Low-fat accounting. (lean manufacturing in accounting department of United Electric Controls Inc.)(Cover Story)

Does lean manufacturing end at the plant doors? Or can the benefits of continuous improvement and waste elimination extend into the domain of the management accountant? Here's how one company took the lean manufacturing concept into its accounting department, with some impressive results.

Aiming to become a world-class producer of its electronic and electro-mechanical temperature and pressure controls and sensors, United Electric Controls Inc. of Watertown, Mass., began aggressively implementing lean manufacturing methods in 1985. Those efforts didn't end on the shop floor. UEC's accounting department has also participated in continuous improvement and has identified and eliminated wasteful practices in order to do more with less.

Over the cost hurdle

The department has taken aim at a number of areas. In its drive toward continuous improvement, for example, the company had run up against a roadblock: its traditional view of costs:

* By focusing on labor and material costs, traditional design decisions ignored perhaps 60 per cent of the life cycle costs of the product. For example, it might appear economical to buy a new microprocessor for five cents less. But if the new microprocessor does not allow access to the software library, then that five-cent saving will end up costing the company $400,000. The company needed a system to account for those costs.

* While recognizing that a product under design must be a profitable one, engineers might feel their design creativity constrained by a system that provides incentives for reducing variety. The system should highlight the costs of unproductive creativity.

* In supplier selection, UEC looks at total cost versus purchase price. Buying overseas may appear cheaper, based on purchase price alone. But suppose it takes three months to initiate an engineering change with an overseas supplier, compared to mere days with a local supplier. Often, it is responsiveness that is key to obtaining a new order. How much engineering flexibility does the company lose with its overseas purchase?

* Different functions within the organization will view this dichotomy of "purchase price versus total cost" in different ways. Salespeople who are measured on margin will favor purchase price. Someone running a department that supports many different goals, such as responsiveness to engineering and favorable price, will want to look at total cost.

Cost accounting systems must be responsive to the life-cycle costs of the product. For example, the company adopted a particular approach to designing a new product line. Besides the usual functional …