Lean Beans: Jack’s Cost
st
System for the 21 Century
Sue Sondergelt, CMA
Lean Accounting Associate
Lean Advisors, Inc
www.leanadvisors.com
Faculty, University of Phoenix Online, MBA Program
“Advanced Cost with a Lean Twist”
IMA 87th Annual Conference & Expo
June 17 – 21, 2006
Las Vegas
© 2006 Lean Advisors Inc
TM
Success Through Knowledge
Agenda
1
FERF: A New Paradigm of Change for Accountants
2
Lean Thinking Prerequisites for Lean Beans
3
What’s Wrong with Standard Cost?
4
Lean
Beans: Re-creating Your Financial System
Conclusion
© 2006 Lean Advisors Inc
Getting Past Old Paradigms
“What Business Are You In?”
80’s and 90’s Management Techniques:
– JIT, TQM, TPM, Six Sigma – All Inwardly focused
on products.
What Business Should You Be In?
- creating VALUE for the Customer.
- Outwardly focused on the Customer.
Example: Pratt & Whitney – “Power by the Hour”
© 2006 Lean Advisors Inc
Getting Past Old Paradigms
If we look at the history of Management
Accounting, there has not been much “change”
or innovation since Henry Ford spoke on Target
Costing back in the 1920’s:
“We have never considered any costs as fixed. Therefore we first reduce the
price to a point where we believe more sales will result. Then we go ahead
and try to make the price. We do not bother about the costs. The new price
forces the cost down.”
- By Henry Ford, My Life and Work, 1922
© 2006 Lean Advisors Inc
Since 1930 there have been no significant
changes in the way in which Financial or
Managerial Accountants “think.”
1990’s: Decade of Tech Tools.
Command & Control!
Crash & Burn!
Then in came the Financial Executive Research Foundation…
FERF
© 2006 Lean Advisors Inc
FERF: Financial Executive
Research Foundation
Defined the Traditional
Accountant as:
•
•
•
•
“Bean Counter”
Messenger of “Doom & Gloom”
Concerned only with Control
Variance Analysis / Paralysis
© 2006 Lean Advisors Inc
“Old” Paradigm vs “New”
in Accounting
• MBO
• What gets done & what
gets measured counts
• Vertical organization
• Control
• Isolated “functions”
• Lone Rangers & one
improvement per year
© 2006 Lean Advisors Inc
• MBV (VALUE)
• “How” we achieve success
is what really counts
• Horizontal organization
• Empowerment
• Integrated Teams
• Kaizen Teams & many
improvements, often
FERF says there will be
Implications
• How will the Finance “function” operate in
a process or team-oriented organization?
• Is a “functional” approach to organizing
Finance still relevant?
© 2006 Lean Advisors Inc
FERF
“Initiative on Organization and Strategy
in Financial Management”
• Finance should be Commitment to Cultural
Change
• Finance plays a major role in this
Organizational Change
(an example: Controller at Gorton Fish)
© 2006 Lean Advisors Inc
Gorton Fish
Kaizen Team mapped the Value Stream, from the time
material hit the receiving dock to the time the finished
product was shipped to the customer.
After mapping the current state, they went to work
eliminating Waste (miles of conveyor belts, waiting time,
queue time, mountains of inventory, handling waste,
defects.)
Reduced lead time from 114 days to 10 days, taking $3
million to the bottom line with only an $80k investment
(that’s an IRR of 3,650%.)
Who led this team? A new age Managerial Accountant!
© 2006 Lean Advisors Inc
Making the Numbers Count
“ADDING VALUE…….”
Excuse: Must obey GAAP!
Yes! But only in Financial Reporting!
Management Accounting is
proactive.
Simplify accounting systems so that they serve
Production, Marketing, and Engineering….
the entire Organization!
© 2006 Lean Advisors Inc
‘Lean Beans’
In A Nutshell
• Junk traditional “absorption” accounting
• Declare Standard Cost and Variance
Analysis DEAD!
• Keep Standard Cost for Families of parts
for sole purpose of valuing inventory on the
Balance Sheet ONLY
• Use cycle time to allocate overhead
(not DLH/not MH.)
More emphasis on L/T than S/T, Judge Production Managers
on INVENTORY TURNS and Defects, not Operating Income.
Let’s quickly review “lean thinking” before discussing Lean Beans.
© 2006 Lean Advisors Inc
Origins of Lean Manufacturing
LEAN is not a buzz word!
Think of LEAN as a new “brand name” to sell an old Concept.
LEAN
1990’s
© 2006 Lean Advisors Inc
JIT
1970’s
Toyota
Production
System
1950’s
Henry
Ford
“Common
Sense”
Early 1900’s
Review of Principles of Lean
Before we discuss Lean Beans, we need to understand
the basic principles of Lean Thinking.
1. Create Value for Customer (Product Families)
2. Map the Value Stream
3. Flow (machines/desks lined up in the order in
which the operations occur)
4. Pull from the Customer
5. Perfect
© 2006 Lean Advisors Inc
Prerequisites for Lean Beans
You should have the first two principles of
Lean in place in your organization:
1. Specify VALUE (set up Product Families)
2. Identify the VALUE Stream
If you have these two principles in place,
you will take millions of dollars to the ‘bottom line.’
© 2006 Lean Advisors Inc
What do we mean by VALUE?
Principle #1
To be successful in Business, we need to look
“Outside-In” and not “Top-Down.”
Deming:
“You must not run your Organization as a functional hierarchy.
You must understand it as a “System.”
Managers must change the way they “think!” Think Systems and not functions,
Look “outside-in” and understand what matters to the Customer.
© 2006 Lean Advisors Inc
Value-Added Analysis
An Example…
Start at the moment supplier drops off material:
1.
2.
3.
4.
Move off truck
Wait in Receiving
Compare to PO
Wait in Receiving
Wait
Time
© 2006 Lean Advisors Inc
30 min
48 hours
60 min
12 hours
Could the process be changed so that the
material doesn’t have to wait?? What about
delivering material direct to the location in
the plant where it will be used?
WASTE
Time!
“Processing Villages” Interrupt Flow.
“Departments” Interrupt Flow.
No
Processing
Villages!
© 2006 Lean Advisors Inc
No
Material
Handlers!
Prerequisite to Creating
Value
Establish PRODUCT FAMILIES
How?
Matrix of your machines, or processes, or steps,
and your Products…
© 2006 Lean Advisors Inc
Identifying PRODUCT Families
A Product Family!
PROCESSES or MACHINES or OPERATIONS or PEOPLE
1
2
3
4
5
6
X
X
X
X
X
X
7
8
P
A
X
X
X
R
B
X
X
X
O
C
X
X
X
D
D
X
X
X
X
X
U
E
X
X
X
X
X
C
F
X
X
X
X
X
T
G
X
X
X
X
X
S
H
© 2006 Lean Advisors Inc
X
X
X
Lean Principle #2:
Mapping the Value Stream
Improving the Whole! Working the ‘Big Picture!’
Value Stream Improvement
vs
Process (Point) Improvement
VALUE STREAM
Stamping
Process
Welding
Process
Assembly
Process
RM
Three Value Streams:
© 2006 Lean Advisors Inc
• Product Concept to Launch
• Raw Material to Finished Product
•Order to Cash
Painting
Process
FG to
Customer
Mapping the Value Stream
• Identify all of the steps currently required to
move product from material requisition to
delivery of Finished Good to Customer.
• Challenge every step: Does it all add Value
for the Customer?
• Many steps are only necessary because of the
way businesses are organized (departments
and functional silos.)
© 2006 Lean Advisors Inc
Mapping the Value Stream
Different from Process Mapping….
• How orders come in (information mapping)
• How material comes in (material mapping)
• How product is shipped out to customer
Current State and Future State Maps
for each Product Family_ a VISION!
…then eliminate steps which do NOT create Value for the Customer.
© 2006 Lean Advisors Inc
The OLD Company….
Sales
Eng’ing
Operations
Quality
Finance
One functional silo to another
“Toll gates”
“Hand-offs” & fumbles!
© 2006 Lean Advisors Inc
HR
WARNING!!!
REQUIRED:
Complete rearrangement of all of your mental,
as well as physical, furniture.
MUST MOVE PAST “MUDA”
(Waste) PARADIGMS!
© 2006 Lean Advisors Inc
The New LEAN Company...
Prod
Dev
Small
group
engineers
(R&TS)
Prod Fam
A
Prod Fam
B
Prod Fam
C
Prod Fam
D
Prod Fam
E
Continuous
Improvemt
Office
Kaizen facilitators
Admin
Team
CEO, CFO,
Core Finance,
Supply Mngmt
Shipping
Team
Sales
Team
In Field
From Accounting point of view, no more allocations*,
90% of charges are Direct within a Family,
increased responsibility in every P&L.
*Lean Beans leaps right over the top of ABC Cost!
© 2006 Lean Advisors Inc
New Management Accountant’s Role:
Creating New Paradigms
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•
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•
•
Soft Skills as well as Hard skills. You will always need knowledge of GAAP, yes, but you will also
need people skills and some psychology to be successful.
Fewer Controls. You will need to move away from Controls and move toward adding Value and
empowering your people. You will need to be a COACH_ not a supervisor.
More line integrated. You will find yourself reporting to multiple bosses: some in Finance, some
in Operations. There may still be a solid line boss, but there will be multiple dotted-line bosses.
Share information / data. No more data rich and knowledge poor. You will need to bring the data
to the users of the information, and help them understand it.
No more MBO (management by objectives) but rather MBV (management by Values.)
Help to remove barriers within the company, tearing down functional silos, departments,
processing villages, flattening the organization. You will need to build cross-functional teams to
solve problems, cross departmental barriers, and communicate your data and knowledge to all
types of employees in all sorts of functional areas. Robert Half, in a recent survey entitled “The
Next Generation Accountant,” stated that today’s CFO expects non-traditional accounting
functions to occupy 37% of a Sr. Accountant’s time five years from now.
Help with Organizational learning. People throughout the organization need to know the
business cold! People can better help move the organization if they understand it. Provide Cost
training for Operations people_ “YOUR BUSINESS 101” for new hires.
Do bottom line results count more than how we achieved those results? Did the Financial
Accountant play games with the Balance Sheet, or did you, the Management Accountant, create
Value for the business?
© 2006 Lean Advisors Inc
Trends in New Management Lean
Bean Accounting
•
•
•
Emphasis on eliminating Waste rather than just reducing costs. We will be
looking at processes and the entire Value Stream rather than just the “point
improvements” we got with Reengineering, JIT, Six Sigma, etc. in the 1990’s.
Emphasis on cost reduction at the new product development stage. Design to
Cost and Target Costing are emerging as standard practices in the new organization.
Utilization of VE (Value Engineering) Teams to:
–
–
•
•
Create Estimated Cost Accounting Systems. We don’t need to calculate the actual cost
of each individual product separately for internal use, nor do we need to put a cost on every
little nut and bolt in our Inventory. At Pratt & Whitney, we did not need to cost every single
engine serial number, but rather we cost families of engines based on pounds of thrust.
Knock down your organization’s exterior walls, and send VE Teams to work at reducing
costs at your Suppliers. We are not going to cut the Supplier’s profit margin, but rather help
him eliminate waste and improve processes. After all, your Supplier is an extension of your
Value Stream.
Implementation of a Product Cost Management System, to handle cost reduction
and cost control, and standardize how we do this across the entire organization.
Once we have calculated “estimated costs” for different product families, then we can
apply cost reduction ideas across the family of parts.
Effectiveness on your part will be more important and more valuable than
efficiency. People need to be empowered to make changes. Cross-functional
teams are getting things done more effectively than Lone Rangers stacked in layers
of hierarchy.
© 2006 Lean Advisors Inc
Effectiveness vs Efficiency
• What is and what could
be
• Outside-in view from
customer perspective
• Identifies the
expectation gaps
between current
activities and optimal
performance
• Doing the right thing!
© 2006 Lean Advisors Inc
• Keep people busy doing
anything, just to cover
overhead
• Inside-out view
• Identifies how much work
I did with the resources I
had
• Having good people do
the wrong things well
OLD vs NEW Paradigm
Cost Accounting
‘OLD!”
= transactions
= bean counting
= Standards
= Command & Control!
Cost Management = Target costing
= QFD
= Cost Planning
‘NEW!’
= Empowerment/Psychology
COSTS JUST DON’T HAPPEN!!
We should PLAN our costs!
© 2006 Lean Advisors Inc
So What’s Wrong with
Standard Cost?
How does Standard Cost fit into Cost Management?
IT DOESN’T!
When Standard Cost was established, cost was 30% material, 60% labor,
So allocating overhead based on labor was legitimate.
But today cost is at least 60% material and 10% labor!
If we use traditional accounting to report performance,
we are distorting product Costs!
Bottom Line: Standard Cost as we know it (since 1930) just doesn’t “cut it!”
WE NEED SOMETHING DIFFERENT!
© 2006 Lean Advisors Inc
Lean Business Structure Demands
We Recreate the Financial System
What Variable Cost Management System will cause
Product Managers to do the right thing?
•
Standard Cost & Absorption Accounting are not it!
-- Does not “pull” from the Customer
-- Allows “game-playing”
-- Measures Inventory and “batches”
-- Measures “efficiency”
© 2006 Lean Advisors Inc
Standard Cost Measures
“Efficiency”
• Efficient use of machines and people
creates “volume” variances.
• But in Lean we want to reduce volumes,
and make only what the Customer orders.
• In Standard Cost these lower Lean
volumes create negative variances and
lower profits as these variances hit
expense.
© 2006 Lean Advisors Inc
Bottom Line Improvements
Three Reasons why we see NO Bottom Line
improvements from Lean in the first year:
1.
You are still using Standard Cost with Volume Variances
creating problems!!
2.
Any month you do substantial Inventory reduction, you show your
manufacturing expenses increasing.
3.
In Lean you have eliminated Waste but not, in the short-term,
costs. The Waste you removed has been converted into available
capacity, and you will need to DO something with that extra
capacity and floor space to “create wealth.”
© 2006 Lean Advisors Inc
Robert Kaplan, “Relevance Lost”
“Corporate Management Accounting systems
are inadequate for today’s environment.”
Too complex!
• Evolution of Lean is toward simplicity & speed!
ABC Costing has only added complexity and cost
to the accounting system.
• In any company involved in Lean, Standard
Cost becomes a barrier to change!
© 2006 Lean Advisors Inc
We need something different…….
A New Focus on the Business…..
The Value Stream Map!
A “Systems” approach to Change….a Vision!
Without a Vision, the Result will be NO savings
reaching the bottom line, because the Value Flow
comes to a halt in a swamp of Inventory and detours
up & down, and through Departments.
Isolated, point improvement victories over waste
will fail to improve the whole.
We do not want a bunch of hammers looking for a bunch of nails!
(Not bad, but not optimal.)
© 2006 Lean Advisors Inc
Focus Needs to be on Productivity, not Cost!
Productivity = Wealth
Productivity = Revenue / #Employees
How are you getting productivity improvements?
• Increasing the numerator, or decreasing the
denominator?
• Truly increasing revenue, or raising prices?
• Truly increasing revenue, or laying off employees?
TOYOTA’s Productivity measure: 400% Improvement over 10 Years!
© 2006 Lean Advisors Inc
And Focus Needs to be on Our
Value Streams!
1.
2.
3.
4.
5.
6.
7.
8.
New CM “Reporting” needs to be by Value Stream (VS),
and not by Departments.
People need to be assigned to a VS
Few shared-service departments and few monuments
(avoid cost allocations)
Need Tracking system of “out of control” situations, eg,
scrap and rework.
Inventory must be relatively low (>25 turns)
Change the Metrics to motivate
Get rid of most accounting “controls”, and replace with
“visuals” (Kanbans, Scorecards)
Validate the financial impact of Lean successes with
“new” Lean P&L’s
© 2006 Lean Advisors Inc
Summary of Lean Beans…
1. Replace Standard Cost system with some
Variable, Value Stream cost system. (suggest
a Target Cost system where one looks at Actuals
and trends.)
2. Create “simple Lean Bean” financial
statements & P&L’s.
3. Use Target Cost to drive the business from
Customer Value, and not from Cost.
4. Use Target Cost for strategic Budgeting.
5. Use Cycle Time to allocate overhead.
© 2006 Lean Advisors Inc
Lean Accounting is a Philosophy
of doing Business
(Not a CD Rom!)
Remember! Goal of Lean Beans is to:
1. Clarify financial statements (simplify!)
2. Give operations folks insight into the
business.
3. Keep it simple, and in a language that folks
can understand!
© 2006 Lean Advisors Inc
Old Paradigm vs New Lean
Paradigm
• Standard Cost
• Absorption
• Variance Analysis
/Paralysis
• O/H allocation based
on DLH
• Old Cost System =
Standard & Absorption
© 2006 Lean Advisors Inc
• Target / Actual Cost
• Variable
• Variance of Actual to
Target/ Trend Analysis
• O/H allocation based on
Cycle Time
• New Cost System =
anything that drives the
right behavior
Old Paradigm vs New Lean
Paradigm
• Valuing Inventory
• Controlling Transactions
• Financial Metrics and
MBO
• S/T Goals (Operating
Income)
• Make-the-Month
• Cost Accounting
© 2006 Lean Advisors Inc
• Eliminating Inventory
• Controlling Processes
• Non-financial Metrics
and MBV
• L/T Goals (Inv Turns,
Customer Satisfaction
• Cycle time = Takt
• Cost Management
Old Paradigm vs New Lean
Paradigm
• Cut Costs
• Saving Cash
• ABC Allocation
• Traditional Standard
Cost P&L
© 2006 Lean Advisors Inc
• Cut Wastes
• Create Cash
• No Allocations (all
costs are direct)
• “Simple Lean Bean”
P&L
WHAT WILL LEAN BEANS
DO FOR US?
© 2006 Lean Advisors Inc
Mass Production vs Lean
Production
MASS
Beg Inv
1,450,000
DM purch
950,000
Dir Labor
900,000
Indir Mfg Costs
350,000
SubTotal
3,650,000
- End Inv
1,450,000
Total Costs
2,200,000
Total Revenue
3,000,000
Profit (loss)-pretax
800,000
Cash Flow-pretax
800,000
LEAN
Beg Inv
1,450,000
DM purch
500,000
Dir Labor
900,000
Indir Mfg Costs
350,000
SubTotal
3,200,000
- End Inv
150,000
Total Costs
3,050,000
Total Revenue
3,000,000
Profit (loss)-pretax
(50,000)
Cash Flow-pretax
1,250,000
First of all, it will INCREASE CASH!
Adapted from Lean Thinking by Womack
II. INCREASES CAPACITY
We are working smarter and faster, shorter lead times, less waste,
serving more Customers.
•
Most companies look for short-term cost reductions as a result of Lean.
•
Financial impact of Lean comes from utilizing the increase in available
capacity.
•
As we gain speed and make more with less, we free up space and capacity.
We need to “do something” with that capacity to increase revenue and profits.
© 2006 Lean Advisors Inc
III. INCREASES SALES
Cash created by reducing Inventory can
be used to buy a like business or
supplier, and increase sales.
-One company’s strategy:
Use cash from reduced Inventories to buy another similar company/supplier.
Used first $11mm in inventory reduction/increased cash flow to buy
a $25mm supplier with a 10% ROS. In so doing, this company raised its Revenue
$25mm and increased operating income by 10%.
© 2006 Lean Advisors Inc
IV. Saves Time & Money in
Accounting Systems
•
•
•
•
Lean Beans eliminates loads of “transactions”
Eliminates army of people on Standard Cost
Work Orders are no longer needed
Many procurement costs go away as we are
using Kanban systems, LTA’s, fewer Suppliers.
• As you reduce Inventory, most of the perpetual
inventory system can be eliminated. No more
cycle counting!
• “Simple Lean Bean” financial statements are
quick and easy to put together!
© 2006 Lean Advisors Inc
Traditional P&L
This Year
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•
•
•
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•
•
•
•
•
•
Net Sales
Cost of Sales:
Standard Cost
Purchase Price Variance
Material Usage Variance
Labor Efficiency Variance
Labor Rate Variance
Overhead Volume Variance
Overhead Spending Variance
Overhead Efficiency Variance
Total Cost of Sales
Gross Profit
Gross Profit %
© 2006 Lean Advisors Inc
Last Year
Who in Operations understands
this accounting jargon?
Example of a “Lean Bean”
Financial Statement
•
•
•
•
•
•
•
•
•
•
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•
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•
•
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Net Sales
Cost of Sales:
Purchases
Inventory material (incr)/decr
Total Material Costs
Processing Costs:
Factory Wages
Factory Salaries
Factory Benefits
Services & Supplies
Equipment
Depreciation
Scrap
Total Processing Costs
Occupancy Costs:
Building Depreciation
Building Services
Total Occupancy Costs
Total Manufacturing Costs
Inventory – labor/overhead (incr)/decr
Cost of sales
Gross Profit
Gross Profit %
Adapted at The Wiremold Company
Actual, Last Month
Actual, This Month
Target
LEAN P&L
Future
Future
Target
Current
State
State
Future
P&L for EACH
State
One
Two
State
Product Family
Jan
Feb
Mar
Dec
Revenue
4 MM
4.5 MM
5 MM
6 MM
Material Costs
1 MM
0.9 MM
0.8 MM
0.7 MM
1.5 MM
1.4 MM
1.3 MM
1.0 MM
Profit
1.5 MM
2.2 MM
2.9 MM
4.3 MM
ROS
37.50%
48.88%
58.000%
71.66%
(purchased & expensed in period)
Conversion Costs
(DL & Mach, O/H based on C/T)
© 2006 Lean Advisors Inc
Remember! ALL Costs in a Product Family are Direct Costs!
Lean Beans Scorecard
More non-financial than financial measures!
Actual
Current VSM
Actual
Future VSM1
Actual
Future VSM2
Target
for a Product Family
7-11
7-18
7-25
12-31
Sales per Ee
$200,000
$200,000
$200,000
$250,000
20
26
28
50
3
3.5
4
20
On-Time delivery
85%
90%
90%
100%
Quality (first pass yield)
60%
70%
75%
100%
Space (in Sq Feet)
1200
1000
900
400
100,000
80,000
75,000
500
Available Capacity
2%
10%
12%
10%
Lead Time (in days)
400
400
350
14
$100,000
$150,000
$200,000
$1,000,000
QCD Scoreboard
Productivity (FG/Ee/Day)
Inventory Turns
Pn Travel Distance (ft)
Cash
Six Steps to a Healthy, Lean Organization
1. Re-create the Organization (Product Families & Lean Thinking).
2. Re-create the Financial System (No Standard Cost nor Make-the-Month, but rather
a Variable, Contribution Margin Cost Management system.)
3. Level Order-taking and Scheduling. (Cycle time = Takt time)
4. Give Customer “What he wants” at the “Price he wants.”
(Product Development, QFD & Target Cost.)
5. Recreate Supply Management (Fewer suppliers/Commodity Mngmt.)
6. Growth Strategy (Have one! Will not see ‘bottom line’ results without this.)
© 2006 Lean Advisors Inc
Conclusion…
A statement from Art Byrne, CEO of The Wiremold Company,
“If you want to compete with me,
and you are doing batch and I am doing Lean,
then over time I am going to kill you.
I am going to take your market share.
You just don’t have a chance.”
And your Lean successes will never hit the ‘bottom line’
unless you are using ‘Lean Beans.’
© 2006 Lean Advisors Inc
Lean Beans!
Bean Counter No More!
Business Manager!
New-Age Managerial Business Partner!
THANK YOU!
Lean Advisors, Inc.
www.leanadvisors.com
•
•
•
•
•
•
•
•
Established in 1998
Experts in Lean theory & application
(hands-on experience – lived it.)
100s of implementations across most industries
Advisors/Experts in N.A. (Mexico), divisions in Spain,
India and China
Training and implementation - English, Spanish, French, Cantonese
and Mandarin
Effective training and implementation methods
Various methods of Training / Implementation customized.
a) On-Site
b) Webinars
c) On-Line
© 2006 Lean Advisors Inc
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