Henry Gantt and Lean Accounting

Henry Gantt, 1916

I would like to share with you some important words of wisdom from Henry Gantt (1861-1919), an esteemed associate of Frederick Winslow Taylor, the father of Scientific Management, the predecessor to Lean management.

The following excerpts about financiers and accountants are taken from Mr. Gantt’s book, Industrial Leadership, published in 1916.

  • Page 3: Referring to financiers and merchants, Gantt said: “Their natural tendency, therefore, was to apply to the purchase of labor the same rules which they had applied to the purchase of materials, namely, to buy it as cheaply as possible.”

In context, Gantt makes the case that labor is vastly different from material and must be carefully acquired, developed, and rewarded. The consequence of cheap labor are undesirable for a business, and include low quality work and workers who perform only well-enough to keep their job.

  • Pages 38-39: “Too often the system of cost accounting has been to a large extent to blame, for the systems in general use often fail to disclose the real troubles, and content themselves with blaming the shop with inefficiency… the call for efficiency which has been so loudly proclaimed throughout the country for several years has had a great deal of influence on shop organizations, but it has hardly been heeded at all in the financial and selling ends of the business, where it is needed even worse than in the shops” [italics original].

Finance departments remain notable laggards in the application of Lean principles and practices to finance and accounting work.

  • Page 39: “The cost keeping and accounting methods in general use in our industries today are so devised as to put all the blame for failure on the producing portion of the business, and do no show the loss due to improper business policies, which it is safe to say are a more fertile source of failure than mistakes made by the production end of the business.”

This remains true today in any organization that continues to use standard cost accounting.

  • Page 39: “It is necessary that our cost keeping and accounting methods of the future shall show what losses are due to an unwise policy, or to poor management… or industrial scheme will not be rounded out until we have a means of measuring the ability with which those at the head of the business perform their functions, that is at least as good as that which we use to measure the efficiency of the operative.”

We now have that means. It is called Lean accounting.

  • Page 40: “The time will come, however, and indeed is not far distant, when cost keeping and accounting methods… will be so changed as to place blame for failure where it belongs, and give credit to whom credit is due.”

Lean accounting will help assign problems to the correct areas so that root cause analysis can be performed in a non-blaming, non-judgmental way.

  • Page 65: “Our difficulty in the past has been mainly with the commercial man, who has certain theories of efficiency gained from the cost accountant which are fatal to our efforts to make improvements of any kind.”

Indeed, the “commercial man,” focused on selling, lives on, and continues to remain closely aligned with status-quo oriented cost accountants.

  • Page 68: “…the financier, in many cases, still sincerely believes the accountant to be more important than the manufacturer, even though he only keeps a record of what the manufacturer does.”

Manufacturing is where value is created, not in accounting. The financier needs to pay attention to manufacturing.

  • Page 69: “…it is time we readjusted the traditional relative positions of the record keeper and the doer. The record keeper is just as essential as ever, but under modern methods he must yield his supremacy to the producer, and give up his privilege of being simply a critic.”

The account must become actively engaged in continuous improvement though participation in kaizen.

So there you have a sample of Mr. Gantt’s views on financiers and accountants, based on his extensive experience with progressive management practice.

Gantt would no doubt be upset and disappointed with today’s finance and accounting leaders. They thought the best route for reducing unit costs was by offshoring work to low wage countries, thereby continuing the long tradition of failing to understand the difference between unit cost and total cost. Gantt would rip the leaders of large corporations who drove their suppliers to set up businesses in low wage countries, and then, a decade or more later, take credit for re-shoring work to the home country (e.g. Wal-Mart, General Electric).

Today’s finance and accounting leaders extended payment terms to their supplies, which, in effect, raised their costs. But, unable to pass the increased costs on to their customers, they suffer reduced profits which threaten the future existence of their business. Instead of helping suppliers improve their processes, they harmed suppliers.

Gantt would also rip today’s financiers, who remain far more adept at speculation and harvesting the resources in a business than improving businesses and the processes used to create value for customers. He would have harsh words for company leaders who hoarded cash and richly rewarded shareholders, while reducing the wages and benefits of the employees that remained after all the layoffs.

Ultimately, Gantt would be upset that, 100 years later, the pinnacle of management practice remains zero-sum (win-lose). He would be disappointed in leaders for not evolving towards non-zero-sum (win-win) business practices, and in government and society for not holding them accountable.

Fortunately, a few men and women have followed in Mr. Gantt’s footsteps and made the kinds of improvements that Gantt would no doubt greatly admire.

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