One of the keys to a successful lean accounting implementation is getting your Value Streams right. That is not to say you cannot change your defined Value Streams once you set them (indeed many organisations do change their Value Streams over time) but rather aligning your costs to Value Streams will only help drive improvement if that alignment is meaningful. Go too deep and you will have too few direct costs and very
many unallocated “support” costs. This is meaningless. Stay at too high a level and the financial data will be too aggregated to be of use in operational improvement.
Of course, there is no formula to get the “right” level for your Value Streams and, often, it will come down
to experience and gut feel.
For example, I recently worked with a manufacturing company that produces about 14 products through six
process lines. Operational staff were keen to have six Value Streams, but it was clear that products could move between the lines depending on availability, and, anyway, the only direct costs in this proposal would be the employees operating the machines. Another faction favoured one single Value Stream for the whole plant. This was the easiest approach but provided no granularity to reflect differences between products and their costs, and would, therefore, be of no use for operational improvement. We analysed product flow and the customer application of the products and realised that there were broadly two flows: higher volume older technology products and high value lower volume leading edge products. Following the process flow it became clear that the “legacy” products always went down three of the process lines, while the “new technology” products always went down the other three lines. Thus two Value Streams were born, and two sets of Box Scores and lean performance measures were created.
This solution is not totally simple because there are still some shared costs – inspection and non-destructive testing, and engineering. These costs are not allocated to the Value Streams but held in “Support”. However,
the two Value Streams costed separately and linked to costs does help focus improvement activity.
In another situation a company started with three Value Streams, based largely on product size (with one Value Stream requiring heat treatment). Within 9 months their improved understanding of lean lead them to five Value Streams based on customer application (with one specialist make to order Value Stream). This works well and we were able to realign cells and cost centres fairly easily to generate the new Box Scores.
Many books provide guidance on defining Value Streams – based on physical flow – by mapping the steps and activities that each product/ service goes through and grouping those with very similar flow. This approach
provides a useful starting point. However, the first principle of lean is to define value in the eyes of the customer, and I feel it is important to incorporate this into the Value Stream definition. Thus, as well as developing a product/ activity matrix, you should also prepare a product/ customer (or customer application) matrix. Combining this customer focus with the physical flow can often help guide your decision on Value Streams.
Sometimes, products with similar process flow may go to widely different customers whose perceptions of
“value” are also different. This may suggest different Value Streams. Similarly (though more rarely), products with different process flows may be near substitutes for one another with similar customer value characteristics. This might suggest they be included in one Value Stream (different cell measures would enable management of their different physical flows).
There is no “right” answer to what Value Streams are right for you. It depends on many factors including
your maturity with lean, and your connection with the customer or end-user. Preparing a product/ activity matrix together with a product/ customer (application) matrix will give you a good starting point to explore the options.
But always give yourself the flexibility to change Value Streams, and cost centre alignment, in future as your