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 reserved. 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 reserved. 3 Time-Based Strategies Lead-Time Reduction Critical for driving improvement to your customers Copyright 2006 by Orest J. Fiume - All rights reserved. 4 Time-Based Strategies Lead-Time Reduction The key is to reduce your processes to “core value” Copyright 2006 by Orest J. Fiume - All rights reserved. 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 Copyright 2006 by Orest J. Fiume - All rights reserved. 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? Copyright 2006 by Orest J. Fiume - All rights reserved. 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 reserved. 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 reserved. 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 Copyright 2006 by Orest J. Fiume - All rights reserved. 10 CEO’s Role Copyright 2006 by Orest J. Fiume - All rights reserved. 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 Copyright 2006 by Orest J. Fiume - All rights reserved. 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 Copyright 2006 by Orest J. Fiume - All rights reserved. 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 Copyright 2006 by Orest J. Fiume - All rights reserved. 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 Copyright 2006 by Orest J. Fiume - All rights reserved. 15 When Should Metrics be Addressed? AT THE BEGINNING OF THE LEAN TRANSFORMATION Copyright 2006 by Orest J. Fiume - All rights reserved. 16 Who are the Principal Users of Metrics The Workers Copyright 2006 by Orest J. Fiume - All rights reserved. 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 Copyright 2006 by Orest J. Fiume - All rights reserved. 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 Copyright 2006 by Orest J. Fiume - All rights reserved. 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 Copyright 2006 by Orest J. Fiume - All rights reserved. 20 Eliminate Concrete Heads But do it the right way… everyone is watching Copyright 2006 by Orest J. Fiume - All rights reserved. 21 Have a “no lay-off’ policy “No one will lose their employment as a result of productivity gains” Copyright 2006 by Orest J. Fiume - All rights reserved. 22 Organize Around Value Streams • Traditional organizational structure hides problems • Value streams look at the organization horizontally, not vertically Flatten the organization Copyright 2006 by Orest J. Fiume - All rights reserved. 23 Plan to answer the question: “What’s in it for me?” Profit Sharing Copyright 2006 by Orest J. Fiume - All rights reserved. 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 reserved. 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 reserved. 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” Copyright 2006 by Orest J. Fiume - All rights reserved. 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 Copyright 2006 by Orest J. Fiume - All rights reserved. 28 Understand the difference between Efficiency and Productivity PRODUCTIVITY = WEALTH Arthur P. Byrne Copyright 2006 by Orest J. Fiume - All rights reserved. 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 Copyright 2006 by Orest J. Fiume - All rights reserved. 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 Copyright 2006 by Orest J. Fiume - All rights reserved. 31 EFFICIENCY The Relationship Between Two Inputs: Standard Labor Hours vs. Actual Labor Hours It Presumes That The Standards Are Right Copyright 2006 by Orest J. Fiume - All rights reserved. 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 reserved. 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 reserved. 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 reserved. 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 reserved. 44