LEAN AND ACCOUNTING the role of the CEO and CFO

But What About Non-Manufacturing CompaniesManufacturing Develop new products Take orders Process orders Purchase materials Make products Payroll Ship product Close the books Accounts rec

LEAN AND ACCOUNTING: The Role of the CEO and CFO

Orest J FiumeRetired Vice President - Finance

The Wiremold Company

Set Up Takes 1 Minute

• Who Has Lowest Cost?

• Who Can Provide Best Customer Service?

A Small Process Improvement Provides

Time-Based Strategies

Lead-Time Reduction

Time-Based Strategies

Lead-Time Reduction

But What About Non-Manufacturing Companies

Manufacturing

Develop new products Take orders

Process orders Purchase materials Make products Payroll Ship product Close the books Accounts receivable

Service

Develop new services

Take orders Process applications Purchase supplies Provide services Payroll Ship product ? Close the books Accounts receivable All Companies have similar processes

Why Doesn’t Everyone Do “Lean”?

• Easy to Agree With

• Hard To Do

Why Is It So Hard?

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

OBSTACLES TO CHANGE

• “But, those companies aren’t like ours, we have different problems”

• “We’ll change, but let’s do so very slowly”

• “Our auditors won’t accept that”

What Does It Take To

CEO’s Role

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

Out Front-Hands On-Don’t Delegate

• “Lean Thinking…is an entire business

model that must be run by the CEO”

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

Change Metrics

Why are Metrics Important?

• Metrics send a message to employees as to what management thinks is important

• Employees want to appear to be doing what management wants them to do

• METRICS SHAPE BEHAVIOR

When Should Metrics be

Addressed?

AT THE BEGINNING OF THE LEAN

TRANSFORMATION

Who are the Principal

Users of Metrics

The Workers

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”

Create an environment where it is OK to fail

Failure vs Making Mistakes

“Every failure teaches a man something, if he will learn”

Charles Dickens

Provide Air Cover for Early Adopters

• A 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?

Eliminate Concrete Heads But do it the right way…

everyone is watching

Have a “no lay-off’ policy

“No one will lose their employment as a result of

productivity gains”

Organize Around Value Streams

• Traditional organizational structure hides problems

• Value streams look at the organization

horizontally, not vertically

Flatten the organization

Plan to answer the question:

“What’s in it for me?”

Profit Sharing

CEO’s Role - Summary

• Learn Lean Thinking

• Out Front - Hands On - Don’t Delegate

• Lots of Leaps of Faith

• Change Metrics

• Create an Environment Where it’s OK to Fail

• Provide Air Cover for early adopters

• Eliminate Concrete Heads

• Have a “no-layoff” policy

• Organize around Value Streams

OBSTACLES TO LEAN ACOUNTING

CFO’s Role

• Learn Lean by Doing Lean

• Change Metrics/Performance Measures

• Remove the Obstacles

• Understand the difference between

Efficiency and Productivity

• Provide Information that non-accountants can actually use

• Avoid the two big “surprises”

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 staff to Operating

Teams

• Simplify Business Systems

PRODUCTIVITY = WEALTH

Arthur P Byrne

Understand the difference between

Efficiency and Productivity

Productivity Is The Relationship Between Quantity of Output vs Quantity of Resources Consumed

Changing the “Q’s” Requires PhysicalChange It’s Not a Financial Thing

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

The Relationship Between Two Inputs:

Standard Labor Hours vs Actual Labor Hours

It Presumes That The Standards Are Right

The Standard Cost P&L

This Year Last Year

Cost of Sales:

Labor Rate Var (2,000) 9,000

OH Eff Var 16,000 (17,000) Total Cost of Sales 64,000 54,000

How are Standard Costs Calculated?

• Materials = Quantity x Unit Costs

– Material Quantity based on engineering design, modified for yield modified for yield

– Material Unit Costs based on quotes, current average or ??? quotes, current average or ???

• Labor = Hours x Hourly Rate

– Labor Hours based on engineering studies, adjusted for PFD, etc studies, adjusted for PFD, etc

– Labor Rates based on average rate average rate

• Overhead = Labor Hours x Overhead Rate

– Overhead Rate based on Budgeted Overhead Budgeted Overhead divided by Budgeted Budgeted

Hours

The “Plain Language” P&L

The “Plain Language” P&L

This Year Last Year +(-)%

Costs of Sales:

Purchases 28,100 34,900 Inventory (Inc) Dec: Mat’l Content 3,600 (6,000)

Total Materials 31,700 28,900 9.7

Processing Costs:

Factory Wages 11,400 11,500 (0.9) Factory Salaries 2,100 2,000 5.0 Factory Benefits 7,000 5,000 40.0 Services & Sup 2,400 2,500 (8.0) Equipment Depr 2,000 1,900 5.3 Scrap 2,600 4,000 (35.0)

Total Processing Costs 27,500 26,900 2.2

Occupancy Costs:

Building Depr 200 200 0.0 Building Services 2,200 2,000 10.0

Total Occupancy Costs: 2,400 2,200 9.1

Total Mfg Costs 61,600 58,000 6.2

Balance Sheet

Current Assets: TY LY Current Liabilities TY LY

Long Term Debt xx yy

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 8.0 Total xx yy 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 + xx yy

The “Plain Language” P&L

The “Plain Language” P&L

This Year Last Year +(-)%

Costs of Sales:

Purchases 28,100 34,900 Inventory (Inc) Dec: Mat’l Content 3,600 (6,000)

Total Materials 31,700 28,900 9.7

Processing Costs:

Factory Wages 11,400 11,500 (0.9) Factory Salaries 2,100 2,000 5.0 Factory Benefits 7,000 5,000 40.0 Services & Sup 2,400 2,500 (8.0) Equipment Depr 2,000 1,900 5.3 Scrap 2,600 4,000 (35.0)

Total Processing Costs 27,500 26,900 2.2

Occupancy Costs:

Building Depr 200 200 0.0 Building Services 2,200 2,000 10.0

Total Occupancy Costs: 2,400 2,200 9.1

Total Mfg Costs 61,600 58,000 6.2

An Increase in Productivity

Result in an Increase in Profit

A Fundamental Truth

How to Actualize Productivity Gains?

Cash Flow From Manufacturing

This Year Last Year

Equipment

Building Depreciation

According to Jim Womack: The Ages of Lean

industry

THANK YOU

ojfiume@comcast.net

Real Numbers:

Management Accounting in a Lean Organization

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Applications)

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