Lean Accounting or Accounting for Lean
Do You Know the Difference?
Presented by Mark C. DeLuzio, CMA – President & CEO
Lean Horizons Consulting, LLC
Presented to: Institute of Management Accountants, NERC 8th Annual Conference
September 22, 2015
Contents
Introduction
Lean Accounting – Case Study
Accounting for Lean – Case Study
Summary – Q&A
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Definitions
Lean Accounting
Applying lean concepts to
drive waste out of the
accounting function itself
Accounting for Lean
Modifying the accounting
process to properly deliver
information which promotes
lean behaviors
Both are necessary in a Lean environment and must work hand-in-hand.
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Why Lean Accounting?
Lean Accounting Benefits
Eliminates waste from the accounting process providing:
More timely information
Improved quality of information
Frees up accounting resources
Allows the accountant to focus on the business:
Becomes a navigator rather than a historian
Allows the accountant to become a partner with management
Customer focused:
Provides the customer what he wants, when he wants it
Eliminates unnecessary reporting
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Why Accounting for Lean?
Accounting for Lean Benefits
Discourages dysfunctional behaviors:
Building unnecessary inventory
Long production runs that do not meet customer demand
Un-Lean decisions based on variance optimization
Capital decisions based on traditional decision making
More accurate financial information:
Focus on Value Stream provides comprehensive cost picture
More accurate product costs since allocations are reduced/limited
Greater accountability:
Cost data is not arbitrary
Financials give management vehicle to control one’s destiny
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Contents
Introduction
Lean Accounting – Case Study
Accounting for Lean – Case Study
Summary – Q&A
6
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Situation Analysis – Jake Brake 1988
Accounting Department Headcount
Sales: $65 million
Market Share: 100% and declining
Profitability: 3% ROS
Inventory Turns: 2X
On-time Delivery: 45%
Lead Times: 8-12 weeks
NPD Lead Time: 72 Months
Total Headcount: 550
Accounting Headcount: 25 (See chart)
Department
Headcount 1988
Accounts Payable
3
Accounts Receivable
1
General Accounting
2
Payroll
3
Cost Accounting
4
Information Systems
12
Total
25
Business was in dire straits, losing market share and profitability
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Accounts Payable Kaizen
Mail is Delivered
Enter Invoices in System
Mail Opened
Mail is Sorted
Batch Control Totals
File Vouchers
Correct Exceptions
Major Area of Opportunity
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Accounts Payable Quality Defects
AP Quality Errors
Missing
PO
UOM
Wrong
Qty
No
Receiver
Other
9
Quality defects were the major contributor to
productivity
75% of staff time spent on resolving quality
defects
Specific kaizen improvement events
conducted for each type of quality defects
Visual control of quality defects critical to
making problems obvious to all
Improvements involved many functions
(Accounting, Purchasing, Receiving,
Engineering, etc.)
Eliminating quality defects resulted in
improved quality of payment to vendors,
higher productivity and reduction of
troubleshooting calls from vendors
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Kaizen Approach
Actions Taken
Standard Work developed for Accounts Payable
process
Accounts Payable Cell designed and
implemented
One Piece Flow established
“Hospital Bed” implemented for quality defects
Implemented root-cause quality tracking and
improvement system
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Standard Work – Accounts Payable
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Kaizen Results
Item
Before
After
% Improvement
Headcount
3
1
-66%
Productivity
(Vouchers/Hour)
8.3
25
+200%
1st Pass Defects
(PPM)
650,000 PPM
50,000 PPM
-92%
Duplicate
Payments
-
ELIMINATED
-
Duplicate
Filing/Docs
-
ELIMINATED
-
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Overall Improvements
Department
Headcount 1988
Headcount 1989
Difference
Accounts Payable
3
1
-2
Accounts
Receivable
1
0
-1
General Accounting
2
2
0
Payroll
3
2
-1
Plant Controllers
0
3
+3
Cost Accounting
4
0
-4
Information
Systems
12
2
-10
Total
25
10
-15
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Contents
Introduction
Lean Accounting – Case Study
Accounting for Lean – Case Study
Summary – Q&A
14
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Situation Analysis – Jake Brake 1988
Traditional “batch and queue” standard cost accounting system
MRP-driven work order costing approach
Absorption costing – promoted excess inventory build
Overhead applied on the basis of direct labor hours
Cost accounting variance analysis promoted non-Lean behaviors
Inventory records inaccurate and meaningless
Exhaustive labor reporting system – cumbersome, tedious and provided little value to
management
High volume of inventory and labor transactions
Inaccurate product costing
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Actions Taken
1. Developed Value Stream Costing Methodology
Eliminated work orders and MRP shoplevel scheduling
Treated all labor as a direct overhead
cost
Value streams became profit centers
with stand-alone P&L
Eliminated arbitrary overhead
allocations: (Direct costs increased
from 35% to 80%)
Value stream inventory was backflushed “wall to wall”
Ability to track cell cost performance in
addition to the entire value stream
Accuracy of product costs greatly
enhanced
Eliminate variance reporting (more
later)
Value Stream Managers had greater control of their destiny!
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Actions Taken - continued
2. Eliminated Overhead Variance Analysis and Absorption Accounting
Variance
Absorption Variance
Machine Utilization
Non-Lean Outcomes/Behaviors
•
Building of unnecessary inventory
• Reluctance to change over equipment
•
Reluctance to change over equipment
• Reluctance to perform necessary PM procedures
•
Purchase Price Variance
Direct/Indirect Labor Ratio
Direct Labor Variance
Analysis
Overhead Variance Analysis
Promotes buying excess inventory due to quantity
discounts
• May compromise quality and delivery over price
considerations
•
Used direct operators for indirect purposes
• Minimized the importance of indirect labor activities
•
Use of lowest cost resource regardless of skill set
• Piece rate encouraged the building of unnecessary
inventory, and compromised quality
•
Favorable variances interpreted as good, regardless of
continuous improvement trend
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Actions Taken - continued
3. Redesigned Capital Appropriation Request (CAR) Procedures
Old CAR
Requirements
ROI/NPV
• TAKT Time Analysis
•
•
•
•
•
•
Revised CAR
Requirements
Equipment flexibility
Kaizen opportunities of old equip
Quality ratings (Cpk) of new equipment
Changeover capabilities of new equip.
Flexibility vs. Monument
Technical support required
Is the new equipment consistent with the Lean philosophy?
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Actions Taken - continued
4. Established Target Costing
Target costs established based on market pricing
Accountants proactively worked with multi-functional design team to reduce costs and
hit desired profitability during the design phase:
Material considerations
Manufacturing considerations
Etc.
Created pro-forma standard work and cell design methodology to simulate new
product manufacturing process
Multi-functional involvement: Purchasing, Design Engineering, Manufacturing
Engineering, Marketing, Accounting
Old Formula: Cost + Profit = Selling Price
New Formula: Selling Price – Cost = Profit
70% of a product’s cost is locked in during the design process
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Actions Taken - continued
5. Eliminated Unnecessary Reporting
70% of management reports were deemed non-value added and eliminated
Based on Voice of the Customer
New computer system provided real time access to necessary information
Provided what was necessary, when necessary
Reliance on visual management to provide real-time feedback
Most of the information that we were providing was not needed,
and we found that we were not providing the required information
most of the time
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Actions Taken - continued
6. Implemented Hoshin Planning (Strategy Deployment)
Strategic Deployment
SD Planning
Alpha Beta Company - Top Level Strategy Deployment
m m
l
m
l
m
l m
m
m l
m m m
l m m m
m m m m
l
VP Engineering/NPD - Dick Rutherford
VP Human Resources - Barbara Milford
VP Finance & IT - Kim Richards
VP Marketing - Bill Turner
VP Sales - Jim Hunter
VP Operations & Supply Chain - Bob Hamilton
Improve External Quality from 8000 PPM to 500 PPM by 12/31/07
Improve Internal Quality from 34000 PPM to 2000 PPM by 12/31/07
Improve Leadtime from 12 Weeks to 2 Weeks by 12/31/07
Target to
Improve
l
Improve On-Time Delivery to Request Date from 65% to 90% by 12/31/07
1-3 Year
Breakthrough
Objectives
l l
l l
l
Secure 50 New Distributors by 12/31/07
1st Level
Annual Improvement
Priorities
l
l
Achieve $5 Million of Booked Sales for High Speed Controllers by 12/31/07
Implement Warranty Corrective Action Process
Implement Six Sigma Quality System
Develop "Pull" Production System
Develop Sales & Operations Planning Process
l Develop Distribution Network for High Speed Contollers
l Reengineer N.P.D. Process for High Speed Controllers
Achieve $20 million Revenue from High Speed Controllers by 12/31/08
Achieve 98% On Time Delivery to Request Date by 12/31/08
Achieve Six Sigma Quality Levels by 12/31/09
l
l
l l
l
Focuses on the implementation
of breakthrough objectives
Links breakthrough objectives
with specific resources
Aligns resources within the
company
SD Implementation
Resources
l Primary Responsibility
m Secondary Responsibility
Facilitates on-going review of
progress (PDCA)
Results in specific action plans
and measurements
Is always a dynamic process
Strategic Deployment fosters management to work ON the business not IN the business
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Actions Taken - continued
7. Reassigned Roles of Accountants
Moved accounting staff to the shop floor
Cost Accountants were promoted to Plant Controllers
Assigned to cross functional business teams and Value Streams
Gained experience – “business within a business”
Became navigators rather than historians
Responsibilities included:
Target Costing
Value Stream Costing and Reporting
Capital Expenditure Analysis and Reporting
Product Costing
Cost Improvement Initiatives
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Contents
Introduction
Lean Accounting – Case Study
Accounting for Lean – Case Study
Summary – Q&A
23
© Lean Horizons Consulting, LLC 2012. All Rights Reserved.
Jake Brake Results
1988
1999
$ 65 Million $ 200 Million
Sales Revenue
550
575
Headcount
240,000
Floor Space (Sq Ft) 240,000
2X
25X
Inventory Turns
<20%
99%
On-Time Delivery
3.0
35.0
Productivity
85 Days
2 Days
Lead-Time
75,000 PPM <5,000 PPM
Quality
4%
>30%
Operating Income
Development Cycle 72 Months 16 Months
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Contact Information
Mark DeLuzio, President & CEO
+1 860-430-1174
mark.deluzio@leanhorizons.com
www.leanhorizons.com
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