objectives of this workshop
DESCRIPTION
Understand why traditional accounting, control & measurement methods need to change as the company continues the lean transformation Overview the primary methods of Lean Accounting that will be important to the company Develop a ‘ Go Forward’ plan for your organization. - PowerPoint PPT PresentationTRANSCRIPT
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• Understand why traditional accounting, control & measurement methods need to change as the company continues the lean transformation
• Overview the primary methods of Lean Accounting that will be important to the company
• Develop a ‘Go Forward’ plan for your organization
Objectives of this Workshop
© BMA Inc. 2009. All rights reserved.
A Brief History of Lean Management
1934 on…1945 on…
1926 19791979
Toyota starts producing vehicles, developing Kaizen teams in 1936
Toyota develop ‘Pull Production’ (producing only for actual sales) in response to resource shortages. This was inspired by a visit to a US supermarket chain
Taiichi Ohno develops ‘The Toyota Production System’ (TPS) based on Ford’s principles of 1926
1911-1915
Henry Ford influenced by Frederick Winslow Taylor’s ‘Principles of Scientific Management’
Ford introduces mass production
TodayToday……
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The Toyota Production System
• The idea of pull production (producing only for actual sales) was inspired by a visit to a US supermarket chain - ‘Piggly Wiggly’- shortly after WWII
• Levels of demand in the Post-War economy of Japan were low and the focus of mass production on lowest cost per item via economies of scale had little relevance
• TPS is a whole management system - it is not just about production
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The Philosophy of LeanMaximize competitive
advantage through operational excellence
Why would you perform any
activity that the customer is not
willing to pay for?
A time-based strategy – flexibility & speed of response to the customer & speed through the production/ service delivery process
Improve the flow and you
improve profitability
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The Five Principles of Lean Production
Specify value in the eyes of the
customer
Identify the value stream & eliminate
waste
Make value flow at the pull of the
customer Involve & empower employeesContinuously improve in the pursuit of perfection
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Traditional thinking and lean thinking are in conflict
ASSUMPTIONS
• Profit comes from full utilization of resources
• Direct labor is the most important conversion cost
• Control the business thru detailed tracking
• All excess capacity is bad
Traditional Standard Costing
ASSUMPTIONS
• Profit from maximizing flow on pull from customers.
• Waste is resources impeding the flow
• Control thru continuous attention to flow & waste
• Excess capacity provides flexibility
Lean Thinking
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Why Lean Accounting?
• Traditional Standard Costing was developed for mass production
– The philosophy is that profitability is maximized when labor and machine utilization are maximized
• The focus of Standard costing is on lowest cost per item through economies of scale
• This does not apply in a high variability, multi-product environment
– Here profitability is maximized when the rate of flow is maximized
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What’s the problem?
Traditional management systems:– Actively work against Lean Manufacturing &
other lean improvements.– Are expensive and wasteful.– Provide misleading, wrong, and harmful
information.– Motivate people to do the wrong things.– Are complex and confusing to people.
Here’s a Few Simple Examples
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Actively work against lean manufacturing
Drill on CNC
Machine
Machine on Lathe
Batch 2500
Grind
Inspect & Pack
1 minute
4 minutes6 minutes
4 minutes
Total labor time: 15 minutesLabor cost: £5.00Overhead cost: £15.00Material Cost £1.50TOTAL COST: £21.50
Lead Time: 6 weeksInventory 25 daysBatch size 2500 (10 days)On-Time delivery = 82%
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Lean manufacturing changes
• Create a cell.• Use an drilling machine with quick change
over.• Reduce the batch size.• Reduce the lead time.• Reduce inventory.• Almost perfect delivery.• Created additional capacity on the CNC
machine.
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Lean improvements
Drill on Drilling Machine
Machine on Lathe
GrindInspect &
Pack
4 minutes
4 minutes6 minutes
4 minutes
Total labor time: 18 minutesLabor cost: £6.00Overhead cost: £18.00Material Cost £1.50TOTAL COST: £25.50
Lead Time: 2 daysInventory 5 daysBatch size 250 (1 day)On-Time delivery = 98%
Lean Cell
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The problemWe have made great improvement.
BUT…. the product cost has gone up and the project is cancelled.
In fact, the changes were highly beneficial both operationally and financially.
It is the standard costing that is leading us in the wrong direction.
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Traditional income statement
What does Gross Profit
mean?
Why have the earnings fallen
so much in period 2?
How would you explain this someone in production?
Period 1 Period 2REVENUE
OEM £998,977 £1,039,440Systems £1,002,466 £1,009,246
£2,001,443 £2,048,686
Cost of Goods Sold £1,621,169 81% £1,687,800 82%
GROSS PROFIT £380,274 19% £360,886 18%
ADJUSTMENTSPurchase Price Variance (£60,466) (£59,467)
Materials Usage Variance £94,533 £96,733Labor Variance (£19,718) (£93,895)
Overhead Absorption Variance £38,341 £182,577
SG&A £129,889 6% £135,215 7%
NET PROFIT £197,695 10% £99,723 5%
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“Plain English” Income statement
What does Gross Profit
mean?
Why have the earnings fallen
so much in period 2?
How would you explain this someone in production?
Period 1 Period 2REVENUE
OEM £998,977 £1,039,440Systems £1,002,466 £1,009,246
£2,001,443 £2,048,686
Materials £829,936 41% £849,526 41%Direct Labor £305,767 15% £312,984 15%
Support Labor £340,245 17% £342,421 17%Machines £113,862 6% £116,550 6%
Outside process £60,043 3% £53,731 3%Facilities £40,250 2% £41,200 2%
Other Costs £12,009 0.6% £9,664 0.5%TOTAL COST £1,702,112 £1,726,076
GROSS PROFIT £299,331 15% £322,610 16%
Inventory Adjustment (£41,593) (£161,426)Corporate Allocations £60,043 £61,461
NET PROFIT £197,695 10% £99,723 5%
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Misleading cost information
Actual Production Cost = £580 per hourMaterial cost = £42 per item
Product Cost = ?
Prepare for Mounting
Align &Secure
Inspect & Pack
6 minutes
6 minutes6 minutes
6 minutes
Product B
Output10 per hour
3 minutes
4 minutes4 minutes
6 minutes
Product A
MountComponent
s
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Misleading cost information
Product A
Standard Cost = £90.06Material £42Labor 17 mins @ £24.23/hr = £6.87Overhead 600% = £41.19
Actual Cost = £100 Material £42 Production £580/10 = £58
Standard Cost too low
Product B
Standard Cost = £109.85Material = £42Labor 24m @ £25/hr = £9.69Overhead 600% = £58.18
Actual Cost = £100Material £42Production £580/10 = £58
Standard Cost too high
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Poor decision making: Outsourcing product B
Traditional Approach
Standard Cost = £109.85
Outsourced Cost = £85.00
“Savings” of £24.85 per unit
Actual Impact
New Material Cost = £ 85Old Material Cost = £ 42
Increase in Actual Material Cost = £ 43
Actual production cost per hour = £ 580 because no resources were eliminated
Actual costs increase due to outsourcing
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There is no “Standard” Cost!
In a lean environment, the cost of the product is related to
flow…
•Waste affects cost so that there is no one ‘standard’ cost of a product
•Cost varies with production, FPY, scrap, mix, quality, downtime etc
• If you control the flow, you control the cost
• By improving flow through the Value Streamwe improve capacity = flexibility
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Performance MeasurementsTraditional accounting performance
measurements motivate non-lean actions.Measuring labor efficiency, machine
utilization, and overhead absorption leads to large batches and high inventory.
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Sales policies mismatch with lean capability
Level
Schedule
Value StreamSuppliers
Pull System
Single Piece Flow
Week1
Week2
Week3
Week4
Sales Orders &Shipments
Result:High inventoryLate deliveriesHigher costsConfusion
Conflict
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Transaction-based control systems cost too much
Entering and administering transactions is wasteful and time-consuming.
EXAMPLE:A production plant with 150 people, 120 products, and revenue of £15M required over 4,000,000 transactions per year.
Job costing, procurement, inventory control, accounts payable, accounts receivable:
38 equivalent heads spent processing and using the transactions.
12.7% of revenue
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Two Aspects of Lean Accounting
Applying Lean Thinking & Methods to the Company’s
Accounting Processes
Accounting for Lean & Supporting the Lean
Transformation
•Cost accounting, labor reporting, production reporting & work orders
•Purchasing & accounts payable
•Inventory tracking & valuation
•General ledger simplification
•Month-end close, etc
•Reporting & decision-making to support lean manufacturing & other lean processes
•Financial reporting that is immediately understandable & useable to everyone
•Single lean accounting system for management accounting & external reporting
•Accounting processes focused on customer value, value streams, pull, empowerment, & continuous improvement
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Lean is a set of collaborative and inquisitive behaviours
that result in a culture of continuous improvement.
Eliminating waste is done by people using rigorous
problem-solving methods
Involving people in lean is at least as important as
lean tools.
Behaviours that focus on
improvement & problem-solving
The aim of lean is a production system that highlights problems and a human system that
produces people who are willing and able to identify and solve them
Lean is a People Process
All of this All of this requires Trustrequires Trust
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Lean Accounting has Seven Aims
Performance measures that
motivate lean–cell & value stream
measures
Value Stream Costing, replacing Standard Costing =
Value Stream Profit & Loss Account
Support relevant, accurate & timely decision making
using contribution costing
Elimination of
unnecessary accounting
transactions
Highlighting impact of lean improvements
– eliminate waste, improve capacity,
improve flow
Drive the growth of the business by
increasing customer value using Target
Costing
Motivate lean behaviour in the
planning process – SOFP
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Box Score - Financial Impact
Caspian CompanyPAMotors GOAL
Current 5-Feb 12-Feb 19-Feb 26-Feb 5-Mar 12-Mar 19-Mar 26-Mar 31-Mar
Units per Person 31.77 30.46 32.51 32.19 33.71 35.2
On-Time Shipment 96.2% 98.2% 98.5% 97.6% 97.2% 98.0%
First Time Thru 42% 44% 43% 47% 54% 62%
Dock-to-Dock Days 12.50 11.9 10.94 9.33 8.90 8.0
Average Cost £115.78 £115.78 £114.62 £112.66 £111.74 £107.01
AP days - AR days 8.0 8.0 8.0 8.0 8.0 8.0
Productive 22% 22% 22% 21% 21% 22%
Non-Productive 58% 58% 58% 41% 41% 37%
Available Capacity 20% 20% 20% 38% 38% 41%
Revenue £366,487 £321,499 £331,546 £325,481 £326,240 £325,000
Material Costs £112,196 £109,812 £113,243 £111,172 £111,431 £111,007
Conversion Costs £92,564 £95,743 £95,233 £99,463 £98,194 £94,039
Inventory £310,622 £295,712 £271,857 £231,848 £221,163 £198,798
Value Stream Profit £161,727 £115,944 £123,070 £114,846 £116,615 £119,953
Value Stream ROS 44.13% 36.06% 37.12% 35.29% 35.75% 36.91%
46.00% Hurdle Rate -1.87% -9.94% -8.88% -10.71% -10.25%
OP
ER
AT
ION
AL
CA
PA
CIT
YF
INA
NC
IAL
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Example: Italian ClientWeek 36 Week 37 Week 38 Week 39 Week 40 Week 41
Downtime % 1.10% 1.67% 0.00% 0.00% 0.00% 0.00%Rework (number) 191 286 205 297 414 218Rework (secs) 16,703 43,615 17,048 30,114 48,197 17,030On-Time Delivery % 96.8% 78.9% 83.0% 86.5% 90.1% 93.0%Supplier Materials Days 15 15 15 15 15 15Finished Goods Inventory Days 5 5 5 7 7 10Total Units produced 4,709 2,851 4,178 3,789 3,276 2,325Hours Worked 129.30 131.60 106.60 126.60 110.25 58.30Units per Hour 36.42 21.66 39.19 29.93 29.71 39.88
Productive Capacity 41.55 39.83 17.86 32.29 39.41 33.95Non-Productive Capacity 2.65 5.71 1.58 4.46 2.79 1.58Available Capacity 55.80 54.46 80.56 63.25 57.80 64.47
Revenue € 41,919 35,121 27,541 51,605 32,717 23,421 Material Cost € 27,937 38,961 29,171 33,338 33,798 9,867 Direct Operative Labour Cost € 2,586 2,632 2,132 2,532 2,205 1,166 Direct Support Labour Cost € 4,900 4,900 4,900 4,900 4,900 4,900 Energy Cost € 1,060 1,067 983 1,051 995 819 Facilities Cost € 240 240 240 240 240 240 Depreciation € 1,750 1,750 1,750 1,750 1,750 1,750 Other Direct Costs € 0 0 0 0 0 0 Total Cost € 38,473 49,550 39,176 43,811 43,888 18,742 Value Stream Profit € 3,446 -14,429 -11,635 7,794 -11,171 4,679
Value Stream Return on Sales %8.22% -41.09% -42.25% 15.10% -34.14% 19.98%
Average Value Stream Cost per unit €
8.17 17.38 9.38 11.56 13.40 8.06
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UK Client Box Score - Delivery Value Stream
Week No. 25 26 27 28 29 30 31 32 33 34 35 TARGET
Units / FTE 67 64 87 71 63 72 90 82 49 70 65
Revenue / FTE 1,656 1,411 2,595 1,091 1,374 881 1,796 1,492 1,268 2,141 1,408 2,000
Scrap Costs 101 98 122 120 82 96 88 93 94 80 86
OTR Performance 71.40% 87.40% 86.30% 64.60% 65.30% 72.40% 87.60% 87.70% 91.90% 78.95% 91.00% 90%
OTP Performance 88.73% 91.04% 93.68% 75.61% 90.80% 95.05% 92.56% 92.13% 95.40% 80.26% 91.07% 95%
OED Performance 6.3 5.5 7.2 7.2 7.9 5.4 3.8 3.2 3.2 3.5 4 3
Inventory Turns 10.71 10.71 10.71 10.94 10.94 10.94 10.94 11.11 11.11 11.11 11.11 15
Rework Costs
Sales revenue 47,520 41,262 75,227 30,221 40,244 24,711 46,862 37,479 31,643 45,994 21,050 58,000
Materials Purchased 11,785 10,233 18,656 6,588 8,773 5,387 10,216 7,084 5,981 8,693 3,978 10,730
Conversion Labour 9,274 9,274 9,274 9,245 9,245 9,245 9,245 9,610 9,610 9,610 9,610 9,500
Other Costs 5,184 5,184 5,184 5,135 5,135 5,135 5,135 4,008 4,008 4,008 4,008 4000
Costs Total 26,243 24,691 33,114 20,968 23,153 19,767 24,596 20,702 19,599 22,311 17,596 24,230
Value Stream Profit 21,277 16,571 42,113 9,253 17,091 4,944 22,266 16,777 12,044 23,683 3,454 33,770
Value Stream Profit % 45% 40% 56% 31% 42% 20% 48% 45% 38% 51% 16% 58%
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Value Stream Profit and Loss Account
Required ROS 15.0%Corporate Overhead 3.3%
Support Costs 4.0%New Product Design 23.7%
Value Stream Hurdle Rate 46.0%
HURDLE RATE CALCULATIONTHE VALUE STREAMS MUST MAKE A MINIMUM OF 46%
Motors Systems Spare Parts
New Product Design
Support Costs
TOTAL DIVISION
Sales £326,240 £748,894 £453,215 £1,528,349Additional Revenue £0 £0 £12,422 £12,422
Material Costs £111,431 £232,774 £149,561 £87,909 £12,764 £594,439Conversion Costs £57,628 £70,406 £81,579 £203,769 £37,645 £451,027
Outside Process Costs £32,433 £22,991 £22,661 £7,531 £85,616Other Costs £16,040 £57,816 £29,459 £72,721 £176,036
Tooling Costs £4,843 £12,544 £6,588 £23,975
Value Stream Profit £103,865 £352,363 £175,789 (£364,399) (£57,940) £209,678ROS 31.8% 47.1% 38.8% -23.7% -3.8% 13.7%
£925,314£918,807(£6,507)
£51,147
£152,024
9.9%Division ROS
Corporate Overhead
Division Profit
VALUE STREAMS
Opening InventoryClosing InventoryInventory Change
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VALUE STREAM PROFIT AND LOSS ACCOUNT
Month ending 30/09/07: Weeks 36 to 39
Euro
Refrigeration Valves
Coffee Valves Water Valves General Purpose Valves
Manifold Trading Support/ Overhead
TOTAL
Revenue 156,186 555,755 365,296 175,198 182,696 1,220,000 0 2,655,1310
Direct Material Purchases 129,407 302,892 179,687 98,645 65,387 980,000 1,756,018Direct Operative Labour 9,882 14,967 9,095 10,188 4,976 30,000 79,108
Direct Support Labour 19,600 0 0 0 5,600 190,000 215,200Energy Usage 4,160 2,332 1,202 932 455 1,047 10,128
Facilities cost (m2) 960 960 960 960 1,567 40,000 7,000 52,407
Depreciation 7,000 3,500 3,500 3,500 10,500 10,000 38,000Other Direct Costs 0 0 0 0 0 0
TOTAL VALUE STREAM COST171,009 324,651 194,444 114,225 88,485 1,050,000 208,047 2,150,861
VALUE STREAM PROFIT -14,823 231,104 170,852 60,973 94,211 170,000 -208,047 504,270
Value Stream Return on Sales %-9.49 41.58 46.77 34.80 51.57 13.93 18.99
Total Units produced 15,527 59,450 19,645 26,212 1,225 122,059Average Value Stream cost per
unit11.01 5.46 9.90 4.36 72.23 17.62
Total Hours Worked 494.10 748.34 454.75 509.40 268.19 2,474.78Units Produced per Hour 31.42 79.44 43.20 51.46 4.57
Total Support Cost per Hour Worked this Month
84.07 84.07 84.07 84.07 84.07
Total Support Cost per Unit Produced for this Month
2.68 1.06 1.95 1.63 18.40
"Total Full Cost" per Unit for this Month
13.69 6.52 11.84 5.99 90.64
Italian Client Value Stream Profit and Loss
Account
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Summary - Lean Accounting
Performance Measurement
Transaction Elimination
Financial Impact of Lean
Improvement
Value Stream Costing
Lean Decision Making
Target Costing
Primary method of lean control for meeting customer needs & driving continuous improvement
Save time, money, & confusion by radical
elimination of wasteful
transactions
Understand the financial impact of lean
improvement & create a money-making strategy
Simple, direct, & accurate way to create financial
reports. Very few transactions
Manage the business by value streams with accountability for
growth, profitability & continuous improvement
Drive the business from the customer value – not the cost
© BMA Inc. 2009. All rights reserved.
What Will Lean Accounting Do For Us?• Increase sales & reduce costs through better
decision-making information
• Clearly identify the potential financial benefits of lean programs
• Reduce costs through eliminating wasteful transactions & systems
• Motivate long-term lean improvement through lean-focused information & measurement
• Eliminate the problems caused by traditional costing methods