Lean Accounting as the Best Managerial Policy the Company Should Adopt - Literature review Example

Introduction: Frito-Lay is a sub-division of PepsiCo Company and it was formed in 1961. The headquarters of this sub-division is found in the state of Texas. Frito-Lay is one of the best companies in North America, which specializes in the sale of snacks, and other fast food substances (Team, 2014). It is famous for selling food substances and snacks, such as, Tostitos, Doritos, SunChips, onion flavored rings, cookies, etc. The North America’s operations of Frito Lay span across Canada and United States, and they account for approximately 20% of all the sales of the soda maker (PepsiCo, 2013). However, it is unable to independently compete in its Mexican market, because it is within the operations of its parent company, PepsiCo. Currently, Frito-Lay faces very stiff competition for its snack and beverage market. There are three types of competitors that the organization faces, private brands, regional brands, and national brands (Zarzycka and Michalak, 2013). Some of these competitors include Conagra and Kellogg. These companies are able to offer healthy food substances, which also comprises of little sugar. Because of this increased competition, the sales value of its products and substances went on a decline. One product that experienced a sharp decline was the Sun Chip product. For purposes of protecting their market, the company initiated a series of managerial approaches aimed at increasing its market share. These methods include, localization of food substances produced by the company, promoting the culture of innovation, and improving the productivity of its workforce through training and other motivational measures or activities (Zarzycka and Michalak, 2013). In as much as these strategies are seen to be working for the company, there is one managerial technique that if applied, can greatly increase the productivity of the company. The technique under consideration is lean accounting. This report gives a description of lean accounting, and it provides a rationale on why the company should use this managerial technique. This report further identifies the companies that have successfully used lean accounting method and its impact in the productivity of such companies. This report also contains the implementation process, and a plan of implementing this managerial technique. The conclusion is a summary of the major points contained in this assignment. Rationale for the Selection of Lean Accounting/ Manufacturing: The use of lean accounting/manufacturing is important because it would help the company in the elimination of unnecessary costs that are incurred during its production process. This is because, the lean accounting techniques are always used to identify the most efficient methods of producing a substance, and it eliminates unnecessary processes, that an organization uses, with the intention of producing its products (Zarzycka and Michalak, 2013). It is important to understand that reduction of costs is one of the most efficient methods, or techniques an organization can use, for purposes of increasing its profitability. A company such as Wal-Mart has managed to increase the levels of its revenues, mainly because of a reduction of the various administrative costs that it normally incurs. Wal-Mart constantly identifies the various costs it incurs, and it introduces measures aimed at reducing or eliminating unnecessary costs, that are incurred by the organization. Through this method, the company managed to maximize its revenues (Zarzycka and Michalak, 2013). It is extremely difficult for any organization to eliminate unnecessary costs without their identification. Lean accounting/manufacturing is a perfect tool that a company can use, in the identification of unnecessary costs incurred by a company. Because of increased competition, Frito-Lay may be concerned about the use of cost leadership strategy, in a bid of recapturing its market, and efficiently competing with its rivals. Lean accounting will therefore help Frito Lay, to identify unnecessary costs, and initiate measures aimed at reducing them, so that it can efficiently and effectively pursue the cost leadership strategies. This is the strategy that Wal-Mart has used, and it has succeeded to become the largest retailer in the world, despite the stiff competition that is depicted in the retailing industry (Stenzel, 2007). Frito Lay can therefore make it, through this strategy. Another important reason for the use of lean accounting/manufacturing technique is that, it promotes accountability. Lean accounting advocates for a financial reporting technique that is easy for anybody to understand. This is because this technique does not advocate for the use of traditional accounting techniques, such as standard costing, variance calculations, and other technical and complex accounting techniques (Stenzel, 2007). The use of direct costing approach, advocated by the company, also eliminates the chances of a company to provide a false financial data or report, concerning its true position or value. It is important to understand that by using financial statements are important to shareholders because they provide information on the transactions and value of the company. Reporting financial statements by using complex accounting tools will frustrate the efforts and intentions of shareholders in understanding the financial position of the company, and holding its management accountable for their actions (Stenzel, 2007). A good example of a company that used complex accounting standards for purposes of confusing its shareholders was Enron (Stenzel, 2007). Enron collapsed because shareholders were unable to hold its managers accountable for their actions. They used complex accounting reporting methods, to hide the debts that the company had, failed business projects, and the losses incurred by the company. As a result of this action, the fall of Enron come as a surprise to all its investors, thereby losing millions of dollars, in terms of their investments (Stenzel, 2007). The use of lean accounting methods will help in avoiding the fall of the company, because its managers will provide an easy to understand financial records, hence being accountable for their actions or activities of the organization. Another important rationale for the use of this technique is that it would help in the identification of the various needs of customers. This would make the company to engage in activities aimed at satisfying the needs identified. Lopez (2004) explains that the determinant factor, on whether a company would maximize its sales, is whether the products its offers has the capability of satisfying the various needs of the customers. An organization that does not satisfy this need, will most definitely suffer some losses. A good example is Marks and Spencer, between the periods of 1998 to 2000. During this period of time, there was a demand of retailing institutions that were accepting credit cards. The management of Marks and Spencer refused to introduce credit card services to its customers, leading to a massive los of its customers, to its competitors (Maskell and Baggaley, 2004). The company suffered massive losses, and in the 2000s, the management was forced to introduce credit cards, for purposes of catering for the needs of its customers, and surviving in business. Proper application of the principles of lean accounting will help Frito Lay to identify the needs of its customers, and initiate measures aimed at catering and satisfying these needs. Through these actions, the company will manage to achieve a competitive advantage over its rivals. The Lean Accounting Managerial Technique: This concept of lean manufacturing was advocated by Toyota, and a variety of Japanese companies. This was after a visit to the manufacturing plant of Ford Motor Company, in the 1920s. The managers of Toyota were able to learn on the strengths and weaknesses of Ford Motors and after World War 2, the General Manager of Toyota, Taiichi Ohno and a number of managerial consultants were able to come up with the principles of Lean Accounting/ Manufacturing (Northrup, 2004). Lean accounting/manufacturing were developed out of the weaknesses of Ford Motor Company, which made its production to be expensive. Toyota and other Japanese companies were highly successful in the use of lean accounting techniques, and this forced European and American companies to embrace its principles and concepts in the late 1980s (Northrup, 2004). These companies discovered that the principles of lean manufacturing/ accounting are applied to virtually every area of a company, and this includes its management and financial accounting processes. There are two major methods of conducting this process of lean accounting. The first method is the application of this process of lean accounting to the measurement, control, and accounting process of the company (Arbulo-López and Fortuny-Santos, 2010). This is not different to the application of lean methods of accounting/ manufacturing to other processes of the company. The major objective of this process was to eliminate waste, errors and defects. This was one of the major weaknesses of Ford Motors that was identified by Japanese business leaders, including the leaders of Toyota (Northrup, 2004). Furthermore, this technique further aims at speeding the means of production, giving the company the capability of replacing its sold out stock, in a more efficient and effective method. It used to take quiet a considerable amount of time, for Ford Motors to resupply its retailers. Furthermore, this method would make it easier to understand that management processes and techniques applied and used by the company. Based on this fact, Maskell and Baggaley (2004) explains that the use of lean accounting will help in promoting accountability by the management of an organization. The second and most important application of this concept of lean accounting is in changing the measurement, control and accounting process of an organization, for purposes of providing information that is important in guiding decision makers, on the nature and kind of decision to make. Furthermore, this second application of the principles of lean accounting is able to identify the various needs of customers, and the best methods of satisfying those needs (Northrup, 2004). Arbulo-López and Fortuny-Santos (2010) further maintains that this second application of lean accounting/management has an impact of correctly identifying the impact of the financial activities of the organization. Based on this fact, Braun and Tietz (2010) explains that this second application also has the capability of promoting accountability within an organization. This is because it is easier for third parties, and people who lack financial accounting skills, to understand and correctly analyze the financial accounting records that have been prepared through this technique of lean accounting. The reason why it is easier for people to understand the financial records made through this process of lean accounting, is based on the fact it does not require the use of traditional accounting techniques, such as activity based accounting, standard costing, cost price indexing, variance reporting, and other complex transaction accounting systems (Braun and Tietz, 2010). These complex accounting methods are replaced by, Performance measurements that are lean focused. Direct costing of the values of the organizations processes, and products. The use of a box score in the reporting and decision making of the organization. Their financial statements are written in a plain language that is easy for everybody to understand. A radical elimination and simplification of a transactional control system through eliminating or reducing their use. Initiating a lean change from the understanding of the needs and values that customers need. Elimination of traditional budgeting methods, through operations, monthly sales, and financial planning processes. Value based pricing. Having an understanding of how this process will impact the financial position of the company. Furthermore, as a company begins to master on how to efficiently use this process of lean accounting/manufacturing, they are able to develop the lean management system, which is designed to provide the financial and operational reporting, planning, and motivations that can inspire the growth and success of the company. The Implementation Process of Lean Accounting: During the early stages of this process, it is fundamental for the organization to start its application in the accounting process of the company. This would include the accounts payable, receivable, cost accounting, payroll accounts, expense reporting, etc. There are three important reasons for the use of lean improvement methods, in an accounting process. These reasons (Northrup, 2004), The operations of the company will be better, and the processes improved. The people handling finance in the organization will acquire skills, on the best methods of applying lean improvement techniques. This is because lean accounting is best learned through experience, as opposed to, from the books. Elimination of wastes will give accountants and financial experts the ability to work and develop better methods of introducing lean accounting or techniques in the organization. Some managers may argue against initiating changes to the accounting procedures, because of the dilemma of spending time in improving the processes that will be eliminated in a future period. However, with lean accounting/manufacturing, the company is always interested in making minor improvements that within a given period of time will help in a massive improvement of the processes of the company (Northrup, 2004). It is the objective of lean methodology to eliminate wasteful accounting procedures, however, at its earlier inception, there is a need of improving the accounting processes, providing learning with the intention to the accountants, and freeing up their time, to help in the effective implementation of lean changes. The use of lean manufacturing or accounting to control production and other methods or processes in an organization is achieved through visual performance measurements at the value stream level, and at the shop level (Northrup, 2004). There are approximately three levels of operational measurements and performance. These levels are, company measurements, cell and process measurements, and value stream measurements. Companies measurements normally enable the managers of a company to carry evaluate the mission, vision and objectives of the company, and analyze whether the company managed to achieve these objectives and missions. Value stream measurements involve the continuous tracking of the company’s activities, and their performance (Maskell and Baggaley, 2004). A periodic table is then written to analyze this performance, and give out recommendations on the best method of improving it. Typical measurements under value stream includes, Process control Employees of the organization. Quality of work Safety. Cell and process measurements are used for purposes of identifying defects, and controlling processes. Typical measurements under this operational performance include hourly production quantities, effectiveness of equipments used, etc. Applications by other companies: Toyota is one of the companies that managed to efficiently apply the principles of lean accounting. After of the Second World War, the management of Toyota began implementing the principles of Lean Accounting, in their management of the organization. The company realized that there were a series of wasteful procedures at its production line, and hence there was a need of reducing them (Maskell and Baggaley, 2004). Furthermore, in a bid of identifying the various needs of its target market, Toyota embarked on a fact finding mission, and through the principles of lean accounting/manufacturing, Toyota was able to develop cars, that were of high quality, and affordable. This strategy has therefore turned Toyota into one of the largest and most successful multi-national companies in the world. Another company that has managed to turn around its fortunes through the use of lean accounting is Watlow Electric Manufacturing Co. In 2008, the company faced a serious recession, and it had the option of reducing the number of its employees, which stood at 2000. However, the company applied the principles of lean accounting, and it developed a long term continuous improvement strategy, that could help it, in achieving sales, and increasing its profits. This is one of the principles of lean accounting, as opposed to traditional accounting methods that are concerned with short term results. Applicability by Frito Lay: This strategy is highly applicable in the financial and production processes of Frito-Lay. For instance, in its financial section, the company should encourage its employees to adapt the principles of lay accounting. This is a slow and long process; hence the changes should not be abrupt. Furthermore, lean accounting is better learned through experience, as opposed by the use of books. The financial managers should be encouraged to write their reports, by the use of simple accounting languages that is easy to understand by all the stakeholders of the organization. Through this method, the company would manage to promote accountability, because managers will be held accountable for their actions. The second strategy is on the processes of the organization, specifically in its manufacturing process. The company should identify wasteful processes in the production its snacks, specifically the sun chips. After the identification of these processes, the company should initiate measures aimed at eliminating them. This is a long term process that would help the company to achieve a cost leadership edge, over its rivals. Plan for implementation: The implementation of the lean accounting methods should be a long term plan that would span a period of three years. During the first one year, the company should concentrate on implementing this technique on its accounting procedures and records. This is for purposes of helping accountants, and other managers to familiarize themselves with the principles, and requirements of lean accounting. Furthermore, during this first year, the company should study and identify the wasteful practices or procedures in its manufacturing units. This is for purposes of developing strategies, aimed at eliminating these wasteful processes, or procedures. This should take a period of two years. Three years is a sufficient time that the company would need for purposes of efficiently implementing the concept of lean accounting. Conclusion: In conclusion, Lean accounting is the best managerial policy that the company should adopt. This is because it has three major advantages, it eliminates wasteful practices, improving efficiency, and retraining of employees. The elimination of wasteful processes has an impact in reducing the overall administrative costs of the organization. This would help in increasing the profitability of the organization. These profits can be ploughed back into the company, for purposes of increasing its productions and growth. Furthermore, lean accounting helps in improving the efficiency in which an organization would meet its objectives. Efficiency means that an organization would achieve similar or better results with few employees. By emphasizing on procedures and processes that increases the quality and output of thee organizations products, lean accounting helps in increasing efficiency of the organizations employees. Furthermore, this procedure helps in retraining employees on better financial and management practices and procedures. References: Arbulo-López, P., & Fortuny-Santos, J. (2010). An accounting system to support process improvements: Transition to lean accounting. Journal of Industrial Engineering and Management. Top of Form Bottom of Form Braun, K., & Tietz, W. (2010). Managerial accounting (2nd ed.). Upper Saddle River, N.J.: Prentice Hall. Top of Form Bottom of Form Lopez, M. (2004). Accounting For Differences In Lean Factory Performance: A General Purpose Practice Conceptualization. Academy of Management Proceedings, A1- A6. Top of Form Bottom of Form Maskell, B., & Baggaley, B. (2004). Practical lean accounting: A proven system for measuring and managing the lean enterprise. New York, NY: Productivity Press. Top of Form Bottom of Form Northrup, C. (2004). Dynamics of profit-focused accounting attaining sustained value and bottom-line improvement. Boca Raton, Fla.: J. Ross Pub. ;. PepsiCo, 2013. Annual Report. Retrieved from http://www.pepsico.com/Assets/Download/PEP_Annual_Report_2013.pdf. Top of Form Bottom of Form Stenzel, J. (2007). Lean accounting: Best practices for sustainable integration. Hoboken, N.J.: John Wiley & Sons. Team, T. 2014. Frito-Lay Dominates U.S. Salty Snacks, But Rising Cracker Sales Could Stall Growth. Retrieved from http://www.forbes.com/sites/greatspeculations/2014/06/27/frito-lay-dominates-u-s- salty-snacks-but-rising-cracker-sales-could-stall-growth/ Top of Form Bottom of Form Top of Form Bottom of Form Zarzycka, E., & Michalak, M. (2013). Implementing lean accounting principles to design and improve accounting processes – a case study from a Shared Service Centre. Zeszyty Teoretyczne Rachunkowości, 139-156. Read More