%

c. % Recyclable =
    50%

d. % Recycled = 80%

e. Not recyclable =
    0%

3. Utility % on Value-Add
    Activities

a. This would be a
    measure where you create a baseline of energy spend on the
    value-add activities within the company as a % of total energy
    spend. 

b. As non-value add steps are eliminated, you would take the energy
    cost eliminated out of the baseline to show a higher % of utility on
    value-add activities.

4. $ spent on product liability, workers compensation, scrap, rework

a. Reflects errors in process that consume resources.

5. Capital spend on 7 Wastes

a. 7 wastes = defects, inventory, processing, waiting, motion,
    transportation, overproduction

6. Non-customer Travel

a. Separate customer
    contact based travel
    from total travel as
    a %.

b. Assumes that
    customer travel is
    necessary to grow the
    company and meet
    customer needs.

c. Assumes non-customer travel is not value-add and should be
    minimized to reduce excess energy use and excess time for
    participants.

d. Encourage use of low-energy consumption communication
    methods such as webinar, video conference, email and telephone.

Can you think of other sustainability index possibilities in your company??

Call to Action

The call to action is threefold.

1. Try to use  a few of these measures at your company. Then share the challenges you faced in implementing the measures. Of course, it would be great to share the results, too! 

2. Expand the role of your CFO or Controller to Chief Measurement Officer. As there is a growing social acceptance that businesses have environmental responsibility, so will the role of finance go beyond just measuring in dollars, but also the measurement of other “things” and elements. 

3. Start sustaining the economic and ecological systems with a new emphasis on “doing more with less” of everything by adopting Lean/Green accounting principles and practices to deploy and measure success

If you are currently using what you consider sustainability or Lean/Green measures, please share them by sending a short explanation and data to this newsletter. They will be collected and shared via the Lean and Green Summit. Please, also share any challenges or barriers you face with the concepts, so that others can learn off the shoulders of your work.

It will take a determined ongoing communal effort to establish and spread the use of Lean/Green Accounting. But, starting now at this historical juncture of fewer natural resources and attempts to lower energy usage and emissions will enable the accounting community to be a relevant and sought after player in the lean and green world coming to your company very, very soon.