LEAN AND ACCOUNTING:
The Role of the CEO and CFO
Orest J. Fiume
Retired Vice President - Finance
The Wiremold Company
Copyright 2006 by Orest J. Fiume - All rights
reserved.
1
LEAN
A Business Strategy
Not
A Manufacturing Tactic
Not
A Cost Reduction Program
Copyright 2006 by Orest J. Fiume - All rights
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2
A Simple Example
Two Companies in Same Industry Using Same Equipment
Company A
Company B
Set Up Takes 1 Hour
Set Up Takes 1 Minute
• Who Has Lowest Cost?
• Who Can Provide Best Customer Service?
A Small Process Improvement Provides
Enormous Strategic Advantage
Copyright 2006 by Orest J. Fiume - All rights
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3
Time-Based Strategies
Lead-Time Reduction
Critical for driving improvement to your
customers
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4
Time-Based Strategies
Lead-Time Reduction
The key is to reduce your processes to “core value”
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5
But What About
Non-Manufacturing Companies
All Companies have similar processes
Manufacturing
Develop new products
Take orders
Process orders
Purchase materials
Make products
Payroll
Ship product
Close the books
Accounts receivable
Accounts payable
Hire people
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Service
Develop new services
Take orders
Process applications
Purchase supplies
Provide services
Payroll
Ship product ?
Close the books
Accounts receivable
Accounts payable
Hire people
6
Why Doesn’t Everyone Do “Lean”?
• Easy to Agree With
• Hard To Do
Why Is It So Hard?
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7
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
Must Be Company Strategy To Be Successful
Copyright 2006 by Orest J. Fiume - All rights
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8
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”
Copyright 2006 by Orest J. Fiume - All rights
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9
What Does It Take To
Go to Lean Thinking?
It’s a Culture Change
That Requires Leadership…
Because In The End
It’s All About People
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10
CEO’s Role
Copyright 2006 by Orest J. Fiume - All rights
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11
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
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12
Out Front-Hands On-Don’t Delegate
• “Lean Thinking…is an entire business
model that must be run by the CEO”
– Jim Womack
• “If you can’t get the CEO to lead this, then
don’t start because you are wasting your
time.”
– Art Byrne
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13
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
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14
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
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15
When Should Metrics be
Addressed?
AT THE BEGINNING OF THE LEAN
TRANSFORMATION
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16
Who are the Principal
Users of Metrics
The Workers
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17
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”
– Rowan Gibson
• “The winners will be those companies that focus on
their processes, not their results”
– Art Byrne
We don’t want to be a “make-the-month” company
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18
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
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19
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?
Waiting To See Who Wins
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20
Eliminate Concrete Heads
But do it the right way…
everyone is watching
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21
Have a “no lay-off’ policy
“No one will lose their
employment as a result of
productivity gains”
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22
Organize Around Value Streams
• Traditional organizational structure hides
problems
• Value streams look at the organization
horizontally, not vertically
Flatten the organization
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23
Plan to answer the question:
“What’s in it for me?”
Profit Sharing
Copyright 2006 by Orest J. Fiume - All rights
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24
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
Profit Sharing
Copyright 2006 by Orest J. Fiume - All rights
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25
OBSTACLES TO LEAN ACOUNTING
•
•
•
•
•
•
Transaction focus
Complex systems
Absorption Accounting
Emphasis on Variance Analysis
No Timely Information
Focus on Compliance vs. Improvement
Copyright 2006 by Orest J. Fiume - All rights
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26
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”
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27
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
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28
Understand the difference between
Efficiency and Productivity
PRODUCTIVITY = WEALTH
Arthur P. Byrne
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29
Productivity Is The Relationship
Between Quantity of Output vs.
Quantity of Resources Consumed
• Sales $
• Material $
• Labor $
• O/H $
=
=
=
=
Quantity x Price
Quantity x Price
Quantity x Price
Quantity x Price
Changing the “Q’s” Requires Physical
Change -- It’s Not a Financial Thing
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30
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
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31
EFFICIENCY
The Relationship Between Two Inputs:
Standard Labor Hours vs. Actual Labor Hours
It Presumes That The Standards Are Right
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32
The Standard Cost P&L
Net Sales
Cost of Sales:
Standard Costs
Purch Price Var
Matl Usage Var
Labor Eff Var
Labor Rate Var
OH Volume Var
OH Spend Var
OH Eff Var
Total Cost of Sales
Gross Profit
Gross Profit %
This Year
100,000
48,000
(3,000)
(2,000)
7,000
(2,000)
2,000
(2,000)
16,000
64,000
36,000
36.0%
USELESS MANAGEMENT INFORMATION
Copyright 2006 by Orest J. Fiume - All rights
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Last Year
90,000
45,000
10,000
5,000
(8,000)
9,000
2,000
8,000
(17,000)
54,000
36,000
40.0%
33
How are Standard Costs Calculated?
• Materials = Quantity x Unit Costs
– Material Quantity based on engineering design, modified for yield
– Material Unit Costs based on quotes, current average or ???
• Labor = Hours x Hourly Rate
– Labor Hours based on engineering studies, adjusted for PFD, etc
– Labor Rates based on average rate
• Overhead = Labor Hours x Overhead Rate
– Overhead Rate based on Budgeted Overhead divided by Budgeted
Hours
Variance = Actual – Standard (estimates in Red)
Copyright 2006 by Orest J. Fiume - All rights
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34
The “Plain Language” P&L
Net Sales
Costs of Sales:
Purchases
Inventory (Inc) Dec: Mat’l Content
Total Materials
Processing Costs:
Factory Wages
Factory Salaries
Factory Benefits
Services & Sup
Equipment Depr
Scrap
Total Processing Costs
Occupancy Costs:
Building Depr
Building Services
Total Occupancy Costs:
Total Mfg Costs
Manufacturing Gross Profit
Inv Incr (Dec): Labor,O/H Content
Copyright
2006 Profit
by Orest J. Fiume - All rights
GAAP
Gross
reserved.
This Year
100,000
Last Year
90,000
+(-)%
11.1
28,100
3,600
31,700
34,900
(6,000)
28,900
9.7
11,400
2,100
7,000
2,400
2,000
2,600
27,500
11,500
2,000
5,000
2,500
1,900
4,000
26,900
(0.9)
5.0
40.0
(8.0)
5.3
(35.0)
2.2
200
2,200
2,400
61,600
38,400
(2,400)
36,000
200
2,000
2,200
58,000
32,000
4,000
36,000
0.0
10.0
9.1
6.2
20.0
35
0.0
Balance Sheet
Current Assets:
Cash
Acct Rec
Inventory
Other
Total
Fixed Assets
Total Assets
TY
xx
xx
LY
yy
yy
14.0 20.0
xx yy
xx yy
xx
xx
Copyright 2006 by Orest J. Fiume - All rights
reserved.
yy
yy
Current Liabilities TY LY
Accts Payable
xx yy
Accruals
xx yy
Other
Total
xx yy
xx yy
Long Term Debt xx yy
Capital
xx yy
Total Liab + Cap. xx yy
36
Balance Sheet
Current Assets:
TY
LY
Current
Liabilities
Accts Payable
Cash
Acct Rec
Inv-Material
Inv-Def. L+O/H
xx
yy
xx
yy
8.4 12.0
5.6 8.0
Total Inv
Other
14.0 20.0
xx
yy
Long Term Debt
Total
Fixed Assets
xx
xx
yy
yy
Total Assets
xx
yy
Copyright 2006 by Orest J. Fiume - All rights
reserved.
TY LY
xx
xx
xx
xx
yy
yy
yy
yy
xx
yy
Capital
xx
Total Liab + Cap. xx
yy
yy
Accruals
Other
Total
37
The “Plain Language” P&L
Net Sales
Costs of Sales:
Purchases
Inventory (Inc) Dec: Mat’l Content
Total Materials
Processing Costs:
Factory Wages
Factory Salaries
Factory Benefits
Services & Sup
Equipment Depr
Scrap
Total Processing Costs
Occupancy Costs:
Building Depr
Building Services
Total Occupancy Costs:
Total Mfg Costs
Manufacturing Gross Profit
Inv Incr (Dec): Labor,O/H Content
Copyright
2006 Profit
by Orest J. Fiume - All rights
GAAP
Gross
reserved.
This Year
100,000
Last Year
90,000
+(-)%
11.1
28,100
3,600
31,700
34,900
(6,000)
28,900
9.7
11,400
2,100
7,000
2,400
2,000
2,600
27,500
11,500
2,000
5,000
2,500
1,900
4,000
26,900
(0.9)
5.0
40.0
(8.0)
5.3
(35.0)
2.2
200
2,200
2,400
61,600
38,400
(2,400)
36,000
200
2,000
2,200
58,000
32,000
4,000
36,000
0.0
10.0
9.1
6.2
20.0
38
0.0
A Fundamental Truth
An Increase in Productivity
Does Not Automatically
Result in an Increase in Profit
Copyright 2006 by Orest J. Fiume - All rights
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39
How to Actualize
Productivity Gains?
•
•
•
•
Sell more
Reduce Overtime
Hold on to attrition
In-sourcing
And It’s Management’s Responsibility
To Actualize Productivity Gains
Copyright 2006 by Orest J. Fiume - All rights
reserved.
40
Cash Flow From Manufacturing
Gross Profit
Equipment
Depreciation
Building
Depreciation
Chg. In Inv.
Labor & O/H
Cash Flow
From Mfg.
Copyright 2006 by Orest J. Fiume - All rights
reserved.
This Year
36,000
2,000
Last Year
36,000
1,900
200
200
2,400
(4,000)
40,600
+19%
34,100
41
Summary
According to Jim Womack: The Ages of Lean
1935 to 1977: Invention and Innovation
1977 to 1990: Discovery
1990 to Present: Diffusion out of auto
industry
1990 to 2006: The Lean “tool” age
2007
: The Lean Management Age
Copyright 2006 by Orest J. Fiume - All rights
reserved.
42
THANK YOU
ojfiume@comcast.net
Copyright 2006 by Orest J. Fiume - All rights
reserved.
43
Real Numbers:
Management Accounting in a Lean Organization
• www.tbmcg.com (go to TBM store)
• www.lean.org (go to Store, then Lean
Applications)
• www.amazon.com
Copyright 2006 by Orest J. Fiume - All rights
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44