LEAN AND ACCOUNTING the role of the CEO and CFO

LEAN AND ACCOUNTING: The Role of the CEO and CFO Orest J Fiume Retired Vice President - Finance The Wiremold Company Copyright 2006 by Orest J Fi LEAN A Business Strategy Not A Manufacturing Tactic Not A Cost Reduction Program Copyright 2006 by Orest J Fi A Simple Example Two Companies in Same Industry Using Same Equipment Company A Company B Set Up Takes Hour Set Up Takes Minute • Who Has Lowest Cost? • Who Can Provide Best Customer Service? A Small Process Improvement Provides Enormous Strategic Advantage Copyright 2006 by Orest J Fi Time-Based Strategies Lead-Time Reduction Critical for driving improvement to your customers Copyright 2006 by Orest J Fi Time-Based Strategies Lead-Time Reduction The key is to reduce your processes to “core value” Copyright 2006 by Orest J Fi But What About Non-Manufacturing Companies All Companies have similar processes Manufacturing Develop new products Take orders Process orders Purchase materials Make products Payroll Ship product Close the books Accounts receivable Accounts payable Hire people Copyright 2006 by Orest J Fi Service Develop new services Take orders Process applications Purchase supplies Provide services Payroll Ship product ? Close the books Accounts receivable Accounts payable Hire people Why Doesn’t Everyone Do “Lean”? • Easy to Agree With • Hard To Do Why Is It So Hard? Copyright 2006 by Orest J Fi Most Companies View “Lean” as Some Manufacturing Thing • Just an Element of Strategy • Delegate it Down in the Organization - But Don’t Remove the Barriers – – – – Make the Month Absorption Accounting MRP and Other Computer Systems Direct to Indirect Employee Measurements Must Be Company Strategy To Be Successful Copyright 2006 by Orest J Fi OBSTACLES TO CHANGE • “But, those companies aren’t like ours, we have different problems” • “We’ll change, but let’s so very slowly” • “Our auditors won’t accept that” Copyright 2006 by Orest J Fi What Does It Take To Go to Lean Thinking? It’s a Culture Change That Requires Leadership… Because In The End It’s All About People Copyright 2006 by Orest J Fi 10 Productivity Is The Relationship Between Quantity of Output vs Quantity of Resources Consumed • Sales $ • Material $ • Labor $ • O/H $ = = = = Quantity x Price Quantity x Price Quantity x Price Quantity x Price Changing the “Q’s” Requires Physical Change It’s Not a Financial Thing Copyright 2006 by Orest J Fi 30 IMPROVEMENT REQUIRES PHYSICAL CHANGE • Physically group production by product families • Physically change process layout to facilitate one piece flow • Physically eliminate central parts storage - store at the point of use • Physically reduce set up time 95%+ • Co-locate people: – Marketing & Product Dev – Purchasing, Production Control and Operations – Credit and Customer Service Copyright 2006 by Orest J Fi 31 EFFICIENCY The Relationship Between Two Inputs: Standard Labor Hours vs Actual Labor Hours It Presumes That The Standards Are Right Copyright 2006 by Orest J Fi 32 The Standard Cost P&L Net Sales Cost of Sales: Standard Costs Purch Price Var Matl Usage Var Labor Eff Var Labor Rate Var OH Volume Var OH Spend Var OH Eff Var Total Cost of Sales Gross Profit Gross Profit % This Year 100,000 48,000 (3,000) (2,000) 7,000 (2,000) 2,000 (2,000) 16,000 64,000 45,000 10,000 5,000 (8,000) 9,000 2,000 8,000 (17,000) 54,000 36,000 36.0% 36,000 40.0% USELESS MANAGEMENT INFORMATION Copyright 2006 by Orest J Fi Last Year 90,000 33 How are Standard Costs Calculated? • Materials = Quantity x Unit Costs – Material Quantity based on engineering design, modified for yield – Material Unit Costs based on quotes, current average or ??? • Labor = Hours x Hourly Rate – Labor Hours based on engineering studies, adjusted for PFD, etc – Labor Rates based on average rate • Overhead = Labor Hours x Overhead Rate – Overhead Rate based on Budgeted Overhead divided by Budgeted Hours Variance = Actual – Standard (estimates in Red) Red Copyright 2006 by Orest J Fi 34 The “Plain Language” P&L This Year +(-)% Net Sales Costs of Sales: Purchases Inventory (Inc) Dec: Mat’l Content Total Materials Processing Costs: Factory Wages (0.9) Factory Salaries Factory Benefits 40.0 Services & Sup (8.0) Equipment Depr Scrap (35.0) Total Processing Costs 2.2 Occupancy Costs: Building Depr Copyright 2006 by Orest J Fi Last Year 100,000 90,000 28,100 34,900 3,600 31,700 (6,000) 28,900 11,400 11,500 2,100 7,000 2,000 5,000 2,400 2,500 2,000 2,600 1,900 4,000 27,500 26,900 200 35 200 11.1 9.7 5.0 5.3 0.0 Balance Sheet Current Assets: Cash Acct Rec Inventory Other Total Fixed Assets Total Assets TY xx xx LY yy yy 14.0 20.0 xx yy xx yy xx xx yy yy Copyright 2006 by Orest J Fi Current Liabilities TY LY Accts Payable xx yy Accruals xx yy Other Total xx yy xx yy Long Term Debt xx yy Capital xx yy Total Liab + Cap xx yy 36 Balance Sheet Current Assets: TY LY Current Liabilities TY LY Cash xx yy Accts Payable xx yy Acct Rec xx yy Accruals xx yy Inv-Material 8.4 12.0 Other xx yy Inv-Def L+O/H 5.6 Total xx yy 8.0 Total Inv 14.0 20.0 Other xx yy Long Term Debt xx yy Total xx yy Capital xx yy Fixed Assets xx yy Total Liab + Cap xx yy Total Assets xx yy Copyright 2006 by Orest J Fi 37 The “Plain Language” P&L This Year +(-)% Net Sales Costs of Sales: Purchases Inventory (Inc) Dec: Mat’l Content Total Materials Processing Costs: Factory Wages (0.9) Factory Salaries Factory Benefits 40.0 Services & Sup (8.0) Equipment Depr Scrap (35.0) Total Processing Costs 2.2 Occupancy Costs: Building Depr Copyright 2006 by Orest J Fi Last Year 100,000 90,000 28,100 34,900 3,600 31,700 (6,000) 28,900 11,400 11,500 2,100 7,000 2,000 5,000 2,400 2,500 2,000 2,600 1,900 4,000 27,500 26,900 200 38 200 11.1 9.7 5.0 5.3 0.0 A Fundamental Truth An Increase in Productivity Does Not Automatically Result in an Increase in Profit Copyright 2006 by Orest J Fi 39 How to Actualize Productivity Gains? • • • • Sell more Reduce Overtime Hold on to attrition In-sourcing And It’s Management’s Responsibility To Actualize Productivity Gains Copyright 2006 by Orest J Fi 40 Cash Flow From Manufacturing This Year 36,000 2,000 Last Year 36,000 1,900 Building Depreciation 200 200 Chg In Inv Labor & O/H 2,400 (4,000) 40,600 +19% 34,100 Gross Profit Equipment Depreciation Cash Flow From Mfg Copyright 2006 by Orest J Fi 41 Summary According to Jim Womack: The Ages of Lean  1935 to 1977: Invention and Innovation  1977 to 1990: Discovery  1990 to Present: Diffusion out of auto industry  1990 to 2006: The Lean “tool” age  2007 : The Lean Management Age Copyright 2006 by Orest J Fi 42 THANK YOU ojfiume@comcast.net Copyright 2006 by Orest J Fi 43 Real Numbers: Management Accounting in a Lean Organization • www.tbmcg.com (go to TBM store) • www.lean.org (go to Store, then Lean Applications) • www.amazon.com Copyright 2006 by Orest J Fi 44 [...]... management wants them to do • METRICS SHAPE BEHAVIOR Copyright 2006 by Orest J Fi 15 When Should Metrics be Addressed? AT THE BEGINNING OF THE LEAN TRANSFORMATION Copyright 2006 by Orest J Fi 16 Who are the Principal Users of Metrics The Workers Copyright 2006 by Orest J Fi 17 How should we use metrics? • “Leaders may be judged by he numbers they deliver, but that’s not the way they should run the company”... Thinking…is an entire business model that must be run by the CEO – Jim Womack • “If you can’t get the CEO to lead this, then don’t start because you are wasting your time.” – Art Byrne Copyright 2006 by Orest J Fi 13 Lot’s of Leaps of Faith • Every decision contains a leap of faith, some more than others – Get a sensei • Every decision is a prediction of the future Copyright 2006 by Orest J Fi 14 Change.. .CEO s Role Copyright 2006 by Orest J Fi 11 Learn Lean Thinking • Lean is a personal journey as well as an institutional one” – Jones, Aguirre and Calderone • “If the CEO doesn’t know Lean and how to do it, you’re not going to be successful at implementing it in that company” – Art Byrne Copyright 2006 by Orest J Fi 12 Out Front-Hands On-Don’t Delegate • Lean Thinking…is an entire... structure hides problems • Value streams look at the organization horizontally, not vertically Flatten the organization Copyright 2006 by Orest J Fi 23 Plan to answer the question: “What’s in it for me?” Profit Sharing Copyright 2006 by Orest J Fi 24 CEO s Role - Summary • • • • • • • • • • Learn Lean Thinking Out Front - Hands On - Don’t Delegate Lots of Leaps of Faith Change Metrics Create an Environment... - store at the point of use • Physically reduce set up time 95%+ • Co-locate people: – Marketing & Product Dev – Purchasing, Production Control and Operations – Credit and Customer Service Copyright 2006 by Orest J Fi 31 EFFICIENCY The Relationship Between Two Inputs: Standard Labor Hours vs Actual Labor Hours It Presumes That The Standards Are Right Copyright 2006 by Orest J Fi 32 The Standard Cost... “no-layoff” policy Organize around Value Streams Profit Sharing Copyright 2006 by Orest J Fi 25 OBSTACLES TO LEAN ACOUNTING • • • • • • Transaction focus Complex systems Absorption Accounting Emphasis on Variance Analysis No Timely Information Focus on Compliance vs Improvement Copyright 2006 by Orest J Fi 26 CFO s Role • • • • Learn Lean by Doing Lean Change Metrics/Performance Measures Remove the Obstacles... Obstacles Understand the difference between Efficiency and Productivity • Provide Information that non-accountants can actually use • Avoid the two big “surprises” Copyright 2006 by Orest J Fi 27 REMOVE THE OBSTACLES • • • • • Commit to break with traditional systems Provide education in Lean Thinking Reduce clerical activities to free up time Reduce unnecessary reports to free up time Assign Accounting. .. 2006 by Orest J Fi 28 Understand the difference between Efficiency and Productivity PRODUCTIVITY = WEALTH Arthur P Byrne Copyright 2006 by Orest J Fi 29 Productivity Is The Relationship Between Quantity of Output vs Quantity of Resources Consumed • Sales $ • Material $ • Labor $ • O/H $ = = = = Quantity x Price Quantity x Price Quantity x Price Quantity x Price Changing the “Q’s” Requires Physical Change... small number will quickly understand it and like it • A small number will feel threatened and try to kill it • What is everyone else doing? Waiting To See Who Wins Copyright 2006 by Orest J Fi 20 Eliminate Concrete Heads But do it the right way… everyone is watching Copyright 2006 by Orest J Fi 21 Have a “no lay-off’ policy “No one will lose their employment as a result of productivity gains” Copyright... Labor Hours It Presumes That The Standards Are Right Copyright 2006 by Orest J Fi 32 The Standard Cost P&L Net Sales Cost of Sales: Standard Costs Purch Price Var Matl Usage Var Labor Eff Var Labor Rate Var OH Volume Var OH Spend Var OH Eff Var Total Cost of Sales Gross Profit Gross Profit % This Year 100,000 48,000 (3,000) (2,000) 7,000 (2,000) 2,000 (2,000) 16,000 64,000 45,000 10,000 5,000 (8,000) 9,000 ... Lean as Some Manufacturing Thing • Just an Element of Strategy • Delegate it Down in the Organization - But Don’t Remove the Barriers – – – – Make the Month Absorption Accounting MRP and Other... 2006 by Orest J Fi 26 CFO s Role • • • • Learn Lean by Doing Lean Change Metrics/Performance Measures Remove the Obstacles Understand the difference between Efficiency and Productivity • Provide... J Fi 12 Out Front-Hands On-Don’t Delegate • Lean Thinking…is an entire business model that must be run by the CEO – Jim Womack • “If you can’t get the CEO to lead this, then don’t start because