Departments vs. Value Streams

I’ve seen some accountants understand value streams in a lean organization, and have also seen others not be able to grasp the concept. Understanding the role & function of value streams in a lean business is essential for accountants because it serves as a foundation for moving to lean accounting.

Lean companies organize their entire operations around value streams. The simplest definition of a value stream is all of the necessary process steps from receipt of a customer order to delivery of the order. Value streams cut across the traditional department structure. The goal of a lean business is to flow orders through their value streams as fast as possible, with the highest quality.

Most financial accounting systems are based on a traditional department structure. Accounting uses their financial accounting systems as a source of all internal financial analysis, such as departmental expense reports & profitability analysis. Accounting also uses their financial accounting systems to maintain compliance with external reporting.

For internal financial analysis, accounting needs to transition away from departmental-based information to value stream-based information. It’s best to begin this transition outside of your financial accounting system, then over time make adjustments to your financial accounting system to reflect the value stream organization.

Here are some tips.

One simple way for accounting to better understand value streams is they are the profit centers of a lean business. This means all internal financial information should be focused on the profit centers of the lean business.

Because value streams are profit centers, all direct value stream expenses should be assigned to value streams, and all relevant expense analyses should be at the value stream level.

Don’t allocate expenses using any type of subjective allocation method. Every expense in a company can be assigned directly to some part of the business.

Analyze expenses and profitability at the value stream level. Think of expenses as “resource consumption” and learn how value stream performance can be improved to reduce the resource consumption.

For profitability analysis, the rate of flow of orders through a value stream is the primary determinate of the profitability of the value stream. Link profitability analysis to flow analysis.

Use lean performance measures to link operational performance to financial performance. In lean companies, accounting’s role is to translate operational performance into financial performance.