A Career Built With Lean Techniques

Few careers track the rise of Lean techniques and strategies as closely as that of Mark DeLuzio, who nearly 20 years ago implemented one of the first Lean accounting processes in the United States. A vice president and corporate officer of Danaher Corporation (NYSE: DHR), DeLuzio led the corporate-wide implementation of Lean and designed what is known today as the Danaher Business System (DBS). Our interviewer, Steve Player, recently caught up with the Lean pioneer and asked him to retrace the milestones of his career along Lean's trajectory.

Steve Player: When did you begin with Danaher Corporation?
Mark DeLuzio: In 1988, I was hired at Jake Brake, a division of the Danaher Corporation, as a cost systems manager. While working for the CFO, my sole role was to change the accounting system from the traditional cost system to something that would complement the point-of-production system philosophies that we were just embarking upon. I was hired because I was a Certified Management Accountant and had had some exposure to Just-in-Time techniques (we didn't call it Lean back then).

As a result of that work, I later was promoted to CFO of Jake Brake. From there I moved into an operations role, and then to general manager of the Asian business team. This was nice because I had Asian customers, Toyota. I learned from them as well.

In 1993, the CEO of Danaher Corporation asked me to come to work for him as a corporate officer and vice president. The role was to take the Toyota production system concepts we had at Jake Brake across the entire company globally. At the time, we called this process the Danaher Production System. After I got on board, I changed it to what we now call the Danaher Business System, because it wasn't just about production, it was about the entire Lean organization, enterprise-wide.

SP: There is much discussion today about Lean accounting and its relationship with the Lean enterprise. Take us back 20 years. What were your thoughts when you first got hired as a cost systems manager?
MD: It was a little bit discouraging because all the training that you had, the cost accounting courses, the CMA exam, and all those kinds of things, had taught you all this stuff that did not seem relevant. So now you had to rethink everything that went on. At the same time, what I did know was that we were doing something that was groundbreaking at Jake Brake. It was an experiment because the company was in dire straits. We were almost going out of business. So this was a last call to save the company.

SP: The traditional thing in the late '80s would have been to try activity-based costing. How did your thinking evolve into what we today call Lean accounting?
MD: We looked at activity-based costing, but one of the things that I recognized was that activity-based costing was very transaction-heavy. You had to collect and process a lot of data. Lean accounting is applying the Lean concepts to the accounting process itself. So we use that to really weed out our accounting process and really streamline our closing process, costing process, payable process, etc. It takes cost out of the business, but the other reason for implementing it is that it freed up time in accounting for us to do some other things. So while we had to do the reporting for the SEC, corporate finance, and tax, we didn't want that to consume 100 percent of our time. My goal was to have that consume only 25 percent of our time.

SP: Because of the cost pressure, you were not likely to increase headcount ...
MD: Right. And as a matter of fact, our headcount went down through the design of what we did with Lean accounting. Now my game was, "Okay, I want to use 75 percent of the time to do some things to work on the business as opposed to just doing the traditional accounting stuff that accountants are signed up to do." So with that we started doing things called accounting for Lean, which basically is providing the data and the reporting that promotes Lean behaviors. That's really what we were trying to do -- to give our people the right cost information so that they could make decisions and run their business.

We ended up doing more direct costing rather than ABC. We set up value streams, which were treated like a mini-company.

SP: For the people who aren't that familiar with the term, please explain "value stream."
MD: A value stream is a Lean tool that basically describes the product flow and the information flow of a particular product family or process. It could be either process-based or product-based. In manufacturing, our value streams really centered on our products. We had the Caterpillar product, the Cummins product, the Detroit Diesel product, et cetera. Each product had their mini-factories within factories.

This was a complete wall-to-wall value stream starting with the customer and working all the way back to our supplier. So we look at both the product flow and the information flow. With a value stream, you calculate your lead time and your processing time. You end up finding things like, "Gee, it takes two hours' total processing time, but it takes 25 days to get it through the system. Why?" What Lean really tries to do is work on those 25 days, because that's what the customer sees, that's what the customer feels.

SP: It's not just about the work, it's about how long it takes to go through. So it is a lot like a stream, it's not just the volume of the water or the volume of activities. It's how much the stream meanders versus flows straight through ...
MD: Exactly. Because there are a lot of starts and stops within this value stream, and this is where you have a lot of pools where you sit there and hold for a while. What we ended up doing is creating mini profit-and-loss statements based on each value stream. We drove direct cost to the value stream to give the value stream manager accountability in terms of what that person was controlling.

For example, we would charge machine depreciation to the value stream. I had people coming back to me saying, "Mark, you know, my depreciation charge this month is $75 a unit. What does this mean?" And I would explain depreciation. I would explain why it got charged the way it got charged. And then they'd come back and say, "Well, you mean to tell me that if I do this with eight machines instead of ten machines, my charge will go down?" "Oh, yes -- absolutely." So this, again, is promoting the right behavior. I don't need two machines, I can get rid of these two machines. So these two machines went into an excess pool where we didn't have to buy that capital, and another part of the business grew.

I had people coming back to me saying, "I bought two months' worth of tool, and I got charged with it all in the same month because we didn't amortize it. You mean to tell me that if I buy this on a weekly basis, my charges will be less?" "Yes, that's right." These are the kinds of things that we wanted to promote in terms of behaviors. So we provided this value stream costing.

SP: Your example is a little nontraditional. If you buy tools this month, you're going to be charged this month, as opposed to up an accrual. Rather than being concerned about GAAP accounting, the approach is really trying to reflect more the economics of what was happening with the cash flows.
MD: Exactly. And that's a good point, because one of the things we recognize is that GAAP accounting and managerial accounting don't have to complement each other. As a matter of fact, your normal set of financial statements provides very little information to an operating manager trying to run a business. So we try to provide them the right cost information to drive that. We got to a point where we went from 35 percent to roughly 85 percent of our costs being directly charged to the value stream. So we had very little left over to allocate. And when we did allocate those costs left over -- such as, for example, electricity or building depreciation, things like that -- the allocator was then based on an activity level. So we would use square feet for depreciation. We would use number of units produced for electricity, things like that.

SP: Take us through when you began to think about strategy deployment ...
MD: We started about 1989. We toyed with it at Jake Brake. It wasn't fully deployed until I got to the Danaher Business System office later in '93, and we perfected it throughout the '90s. We kept learning the process. Our thinking was that we were doing all of these Toyota production system-type changes to the company. And we were having a lot of success. There was so much low-hanging fruit that no matter what we touched, we made it better. Eliminating waste, cellularization, floor space reductions, one-piece flow, the whole thing -- just everything kind of went in the right direction.

There came a point in time, though, when we said, "Hey, look, the objective can't be the Toyota Production System. The objective has to be our strategic business imperatives." And we need to align our Lean tools and our Lean initiatives around those objectives as opposed to letting Lean become the objective itself.

Note: DeLuzio is today founder and CEO of Lean Horizons Consulting, a Lean consulting and advisory firm based in Glastonbury, Connecticut.