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The use of lean and refined cost accounting systems

the ability to reduce costs

Master’s Thesis

of

Timothy D.L. Jansen

University of Groningen

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Master of Science in Business Administration

Organizational & Management Control

Amstelveen, 04.07.2013

Student

Name: Timothy D.L. Jansen BSc Student number: s1686291

Email: tdljansen@gmail.com Phone number: 06-52421845

University Supervisor

Name: Dr. Hilco van Elten

Email: vanelten.research.analytics@gmail.com Phone number: 034-6295839

Company Supervisor

Name: drs. Margot Frens RC Email: MFrens@deloitte.nl Phone number: 06-52615669 Company Quality Assurer

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Preface

During the last phase of my studies I will combine the writing of my Master’s thesis with an internship at Deloitte Consulting. Deloitte is an internationally operating company and offers me the opportunity to aid them in a current consulting project. The results of my thesis might be of use for the current as well as upcoming consulting projects.

Deloitte is a worldwide brand under which tens of thousands of professionals are working together on areas of accounting, consulting, financial advisory, risk management and tax. Deloitte is with more than 4500 employees and eighteen offices throughout the Netherlands one of the biggest firms in their expertise. Worldwide about 200.000 employees are employed in more than 150 countries.

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1. Introduction

An increasing number of firms use lean manufacturing techniques in order to stand the growing competition on a global basis (Camacho-Miñano et al., 2013; Jayaraman et al., 2012). This technique was at first developed to lower cost within the manufacturing departments, but is more and more used within other organizational departments as well (Bortolotti & Romano, 2012). As organizations evolve in extending the integration of lean ideas within the firm, the need to adjust the cost accounting practices to support lean becomes stronger (Fullerton & McWatters, 2002). It can then be assumed that if the cost accounting system is aligned with the lean principles, the possibilities to control and reduce costs increase.

Bhasin & Burcher (2006) say that lean should be seen as a philosophy instead of a technique. Within this philosophy lean is a condition that an organization can reach after years of applying lean. Kennedy et al. (2011:1) define lean as ‘emphasizing excellence through a focus on continuous improvement and the elimination of waste. It is a holistic strategy that mandates changes to both production and accounting, as it becomes ingrained in the firm’s operating culture. The ideas of lean should be embedded within the organization, by driving employees to continuously seek for areas of improvement’. Lean can ensure that processes and activities that are not useful are eliminated. It can make sure that a specific process is being conducted in only the necessary amount of steps, cutting all redundant actions. Next to that this technique will help activities to be conducted in a more efficient manner.

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4 The purpose of this study is to investigate how the use of lean and the use of refined cost accounting systems lead to cost reduction. This is rather broadly presented, but leaves room to make a more specific outline and focus while developing the hypotheses and conducting the research. Cost control can only be effective if the insight within particular cost drivers is being used in the form of actively reducing costs. Both approaches can be joined together when analysing activities within the organisation. The cost accounting system shows what kind of activities use what resources, and lean uses this insight to streamline the different activities. The impact could be that the specific product costs, at the end of the control system, are being reduced and controlled. Next to that, if this combination has added value, also the resources of the company are put to better use.

This research contributes to the literature by using Fullerton et al. (2013), who connect lean with cost accounting systems. Only a few papers (Åhlström & Karlsson, 1996; Fullerton & McWatter, 2002; Kennedy & Widener, 2008; Kennedy et al., 2011; Li et al., 2012; Fullerton et al., 2013) have been written about the joint effect of the use of lean and the use of refined cost accounting systems. These papers will later be presented in the literature review, when making the connection with cost reduction. This study will focus on the Dutch pension administration industry. In the second part of this study, interviews will be conducted in various companies within this industry. In these interviews the later presented hypotheses and conceptual model will be tested.

Piercy & Rich (2009) indicate that research connecting lean principles with cost reduction is mainly focused on organizations that produce physical products. It is therefore important that this gap within research, connecting lean principles with cost reduction is being updated to create new insights in this area. The same argument applies to research connecting the joint effect of use of lean and use of refined cost accounting techniques on cost reduction. This is also a relatively novel field in research, indicated by the fact that the papers on this subject have been published very recently.

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5 (2003) conclude that using lean principles within service industries is not much harder than using the principles within the automotive industry in which lean originated.

Pension administrators have lots of different processes as a result of numerous rules and regulations used by various pension funds. Refined cost accounting systems can be particularly suited to get insight within all these different processes, and can rank areas of attention according to importance based on the amount of costs involved.

The remainder of this study is structured as follows; at first the theory will be presented in which hypotheses will be developed. At the end of this section a conceptual model is displayed. Next, the research methods & sample will be explained. Then, the data and results of the interviews will be presented. A discussion will be conducted followed by conclusions. Finally, the limitations of this study and the directions for future research will be written.

2. Theory and hypotheses development

In this section the relevant literature will be presented and used to develop a set of hypotheses. First, the effect of the use of lean on cost reduction will be discussed. Second, the effect of the use of refined cost accounting systems on cost reduction is shown. Finally the joint effect of the use of lean and the use of refined cost accounting systems on cost reduction is presented, concluded by a conceptual model.

Lean

Fullerton et al. (2013:50) define lean as ‘The essence of the lean manufacturing strategy is that all business processes and functions integrate into a unified, coherent system whose single purpose is to continue to provide better value to customers.’ This means that the purpose of lean is to align all parts, the processes and functions, of the organisation and with that ensure high efficiency and effectiveness. By moving all in the same direction, better coordination among processes and functions is established and enables the full potential of waste reduction.

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6 people and process components as well as internal and external forces (Shah & Ward, 2007) and thus present throughout the entire company. Lean makes use of a set of tools such as kaizen, inventory management, standardized work and scrap reduction to eliminate different sorts of waste (Pavnaskar et al., 2003). The general idea behind lean manufacturing is that the set of lean tools available can work synergistically to create a streamlined, high quality system that produces finished products at the pace of customer demand with little or no waste (Shah & Ward, 2003). This means that the different lean tools work together in such a manner that the products or services that are being created are in most cases default free.

Bhasin & Burcher (2006) indicate that when lean exists within organizations, often the scope of lean is very limited, and does not carry out the principles throughout the whole organization. Once lean is fully and thoroughly used, its benefits can aid the company in becoming a stronger competitor. This implies that the extent in which lean is being used within organizations also has an influence on the ability to reduce costs. Browning & Heath (2009) found that much of the waste in a process can be attributed to interactions instead of to particular tasks and the value of a process may be increased by actually adding tasks. These findings show that, as said earlier, the use of lean should not remain on one department only. When used within several departments, or the whole organizations, the interconnected processes and tasks can be better understood and unnecessary wastes eliminated accordingly. This also indicates that the extent of the use of lean within the organization is important and should be taken into consideration when studying the effect of use of lean on cost reduction.

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7 Piercy & Rich (2009) indicate that research connecting lean principles with cost reduction is mainly focused on organizations that produce physical products. In their study they instead focused on the service industry, concluding that when using lean principles both improvements in cost positions and quality levels can be achieved simultaneously.

As can be seen from the presented literature, a positive relation has been established between the use of lean and cost reduction.

Based on the preceding explanation the following hypothesis can be stated:

H1: The use of lean reduces costs

Refined cost accounting systems

Cooper & Kaplan (1988) point out that traditional cost accounting techniques have become less appropriate for the current time of complex multinational organizations. These accounting systems focus mainly on direct labour costs, while in modern organizations overhead costs have become more important. This focus causes cost distortions, such that products are not assigned the right overhead costs. Their solution to this problem is a refined cost accounting system that allocates costs not only using traditional direct labour or machine time to allocate costs. By using more specific cost pools the cost accounting system gives more detailed insights. This insight is necessary to indicate what areas of the organization can be subject to cost reduction.

Houbiers et al. (2012) and Bhimani et al. (2008) say that cost accounting systems can vary from simple to very complex. This can be indicated by the extent to which the cost accounting system is refined. Across different papers and different fields, there is still no clear and common idea of how to operationalize this area. According to Houbiers et al. (2012) and Drury & Tales (2000), the most commonly used operationalization of showing the extent to which the cost accounting system is refined, use the number of cost pools as indicator. Wegmann (2009) concludes that refined cost accounting systems enable more costs to be classified as direct, to extend the number of indirect cost pools, and to identify cost drivers. Better allocation to cost pools, called activities, is achieved because smaller cost pools are created.

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8 classifying of value-adding and non-value-adding activities. This classification provides ways to eliminate the unnecessary activities. Also the cost of excess capacity is identified and explicit cost reduction initiatives can be launched (Kren, 2008; Gunasekaran & Sarhadi, 1998). This actually says that refined cost accounting systems provide the insights that can serve as a starting point from which specific cost reduction initiatives can be started. This is also where Ittner et al. (2002) point to by showing that the insights received from refined cost accounting systems on the value and non-value adding activities performed in the organization, allows managers to reduce costs by designing products and processes that consume fewer activity resources, increase the efficiency of existing activities, eliminate activities that do not add value, and improve coordination with customers and suppliers. They conclude that their analysis indicates that the use of a refined cost accounting system has a positive indirect association with manufacturing cost reductions. Maiga & Jacobs (2008) also conclude that refined cost accounting systems are positively related to cost reductions, but indicate this relationship as direct.

When using a refined cost accounting system, the organization has the possibility of reviewing the internal cost structure on a more detailed level. The more refined the cost accounting system, the better indirect costs can be specifically traced to cost objects. This increased insight can then be used to tackle specific cost areas that show cost inefficiencies. Thus by using a more refined cost accounting system, the organization has an increased ability to reduce costs. This also means that using a less refined cost accounting system, the organization has less ability to reduce costs because of the limited cost insights.

Drawing from the previous arguments, the following hypothesis can be stated:

H2: The use of refined cost accounting systems reduces costs

The interaction between lean and cost accounting systems

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9 Fullerton et al. (2013) provides some of the first large scale quantitative research on the connection between lean and cost accounting techniques. Fullerton et al. (2013) found that as the use of a lean manufacturing strategy increases, the internal cost accounting system will be adjusted to a more simplified system, overhead allocations are eliminated, and there is an increased use of value stream costing, which sheds insight on managing production bottlenecks and capacity vital to lean. In their conclusions they state that all the control elements are directly or indirectly related to each other, indicating that the controls should not be seen as separate but more as a cost accounting system. This is a confirmation of the results of a case study by Kennedy & Widener (2008) on which this paper was based. In Kennedy & Widener (2008) they found that use of lean directly affects cost accounting systems. Both these papers thus indicate that lean and cost accounting systems are connected and their joint effect on cost reduction can be investigated further.

Based on the previous hypotheses, that both indicate that their particular relation to cost reduction is positive, it is expected that the joint effect of lean and refined cost accounting systems on cost reduction is also positive. The literature studying this joint effect on cost reductions is however more scattered than expected, and according to Li et al. (2012) there is only a limited set of papers available that have studied this joint effect.

Åhlström & Karlsson (1996) say that the traditional cost accounting systems are likely to negatively affect the joint combination of the use of lean and cost accounting systems on cost reduction. This is due to a lack of refined tools to show progress of the use of lean. In the ideal situation, so they state, the use of lean should be supported by the cost accounting system. They claim that the cost accounting system has to be of refined nature to be able to show the effects of the use of lean. The cost accounting system affects the support of lean use in three ways, through its design, through its role in the organization, and through the way in which the system is used and thought about. Only the use of a more refined cost accounting system will thus not be sufficient to support lean.

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10 strategic benefits can be derived from continues improvements that both approaches advocate to some extent. By constantly upgrading cost accounting statements when significant lean improvements have been made, insight in cost reduction is provided on a more frequent basis. Kim & Ballard (2001) also point to some of these aspects by showing that the refined cost accounting system is preventing cost distortion and provides an overview of the costs of specific activities, thereby helping reduce wastes or eliminating non-value-adding activities. A quote from the paper by DeFreitas et al. (2013:28) on a case study at Caterpillar says that lean; ‘presents a structured approach for tackling needed cost reductions, and the refined cost accounting system … provided the cost information and measurement data necessary to know progress was being made.’

The above presented literature thus indicates that a positive effect exists between the joint use of lean and use of refined cost accounting systems and cost reduction. Below, the literature indicating a negative effect is presented.

Fullerton & McWatters (2002) point out that the use of lean requires the simultaneous use of a complementary cost accounting system. They indicate, concurred by Fullerton et al. (2013) and Kennedy & Widener (2008), that this simultaneous use of lean and cost accounting is only possible when lean is connected to a less refined cost accounting system. Li et al. (2012) recognise this in their study by stating that the most useful cost accounting system to use when using a lean manufacturing strategy is a simplified one. More refined cost accounting systems do provide benefits to lean, but require a time consuming process of data collection. They do acknowledge that traditional cost accounting systems are not suitable as support for the use of lean. These authors thus point out that there is indeed an effect between the joint use of lean and cost accounting systems on cost reduction. But for the cost reduction to be more effective the cost accounting system should be less refined.

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11 Grasso (2005) also mentions that accuracy of individual product costs may not be important for many companies, as an example he mentions that prices might be determined by the market. Some of the messages of a refined cost accounting system and lean are contradicting, while the accounting system focuses on reducing number of set-ups, lean aims at reducing set-up time. But the refined cost accounting system can be of some benefit to lean oriented companies in prioritizing improvement efforts, because this method can add monetary values to the processes and activities. This last argument is really important when considering the joint effect of the approaches. By providing more insight through a cost accounting system, cost reduction efforts by lean initiatives can be more precisely aimed at those areas that need real attention. The cost accounting system can point towards groups of costs that need closer examination, and thus need to be addressed first. This can be achieved, according to Grasso (2005), by the use of a less refined cost accounting system.

Based on the prior literature stated above the first and second hypotheses, the use of lean and the use of refined cost accounting systems have the ability to separately reduce cost. It was then expected that their joint effect would also lead to cost reductions, possibly more than when used separately. From the here above stated literature some papers argue that the use of a refined cost accounting system and the use of lean are reinforcing each other in order to reduce costs. Then some papers where presented that argued that the use of a refined cost accounting system is too time consuming to provide joint benefits with the use lean. They stated that the use of cost accounting systems is necessary for joint use with lean to be capable of calculating and showing the cost reduction efforts. But the use of a highly refined cost accounting system that calculates the cost within the smallest details is highly inefficient and much too costly. The use of such a system alone might offset all the other cost reduction efforts. For the joint effect of the use of lean and the use of refined cost accounting systems to work, the cost accounting system cannot calculate all the details of every single cost. When a less detailed cost accounting system is used, the joint effect of the two approaches is located in the information about the costs. This means that when the use of lean leads to costs reductions, this is reflected in the cost accounting system. This renewed insight can then be used for further cost reductions but can also change the target areas for cost reductions indicated by the refined cost accounting system.

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H3: We expect a joint effect of lean and refined cost accounting systems on cost reduction

The following figure shows the conceptual model that will be studied in the following sections. The indicated positive or negative relations are derived from the literature stated above and are reflected in the hypotheses. The particular literature used for each section of the conceptual model is included in the figure to provide a thorough overview of the literature review.

Use of lean

Use of refined

cost accounting

systems

Cost reduction

+

+

+/-Fullerton et al. (2013) Shah & Ward (2003;2007) Vinodh & Balaji (2011) Bhasin & Burcher (2006) Browning & Heath (2009) Niemeijer et al. (2012) Piercy & Rich (2009) Fullerton et al. (2013)

Kennedy & Widener (2008) Fullerton & McWatters (2002) Li et al. (2012)

Åhlström & Karlsson (1996) Pryor (2009)

Kim & Ballard (2001) DeFreitas et al. (2013) Grasso (2005)

Cooper & Kaplan (1988) Houbiers et al. (2012) Wegmann (2009) Kren (2008)

Gunasekaran & Sarhadi (1998) Ittner et al. (2002)

Maiga & Jacobs (2008)

Figure 1. Conceptual Model

3. Research methods & sample

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13 reached, by revealing hidden arguments and thoughts behind the joint effect of lean and refined cost accounting on cost reduction. When for example using a survey as research method, a deeper understanding of the topic cannot be reached. This happens because the survey questions scope the subject to prior knowledge of the researcher and literature only (Yin, 2009). Interviews with different experts in the field might provide new insights in this area that will otherwise not become known. To this end, the interviews will be semi-structured. This means that a standard set of questions will guide the interviews, but new insights can be followed along the way.

As mentioned, to study lean and cost accounting systems, qualitative data from pension administration companies are used. These are companies operating in the Dutch pension industry. The last few years, the Dutch pensions have been under great amount of pressure. Due to financial difficulties, investments done in the pension industry dropped drastically. As a consequence, the by law required cash levels were no longer attainable, leading to a cut in pensions for a great amount of people. Together with far reaching changes in legislation and more critical supervisors, the urge to make organizational changes has increased. In addition, the last few years, a fierce public discussion has emerged. This public discussion is one of two extremes. One side is represented by people with pensionable rights who have worked numerous years for their pension payments. The other side is represented by the working class that must provide part of the financing for current pension payments. This in itself provides an urgent challenge.

The interviews will be conducted within pension administrations. The administration and investment activities are increasingly conducted in organisations separated from pension funds, and these organisations handle the transactions of multiple pensions. These so called pension administration companies are the collectors of the pension fees, the investors of the pension money and finally also pay pension to those with pensionable rights. They are under increased scrutiny by pension funds that are even more strictly watching and require more transparency. It is therefore really necessary for the pension administrations that they work as efficiently and effectively as possible, and rigorously control and lower the costs of overhead. Some of the smaller pension funds still handle their own administration, but most have delegated this to the pension administrators.

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14 out. Remaining are three types of organisations, namely pure pension administrations, insurance companies that have devoted part of their business to administration activities, and finally the so called PPI’s which are companies that handle pension administrations and investments of money but are not subject to risk. This third type of organisation pays out pension fees dependent upon the current interest rates.

Within the pension administration industry, using the limitations mentioned above, a total of thirteen potential organisations suitable for interviews have been recognised. From these thirteen, seven organisations have been invited to participate in this study. These seven have been selected on the basis of company size. These seven companies are the largest seven; the other six are relatively small. By selecting only large companies, it becomes easier to make comparisons between the different organisations. When conducting case study research using the interviews as data collection method within a particular industry, time constraints limit the amount of organisations that can be interviewed. Therefore this selection had to be made.

It is preferred to conduct two different interviews per organisation, one with the CFO or controller and one with an operations manager or a lean project leader. This is to ensure that different points of view will be covered, and also to compare answers from individuals working for the same company. The CFO or controller possesses the knowledge about the refined cost accounting system. This individual might also have insights within lean or other continuous improvement programs, currently running within the organisation. The operations manager or lean project leader possesses the knowledge about lean or other continuous improvement programs, used within the organisation. This individual might also have insights on what information is used from the cost accounting system in favour of lean or any other continuous improvement program.

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4. Measurement

To be able to measure how lean is used; some operational measures need to be drawn. Shah and Ward (2007) developed a very thorough framework for measuring the use of lean. This framework uses three underlying constructs. These are related to suppliers, customers, and internal issues. These three constructs can be divided into ten different operational constructs that lead to 48 operational measures. Using the complete framework for this study is unrealistic since the interviews are only limited to one hour each. Therefore the operational measures presented will be used as guidelines to construct the interview questions. Doolen & Hacker (2005) stated the important areas in the organisation to investigate when measuring the use of lean. Therefore, these important areas will also be used when constructing interview questions.

To be able to measure how the cost accounting system is used, the papers by Houbiers et al. (2012) and Bhimani et al. (2008) are useful. They indicate that organisations that use cost pools based on processes instead of functional areas see their cost accounting system as refined. But it is also indicated that the refinedness of cost accounting systems present in an organisation is not an optimum that must be reached. It is a rather complicated process that slowly evolves and is dependent upon individuals’ decisions. Thus, the perception of the use of cost accounting systems can vary dependent upon the person interviewed.

Cost reduction, as the dependent variable, is very broad. Though, in this study, cost reduction is highly dependent upon the perception that interviewees have about this concept. Therefore, to not limit the study in a particular direction, cost reduction remains broadly defined.

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16 meaning of the various questions, the interview questions as presented in the appendix are also provided in Dutch.

The collected data will be recorded where possible, otherwise notes will be taken. This recorded data or the taken notes will be transcribed. Yin (2009) suggests several ways of analysing the data, two of which will be used during this study. The first one is to rely on theoretical propositions, which were built earlier. Because these propositions have shaped the interviews questions, they have guided the interviews towards the relevant subjects. Therefore, by using the propositions in the analysis, the analysis is scoped to the main subjects. The second one, if possible, is to examine rival explanations. From the different interviews it can happen that different views exist about the use of lean and use of refined cost accounting systems and their effect on cost reduction. These rival explanations need to be examined.

The conducted interviews give enough room for comparison; therefore pattern matching will be the used technique. With this technique a comparison can be made between the use of lean and the non-use of lean as well as the use of refined cost accounting systems and the non-use of refined cost accounting systems, and finally also their effect and joint effect on cost reduction. The use of this method is dependent upon the response, and the diversity of organisations along the variables use/non-use of lean and refined cost accounting systems (Yin, 2009).

According to Yin (2009) the analysis should address all the relevant evidence collected from the interviews, all major rival interpretations, should be pointed towards the most significant aspect of the study. Finally, the analysis must not only rely on prior literature but should also be approached using the researchers own expert knowledge.

5. Data and results

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17 Figure 2. Plot of the interviewed companies along the dimensions in the conceptual model

In figure 2, the three interviewed companies are plotted on two dimensions, namely the use of a refined cost accounting system and the extent of the use of lean. These plots are based on the perception the researcher has about the companies following the conducted interviews. This graph is merely an assessment of the situation of these companies, and is used to clarify and visualise some of the results.

The first hypothesis stated that the use of lean reduces costs. Questioning how lean actually contributes to cost reduction, two ways can be recognised. The first is that lean makes sure the organisation is focused, processes are made visible, and performance is displayed. This is facilitated by measuring the effectiveness of processes, by measuring the amount of default, and measuring the amount of rework. Subsequently, a strict policy of only accepting clean orders and no rework is used. The second way is based on awareness among employees and can best be displayed using the following quote; ‘you are never satisfied with a way a process flows, you are always looking for

possibilities to improve quality, client satisfaction, or motivation of employees (controller, company C).’

In the past, the pension administrators did not pay much attention to cost reduction. The urge to make the costs transparent and reduce costs in the identified areas was not present. It is only since recent years that cost reductions are higher on the agenda. This also means that the lean initiatives are relatively new, only implemented within the last few years. As mentioned by multiple

0 0,2 0,4 0,6 0,8 1 0 0,2 0,4 0,6 0,8 1 Th e e xte n t o f u se o f l e an

The use of a refined cost accounting system

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18 respondents, for lean to be able to grow to its full potential the entire organisation needs to be aware of the lean principles. If only a few departments work with lean, and others don’t, it is possible that there are departments that make sub optimal decisions and thus affect the value of the entire organisation. It was even mentioned that the use of lean should be expanded over the entire value chain, and over all the organisations involved, as can be seen below; ‘Lean does not only work

in the processes, but the entire value chain should be involved. All solutions not focusing on the entire value chain are subject to suboptimal decisions (controller, company A).’

Following from the previous result, this implies that the extent in which lean is being used within organisations has an influence on the possibilities to reduce costs. There are differing methods in the way lean is applied. One way is to give the managers of the different departments the responsibility to implement the lean principles in their department. The other method is to work with an independent team that can assist the department managers in meeting their regular goals and targets. Another distinction can be made in the initiation of lean. One way is to initiate lean projects top down, as a result of financial measures and analysis. The other way is to use both top down projects, but also encourage employees in initiating individual improvements. This last way of working is more a cultural aspect. When employees have the principles of lean ingrained in their routines and behaviours, they are more likely to initiate cost reductions; ‘Individuals are often

unaware of how the part of the work they do contribute to the organisation (manager, company C).’ ‘Lean is mainly about improving yourself, thinking in small attainable steps resulting in quick and visible results (controller, company C).’ From these quotes it can be seen that employees need to be

aware of their contribution before they start working and improving in their own jobs. Some of the bottom up lean initiatives to reduce costs are; ‘There are many initiatives from the organisation.

They vary from production measurements, daily working stock, stock in and outflow, process optimisation, kaizen approaches, and even whole business cases (controller, company A).’ These are

all examples of how lean contributes to cost reduction with bottom-up projects.

As mentioned in the interviews, when lean is still in its early stage of development, the cost reduction achieved is relatively high. ‘What I saw in my own experience, is that when you implement

lean, a large cost reduction of 25-30% is likely. After that, it is hard to reach 5% cost reduction a year (manager, company A).’ This happens because there are tactical benefits in eliminating obvious

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19 the organisation are all used in the interest of the strategy, and conducted in a very efficient and effective manner, more cost reduction can follow.

Within pension administrations, the possibility of lean to reduce costs is mainly located in reduction of the amount of full time employees (fte’s). Most of the targets coupled to lean projects are based on these fte’s. When only using fte’s as information source, it happens that in one process fte reductions are accomplished, but subsequently these fte’s are being spread out over other processes. That means that although there is a cost reduction for one activity, the gained time is added to another. This can be seen in the following quote; ‘what I mainly see is that the purpose of

lean is to do certain activities right the first time, and the freed time is spend on other activities. I do not directly see cost reductions (controller, company C).’ It is pointed out here that lean does indeed

help in performing activities and processes more efficiently, but this does not directly result in cost reductions. More insights in the real activities of individual employees can be helpful in preventing this from happening.

‘Lean helps to give me insight in the differences between teams by showing their productivity (manager, company A).’ Lean makes the productivity of teams visible and thereby helps to evaluate

and manage the teams. But, as multiple respondents mentioned, it is hard to show that certain cost reductions are solely resulting from lean projects, and also whether or not these lean projects are the actual triggers that lowered the costs. Fortunately, when lean is implemented in the entire organisation and one of the strategic goals, it is expected that the lean projects are aligned with the business goals. If the outcomes of the financial measures show cost reduction, the means might not matter. Next to that, cost reduction is not the intended focus of lean in pension administrations, as can be seen in the following quote; ‘Lean is not mainly focused on the cost aspect, more important is

the value delivered to customers. This value cannot be directly related to its costs, and if extra value for a customer means that more costs are involved than that should be alright (manager, company C).’

The second hypothesis stated that the use of refined cost accounting systems reduces costs. All interviewed agreed that more insights in their costs through the use of a refined cost accounting system will indeed bring more possibilities to address specific areas in the organisation that have relatively high costs or as one of the interviewed answered; ‘Having more insights helps in pointing

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20 Pension administrations have to deal with numerous client agreements and different associated costs and can use the refined cost insights to effectively compare different clients, and also compare themselves to competitors; ‘Because of limited transparency about conditions and arrangements

with clients, it is hard to make comparisons between clients. As a consequence the costs per participant are also hard to determine. Therefore a refined cost accounting system is needed to provide accurate information (controller, company A).’

Next to that, as some of the interviewed stated, it becomes easier over time to assign the costs to different department. This is due to the knowledge about cost pools, accumulated over the years of using a refined accounting system. When keeping the system up to date on a regular basis it is possible to see cost trends emerging from the system. This means that the longer the refined cost accounting system is in place, the more possibilities there are to target specific areas of the organisation.

What we can see is that, just as with lean, the way in which people think about the information that they receive matters. ‘If a system exists that calculates and makes the contribution of every

individual visible, than that system could help in reducing costs. Otherwise cost reduction is too abstract, and does not trigger individuals to take action.’ ‘We also try to initiate discussion about the costs in the different business units, hoping to create cost awareness throughout the whole organisation (manager, company C).’

Though, there are some challenges emerging from the interviews. Traditional cost accounting systems are too stable to function in the continuously changing environment of a pension administrator. The cost accounting system should be kept as flexible as possible, so the underlying drivers can be adjusted quickly to the changing circumstances in a turbulent environment. This is also where the earlier mentioned challenge is located for a refined cost accounting system. Maintaining and updating a highly refined cost accounting system is challenging and time consuming, and it can be questioned if the benefits outweigh these maintenance costs and costs of the red tape to collect all the data. ‘The pitfall in using a refined cost accounting system is that you

focus too much on the details, the discussion should not be about the individual numbers but should be about the overall perspective.’ ‘The interesting thing is to know on what activities people spent their time, and how they do it (controller, company C).’ Moreover, if the foundation of the system is

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21 comprised mainly out of personnel costs. This has been interpreted in two different ways. On the one hand, a very simple cost accounting system may suffice to give the needed insights in the costs, with just enough detail to be able to see trends, and not end up discussing every single detail. On the other hand, because the costs are uncomplicated a refined cost accounting system can be used to calculate the costs up until individual activities with only a small amount of effort.

In the past, the allocation of costs among different departments in de pension administration industry has not been particularly relevant and high on the agenda. With the external transparency pressure and the need to reduce costs, the correct allocation of costs becomes more important. The first way in which cost reduction can be achieved is to align systems and reduce the amount of systems, illustrate by the following quote; ‘I now use three different systems to do the exact same

thing. That means that I have to insert all information in threefold. This is a source of implementation problems (manager, company A).’

The third hypothesis stated that a joint effect is expected of lean and refined cost accounting systems on cost reduction. It can be questioned which of the two approaches, lean or the cost accounting system, are leading in initiating cost reduction. It appears that the finance departments of the interviewed organisations are still the leading factors by setting targets, whether or not in consultation with the departments, and in indicating the amount of costs, in percentages, that need to be reduced. These targets are the result of conducted financial analysis. Lean is more seen as the method with which the cost reduction can be achieved; ‘Lean is the way in which, not the reason

why (controller, company C).’ Lean is also more focused on small attainable steps, and the cost

accounting system should keep the overview of the entire value chain; ‘The power of lean is located

in the improvements in small attainable steps, but in the overall management it is nice to know that the whole value chain is performing as planned (controller, company B).’

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22 system is that this system can help in showing the actual contribution of particular projects to the cost reduction.

It can be seen that in the early stages of using lean in the organisation; the information sharing from the accounting system and from the finance department is not yet part of daily business. Whereas organisations that use lean more intensively indicate that the used information contains the set targets from the finance department, customer complaints, client signals, analysis of standard times for certain activities, market developments, and alignment with the organisation’s vision and strategy. Other organisations indicate that; ‘Not much information from the cost accounting system

is used in favour of lean. At the moment we only evaluate the amount of hours individuals spend on projects (manager, company B).’

From the interviews it becomes clear that the leading factor in using lean and using the cost accounting system is not to reduce costs. Although all interviewed organisations do acknowledge that there is increasing pressure to make costs more transparent and consequently reduce them. But the leading factor is to increase the value delivered to their customers. This is stipulated by the following quote; ‘From your cost allocation you develop an image of client revenues, consequently

you question if your cost distribution is relevant. After this you know which clients are profitable and which are not. If it then turns out that you need to work more efficient, you can use lean to achieve this (controller, company A).’ The way in which the organisations try to accomplish this, is by

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23 In this table the results per hypothesis, in a short sentence, as displayed in this chapter are shown.

Results

H1 - Lean makes performance and processes visible

- Lean improves awareness of employees to work efficiently - The entire organisation needs to be aware of the lean principles - The extent of lean use is related to the amount of bottom-up initiatives - The amount of costs to be reduced by lean diminishes over time - Freed time because of lean is spend on other activities

- Value delivered to clients is more important than cost reduction

H2 - A refined cost accounting system brings more possibilities to address cost discrepancies

- It becomes easier over time to maintain a refined cost accounting system and more trends are visible

- A refined cost accounting system improves awareness of employees about their contribution - The cost accounting system should be kept as flexible as possible

- Maintaining a refined cost accounting system is time consuming and challenging - All the different systems need to be aligned to prevent inefficiency

H3 - The cost accounting system is leading in setting targets for the departments, lean is the method - Conflicting results as to what accounting system is best to use with lean

- As lean is used longer and more extensively relevant information is shared more frequently - Leading factor of the cost accounting system and lean is to increase customer value

Table 1. The results of the interviews

6. Discussion

In this section, it will be discussed what we learned from the conducted research. This will be done by matching the presented results from the interviews with the earlier developed arguments from the literature, and interpreting what might be happening in that particular situation. Most importantly, we would like to know how the three hypotheses work. But also the preconditions need to be known.

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24 lean, a relatively high cost reduction can be achieved. The amount of costs to be reduced will diminish over time, as improvements are conducted in increasingly smaller steps.

Several respondents indicated that culture is not present in the ideas and principles of lean. But, as Shah & Ward (2007) concluded, lean is related to people and processes. As every individual in the organisation is aware of its contribution, they are more likely to be triggered to initiate individual efficiency improvements. So while the lean principles have nothing to do with culture at first sight, over time lean becomes ingrained in the entire organisational culture. Lean makes sure that employees are aware of their contribution, and helps them in working more efficiently. It is exactly this awareness that shows where the cultural aspect in lean is located, and this also shows how lean helps in reducing costs. This awareness has been stipulated by several respondents in the interviews.

Next to the cultural aspect, the lean tools are set in place to gives important insights in how processes work as they work. The performance of individuals, teams and departments can be monitored and managers can take appropriate actions.

The conclusion by Browning & Heath (2009) that there is a trade-off between the benefits of lean, and the process disruption caused by changing the way of working, is not entirely supported. From the interviews it can be concluded that if certain processes are conducted more efficiently, the time freed is being transferred to other processes making these less efficient. This happens because personnel costs are fixed in the short term. Making a process more efficient does not lead directly to a cost reduction in personnel costs. Individuals simply spent their time on other activities. On which activities this time is spend can be calculated using a refined cost accounting system, as discussed below.

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25 second system is executed with a relatively small amount of effort due to the clear costs in this type of organisation.

The organisations that use the first approach do acknowledge that more insight in costs will always lead to better decisions. This can be particularly seen in the documentation of client agreements. Since pension administrators generally handle multiple clients, they have to deal with different agreements and different requirements. A refined cost accounting system will be very helpful in making clear where the costs of different clients are located, and adjust prices and arrangements accordingly. This is in concurrence with the findings by Ittner et al. (2002) that say that a refined cost accounting system can improve coordination with customers. This means that a refined cost accounting system makes it possible to get insights in different profits per customer and also opens up ways to make benchmarks with competitors. Next to that, a refined cost accounting system brings more possibilities to address cost discrepancies that emerge from the system. The awareness of employees, as also mentioned in combination with lean, is improved when more information is available and shared throughout the organisation from the accounting system. The more information they receive about their performance and about their contribution, the more employees start thinking about how they do their work.

As said, maintaining and updating a refined cost accounting system is challenging and time consuming, certainly when the different underlying drivers constantly change. Therefore the system should be kept as flexible as possible to be able to change these underlying drivers with relative ease. As can be seen from the results, it becomes easier over time to maintain a refined cost accounting system. This is probably due to the individuals learning to more efficiently work with the cost accounting system.

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26 that this time consuming process is not efficient, and is not conducted in a lean way. From these mixed arguments, a pattern becomes visible. In the earlier stages of the use of lean, and when lean is not used in the entire organisation, individuals need to receive extra insight in their activities to be able to learn to work with the lean principles. Later on, when lean is ingrained in each and every individual they know and feel how to work as efficiently as possible because it has become part of their daily routine. The mixed outcomes are in fact not mixed but just represent different stages or phases in which lean is used and the extent to which lean is used. This is also concurred by figure 2, earlier in this research. When reviewing this figure, in which the three interviewed companies are displayed along two dimensions, there is a trend visible. Although only three companies where interviewed, no significant conclusions can be drawn from this graph, this trend shows that as organisations increase the extent of use of lean in their organisation, the used cost accounting system becomes less refined.

From the paper by Kennedy & Widener (2008) it became clear that the use of lean directly affects the cost accounting system. This implies that lean is leading in setting targets. This was not concurred by the interviewed organisations, in fact it was indicated that the cost accounting system is leading in the target setting process. As a result of financial analysis targets and budgets are set for the departments. These departments subsequently use lean to accomplish these targets and stay within budget. Lean is more seen as a method for reaching process improvement. This implies that pension administrators have historically been driven by the finance department. This is contradicting with other conclusions from the interviews that the value delivered to customers is leading, meaning that the business should be the leading department.

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27

7. Conclusions

This paper studied the joint effect of use of lean and use of refined cost accounting systems on cost reduction. The purpose is to investigate how the use of lean and refined cost accounting systems lead to cost reduction. The idea behind this research is that cost control can only be effective if the insight within particular cost drivers is being used in the form of actively reducing costs using lean. This research has contributed to the literature by studying the joint effect of lean and refined cost accounting systems, a subject on which only a handful of papers have been written. This study focussed on the Dutch pension administration industry and thereby also contributed to the literature by testing this joint effect in the service industry.

Three varying but also overlapping hypotheses were developed. The first stated that the use of lean reduces costs. This hypothesis is confirmed during the study. Lean makes processes visible and improves awareness among employees. It is pointed out that for lean to be able to efficiently reduce costs it needs to be present throughout the whole organisation, and be ingrained in the organisation’s culture. The cost reduction might not set in right away as the largest portion of the costs in pension administrations are tied up in personnel costs, which are fixed in the short term.

The second hypothesis stated that the use of refined cost accounting systems reduces costs. It is acknowledged that more insights lead to better cost control and enables the organisation to target specific areas that show relatively high costs. The use of a refined cost accounting system improves the awareness of employees about their contribution to the organisation. The refined cost accounting system should be as flexible as possible to help in overcoming the challenges of updating and maintaining the system. Over time, due to learning effects, it becomes easier to keep the system up to date. However some organisations rather use a simpler cost accounting system that gives just enough detail to see trends emerging. This is directly related to the third hypothesis.

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28

8. Limitations and future research

This study is subject to several limitations. The first is the limited scope of the study; only three organisations have been interviewed. The generalisation of the findings is possible to the total population of pension administrators, but it should be kept in mind that the interviews were subject to interpretation of the researcher. No generalisations outside the scope of the pension administration industry can be made, as this research was specifically targeted towards this industry. It is possible the interviewed were biased, toward a positive outcome of the hypotheses. This risk for this bias has been minimalized by not providing the interviewed subjects too much information about hypotheses or the research. Next to that, the studied subjects might be hesitant to speak openly and freely in a face to face meeting, even though the confidentiality of the interview is guaranteed. It is also possible that the interview questions do not represent the entire scope of the hypothesis, and are therefore not complete. Finally, the researcher has limited experience with the technique of interviewing and might not have collected all available information. This last limitation has been partly reduced by inviting a second, more experienced, interviewer for every interview.

From this interview several leads for future research can be derived. At first a more extensive study of the same hypotheses and with more extensive and in-depth interviews should be conducted, to be able to significantly confirm the results of this study.

Next to that, the role the cultural aspect plays in the joint effect between the use of lean and the use of refined cost accounting systems could be investigated further. From the interviews it became clear that culture plays a very important role in the use of lean and the use of the refined cost accounting systems. This future study could investigate what this role is, and how it contributed to the joint effect and the cost reduction.

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29 Finally, the findings indicated that the extent of the use of lean plays a role in the refinedness of the cost accounting system. This was interpreted by the researcher, but should be confirmed by an extensive study.

Acknowledgements

At first I would like to thank my university supervisor, dr. Hilco van Elten, for his continues support and his comments on this thesis. These comments have helped me to constantly improve the research and bring it to a higher level.

I also would like to thank Deloitte for giving me the opportunity to conduct this research. In particular I would like to thank Margot Frens, for giving me tips and advice to improve my final piece and for constantly pressuring me to keep up the good work. I would like to thank Peter Smidt for his insights from an educational point of view. I would like to thank Caroline Schouten for her assistance with the arrangements for the interviews, and also her assistance during some of them. I would also like to thank Peter Janssen and Esmee Blom for assisting me during the remaining interviews.

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30

References

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31 Gunasekaran, A., & Sarhadi, M. (1998). Implementation of activity-based costing in manufacturing.

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Ittner, C. D., Lanen, W. N., & Larcker, D. F. (2002). The Association Between Activity‐Based Costing and Manufacturing Performance. Journal of Accounting Research, 40 (3), 711-726.

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32 Vinodh, S., & Balaji, S. R. (2011). Fuzzy logic based leanness assessment and its decision support system. International Journal of Production Research, 49( 13), 4027-4041.

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33

Appendix I

Interview

Introductie

 Momenteel ben ik aan het afstuderen voor mijn opleiding Organizational & Management Control, onderdeel van bedrijfskunde in Groningen. Hiervoor doe ik onderzoek naar het gebruik van lean en het gebruik van kostprijssystemen binnen pensioenadministraties.

 In dit interview zal ik eerst een aantal vragen stellen over het gebruik van lean of een andere procesverbeteringssystematiek binnen de organisatie, vervolgens heb ik een aantal vragen over de gebruikte kostprijssystematiek.

 De resultaten van het onderzoek zullen vertrouwelijk worden behandeld, en zullen niet tot u of de organisatie te herleiden zijn.

 Het interview zal ongeveer een uur in beslag nemen.

 Omwille van de tijd zou het kunnen gebeuren dat ik op enig moment het interview zal moeten bijsturen.

 Tot slot wil ik u vragen of u het goed vind dat ik gebruik maak van een recorder, zodat ik het gesprek later terug kan luisteren voor mijn analyse.

 Heeft u, voordat we met het interview starten, nog specifieke vragen?

Gestructureerde vragen (5 min)

- Wat is uw positie binnen de organisatie?

- Wat zijn uw werkzaamheden/bevoegdheden/verantwoordelijkheden binnen de organisatie?

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34 - Als ik dit onderwerp zo noem, wat wilt u mij dan meegeven of wat is uw eerste reactie?

Thema: ‘gebruik van lean’ (25 min)

- Is er binnen de organisatie een focus op het reduceren van kosten? - Wordt hier een gestructureerde manier voor gebruikt?

o Waarom? o Sinds wanneer?

- Maakt u binnen de organisatie gebruik van lean? o Hoe wordt lean gebruikt?

 Ad hoc of op continue basis? o Waarom specifiek lean?

o Wordt lean als bedrijfsstrategie toegepast, of meer als techniek voor een afdeling - Hoe wordt er bepaald welke processen door lean (of een andere methodiek) kunnen worden

herzien?

o Welke informatie wordt hier voor gebruikt?

o Denkt u dat deze afstemming kan bijdragen aan het reduceren van kosten? - Hoe draagt naar uw mening het gebruik van lean (of een andere methodiek) bij aan het

reduceren van kosten?

- Kunt u aangeven hoe de kosten in het verleden zijn veranderd als gevolg van het gebruik van lean?

o Radicale of geleidelijke verandering?

Thema: ‘gebruik van het kostprijssysteem’ (25 min)

- Gebruikt u een bepaalde manier voor het berekenen van kosten? (absorption/variable/throughput costing)

o Waarom hanteert u dit systeem?

o Hoe worden de kosten toegewezen aan de verschillende afdelingen?

o Wat is uw mening over de manier waarop de kosten worden toegerekend aan de verschillende afdelingen?

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35  Gebeurt dit in grote groepen kosten, waarbij de kosten wel worden

toegewezen maar niet tot in de kleinste details?

- Hoe wordt de informatie vanuit het kostprijssysteem ingezet in de organisatie? o Alleen gebruikt voor evaluatie? (Management rapportage/Koppeling

KPI/Strategische doelstellingen)

o Meer pro actief gebruik? (Creativiteit in het uitvoeren van analyses)

- Hoe draagt naar uw mening het kostprijssysteem bij aan het reduceren van kosten?

- Kunt u aangeven hoe de kosten in het verleden zijn veranderd als gevolg van het gebruik van het kostprijssysteem?

o Radicale of geleidelijke verandering?

- Hoe gebruikt de organisatie het kostprijssysteem om te evalueren wat de impact van lean is? - Wat voor onderlinge afstemming is er over en weer tussen het gebruik van lean en het

aanwezige kostprijssysteem? o Op wat voor manier?

Afsluiting

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