bridging the gap between accounting and...
TRANSCRIPT
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Bridging The Gap Between Accounting and
Operations
Jerry Solomon
Retired - Vice President of Operations – MarquipWardUnited, Hunt
Valley, A Division of Barry-Wehmiller, Inc.
• $2.4 billion annual revenues
• One of the largest capital
goods producers in the
Western Hemisphere
• More than 11,000 team
members
• Over 65 locations worldwide
• 19% compound annual revenue
growth for 21 years
• Well-balanced and financially
solid company
• Privately held by 400+
shareholders with an outside
Board of Directors
Barry-Wehmiller Cos.
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Video of Machine
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MWU Hunt Valley, Then & Now
Orders
Revenues
Operating income
Investment in R&D
Team members
Inventory Turns
Working capital investment
Functional/silo organization
Focus on Lean tools
Standard cost system
Up 110%
Up 90%
Up 400%
Up 550%
Up 20%
Up 100%
Negative working capital
Value stream organization
Focus on culture
Lean accounting
2003 2014
© Solomon and Fullerton 2007. All rights reserved. 6
What is Lean?Elimination of Waste Respect for People
Utilization of
Lean tool kit
in pursuit of
perfection in
safety,
quality,
delivery, &
cost!
Inspirational
leadership,
profound
cultural &
organizational
change
required!
© Solomon and Fullerton 2007. All rights reserved. 7
How is Lean Typically Implemented?
Elimination of Waste
Respect for People
Layoffs
Command &
Control
Silos & Local
Optimization
Middle Mgmt.
Struggling
“Managing”
Drive by
Kaizens
Focus on
Shop
Lack of
Alignment
© Solomon and Fullerton 2007. All rights reserved. 8
How Should Lean be Implemented?
Continuous Improvement
Respect for People
No layoffs
C-Level
Support
Value Stream
Org.
Recognition,
empowerment,
coaching, &
training
Inspirational
Leadership
Lean
Accounting
High Level VS
Mapping
Meaningful
Area
Narrow & Deep
Link all
Kaizens
Hoshin Kanri
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Are Your Financial Reports/Information Respectful To
All Customers?
• It’s all about RESPECT!
• Do the financial statements and reports
– Make the numbers easy to understand?
– Promote Lean behavior?
– Illustrate Lean benefits?
– Provide actionable information in a timely manner?
– Promote alignment between manufacturing and
accounting?© Solomon and Fullerton 2007. All rights reserved.
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Lean Accounting
Lean Accounting – The Accounting Department
• Use of Lean tools to eliminate waste/frustration in the
accounting department
Accounting for Lean – The Company Scorecard
• Plain English P & L, Box Scores & Value Stream Costing
• Actionable information that is understandable and
promotes Lean behavior
© Solomon 2016. All rights reserved.
© Solomon and Fullerton 2016. All rights reserved. 11
Caution !!!!
• Lean improvements initially invisible to
accounting
• The greater the initial success with Lean,
the more likely earnings will be
negatively impacted, and
• Accounting is often one of the biggest
roadblocks to a successful Lean
journey!
© Solomon and Fullerton 2007. All rights reserved. 12
Lean is...
• Strategic
• A huge competitive advantage
• Benefits mostly invisible to accounting
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Setup TimeMachine Run
TimeLot Size
Number of Different Part
Numbers Produced
2 Hours 6 Hours 512 1
1 Hour 6 Hours 256 2
30 Minutes 6 Hours 128 4
15 Minutes 6 Hours 64 8
7.5 Minutes 6 Hours 32 16
3.75 Minutes 6 Hours 16 32
113 Seconds 6 Hours 8 64
56 Seconds 6 Hours 4 128
28 Seconds 6 Hours 2 256
14 Seconds 6 Hours 1 512
L
E
A
N
L. Rubrich & M. Watson, Implementing World Class Manufacturing, (Ft. Wayne, IN, WCM Associates, 2000) p. 312.
Improvements Are Invisible
© Solomon and Fullerton 2007. All rights reserved. 14
Lean is...
• Not a cost reduction program, it is a
• Cash flow generator,
• Customer service program,
• Capacity generator, and most of all, a
• People system
• Benefits of Lean based on how these improvements are utilized!
© Solomon and Fullerton 2007. All rights reserved. 15
Typical Plant Cost Structure
Direct Labor
60 – 70%
Overhead
10 – 20%
Material
20 - 30% Material
60%
Overhead
30%Direct Labor
10%
Decades Ago Today
How Accurate Are Your Costs at the SKU Level?
Cost
Category
Weighting Accuracy Weighted
Accuracy
Material 60%
Direct Labor 10%
Overhead 30%
Totals 100%
© Solomon and Fullerton 2007. All rights reserved. 16
• What goes into the rates?
• How are the costs spread?
• How accurate are they?
Cost
Category
Weighting Accuracy Weighted
Accuracy
Material 60% 90% 54%
Direct Labor 10%
Overhead 30%
Totals 100%
Cost
Category
Weighting Accuracy Weighted
Accuracy
Material 60% 90% 54%
Direct Labor 10% 60% 6%
Overhead 30%
Totals 100%
Cost
Category
Weighting Accuracy Weighted
Accuracy
Material 60% 90% 54%
Direct Labor 10% 60% 6%
Overhead 30% 30% 9%
Totals 100% 69%
© Solomon and Fullerton 2007. All rights reserved.17
Traditional Cost Accounting
Drill
Mill
Direct Labor Rate/Hr. = $30
Overhead Multiplier = 3X DL
Material Cost per Unit = $10
Product Cost
D. Labor $7.50
Overhead $22.50
Material $10.00
Total $40.00
Metrics
Avg. Inventory 5,000
Lead time 8 Weeks
OTP 75%
Pack
Assemble2 Minutes
4 Minutes 3 Minutes.
6 Minutes
Production Lot Size = 3,000 Pcs.Total Minutes = 15
Cost per Minute = $0.50
© Solomon and Fullerton 2007. All rights reserved. 18
Kaizen Event
• U – shaped cell
• All equipment right sized & co-located
• Material kanbanned and lot size reduced
© Solomon and Fullerton 2007. All rights reserved.
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After Kaizen/Traditional Costing
Dots
(Drill holes on
manual machines)
Pins
(Mill slots)
Taping
(Assemble
components)
Pack Out(Inspect & pack)
4 Minutes 4 Minutes
6 Minutes 4 Minutes
Direct Labor Rate/Hr. =$30
Overhead Multiplier = 3X
Material Cost per Unit = $10
Product Cost
D. Labor $9.00
Overhead $27.00
Material $10.00
Total $46.00
Metrics
Avg. Inventory 500
Lead time 2 Weeks
OTP 95%
Production Lot Size = 300 Pcs.
Total Minutes = 18
Cost per Minute = $0.50
© Solomon and Fullerton 2007. All rights reserved. 20
What Really Happened Besides Co-locating Activities In a Cell, Right
Sizing Equipment, and Balancing the Process?
Metric Before After % Improvement
Inventory 5,000 500 90%
Lead Time 8 Weeks 2 Weeks 75%
On Time Performance 75% 95% 27%
Batch Size 3,000 300 90%
Sq. Footage 8,000 3,000 63%
Quality 50 PPM 15 PPM 70%
# of Transactions Many Few Dramatic
Throughput ? ? ?
Flexibility & Teamwork Poor Improved Dramatic
Unit Cost per Cost Acctg. $40 $46 (15%)
© Solomon and Fullerton 2007. All rights reserved. 21
What Really Happened Besides Co-locating Activities In a Cell, Right
Sizing Equipment, and Balancing the Process?
Metric Before After % Improvement
Inventory 5,000 500 90%
Lead Time 8 Weeks 2 Weeks 75%
On Time Performance 75% 95% 27%
Batch Size 3,000 300 90%
Sq. Footage 8,000 3,000 63%
Quality 50 PPM 15 PPM 70%
# of Transactions Many Few Dramatic
Throughput 10 10 No Change
Flexibility & Teamwork Poor Improved Dramatic
Unit Cost per Cost Acctg. $40 $46 (15%)
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Accounting for Lean
Value Stream Costing
"It was not enough to chase out the cost accountants from the plants. The problem was to chase cost accounting from my people's minds"
Taiichi Ohno, founding father of the Toyota Production System
Why Accounting for Lean?
23LA Summit 2010
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Value Stream Costing
Value Stream
Labor (Salaried, Hourly,
Benefits, etc.)
Materials
Fixed Costs of Value Stream Conversion Costs (Consumables)
Allocated Costs are Excluded
© Solomon and Fullerton 2007. All rights reserved.
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Value Stream Costing
Sample Product Costing using Value Stream CostingLabor $ 10,000
Conversion (Consumables) $ 3,000
Materials $ 25,000
Fixed costs $ 6,000
Total cost $ 44,000
Units produced 4,000
Average cost per box $ 11.00
© Solomon and Fullerton 2007. All rights reserved.
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Value Stream Costing
Pins
(Mill slots)
Taping
(Assemble
components)
Units/Hour =
Value Stream Cost/Hr = $200
Material Cost/Unit = $100
Cost/Unit =
Pack Out
(Inspect & pack)
Dots
(Drill holes on multi-
axis CNC machine)
12 Minutes
6 Minutes 2 Minutes
4 Minutes
5
$140
Units/Hour =
Value Stream Cost/Hr = $200
Material Cost/Unit = $100
Cost/Unit =
5
$140
5
$100/120/125/133
Units/Hour =
Value Stream Cost/Hr = $200
Material Cost/Unit = $100
Cost/Unit =
6 Minutes
6 Minutes12 Minutes
0 Minutes
8 Minutes
4 Minutes
6 Minutes
10 Minutes
© Solomon and Fullerton 2007. All rights reserved.
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Accounting for Lean
“Plain English” P & L’s
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Traditional Company
Profit & Loss Statement
$(000) %
Sales 1,303 100%
Cost of Sales @ Standard 787 60%
Purchase Price Variance 20 2%
Material Usage Variance 30 2%
Labor Rate Variance 10 1%
Labor Usage Variance 15 1%
Overhead Variance 50 4%
Total Cost of Sales 912 70%
Gross Margin 391 30%
Operating Expenses 250 19%
Operating Income 141 11%
© Solomon and Fullerton 2007. All rights reserved.
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Lean Company
“Plain English” Profit & Loss Statement
$(000) %
Sales 1,303 100%
Cost of Sales
Material 517 40%
Shop Supplies 67 5%
Shipping & Receiving Supplies 5 0%
Equipment Repairs 22 2%
Hardware 32 2%
Sub-Total Variable Cost of Sales 643 49%
Variable Margin 660 51%
Labor Costs 190 15%
Fixed Costs 42 3%
Cost (To)/From Inventory 37 3%
Sub-Total Fixed Costs 269 21%
Total Cost of Sales 912 70%
Gross Margin 391 30%
Operating Expenses 250 19%
Operating Income 141 11%
Conversion Costs
© Solomon and Fullerton 2007. All rights reserved.
© Solomon and Fullerton 2007. All rights
reserved.
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Lean Company
“Plain English” Profit & Loss Statement
$(000) %
Sales 1,303 100%
Cost of Sales
Material 600 46%
Shop Supplies 80 6%
Shipping & Receiving Supplies 8 1%
Equipment Repairs 25 2%
Hardware 35 3%
Sub-Total Variable Cost of Sales 748 57%
Variable Margin 555 43%
Labor Costs 222 17%
Fixed Costs 42 3%
Cost (To)/From Inventory (100) -8%
Sub-Total Fixed Costs 164 13%
Total Cost of Sales 912 70%
Gross Margin 391 30%
Operating Expenses 250 19%
Operating Income 141 11%
Conversion Costs
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Accounting for Lean
• Standard costing, labor reporting and variances
replaced with actual costs and performance
metrics
• Metrics maintained by employees at the work
cell and form basis for continuous improvement
• Metrics reinforce Lean activities and promote
continuous improvement
© Solomon and Fullerton 2007. All rights reserved.
© Solomon and Fullerton 2007. All rights reserved. 32
Financial Impact of
Inventory Reductions
During a Lean
Conversion
© Solomon and Fullerton 2007. All rights reserved. 33
Inventory Over Time at ANY Company
$ Inventory
Start Up Today
Overhead
Labor
Material
How much labor and overhead
resides on your Balance Sheet
today will determine the “hit” to
profit resulting from improved
inventory management/turns!
© Solomon and Fullerton 2007. All rights reserved. 34
When Improving Inventory Turns it’s Payback
Time!
$ Inventory
Today Future
Overhead
Labor
Material
The reduction in labor and overhead
must flow through the P & L!
© Solomon and Fullerton 2007. All rights reserved. 35
Results from Improved Inventory Turns
2 4 6 8 10 12 14 16 18 20 22 24
Turns
Impact on
Income &
Cash Flow
$
$$
$$$
$$$$
Change in cash flo
w
Change in income
© Solomon and Fullerton 2007. All rights reserved. 36
How Do We Make Lean Improvements Visible?
• As we physically change processes during the Lean
journey, manufacturing & accounting must work
together to transition to Lean Accounting.
– New financial statements – In “Plain English”
• No standard costs, absorption or variances
• Easy for everyone to understand - RESPECTFUL
– Box scores
• Illustrate improvements in Lean operating metrics and capacity
– Value stream costing
– Focus on cash flow
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Summary - Why Companies Need an Alliance Between
Manufacturing & Accounting
• To create a scorecard that is both supportive of the Lean journey and is understood and owned by all associates
• To have accounting and manufacturing jointly anticipate financial impact of Lean initiatives - no surprises
•
• To highlight and understand the full value of Lean improvements
• To be one team and respect each other!
© Solomon & Fullerton 07. All Rights Reserved
For Further Information……
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Available at www.wcmfg.com
or Amazon.com
Email:[email protected]
Cell: 410-207-3340
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Questions
© Solomon & Fullerton 07. All Rights Reserved