LLW Publicover HoganSeptember 2021
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• Support IPS, Lean manufacturing and business leaders
• Standard costing is an antiquated means of product costing • “Variable” costs are fixed – example on next slide
• Variances have not been an accurate predictor of profitability or measure of plant performance
• Lack of confidence in accurate inventory valuation • Complexity and sensitivity on inventory turns used for plant variances
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Accounting for Lean • Measuring the company with timely, actionable information that is
respectful, understandable and promotes Lean behavior • Plain English P&L, Box Scores, Value Stream Costing
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The core principle of Lean is to eliminate waste – “more for less”
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• Visual communication on progress
• Highlights areas of opportunity
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Provide relevant, reliable, and easy to understand information in a format that shows how actual costs are incurred
Simplify manufacturing accounting
Improve measurement of plant performance and eliminate variances
Support Lean Manufacturing initiative in IPG
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Parallel Reporting Traditional
• Plant variance FIFO • Plant and CM P&Ls • Weekly variances • Quarterly bridge
Lean - Ops Prefers • Cost (to) / from inventory • Plain English P&L • Weekly Box Score • Conversion & total waste
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• Standard costs in ERP • Forecast • Consolidated P&L
• New cost (to)/from inventory line
• PVMC • Minor impact for timing?
• Sales Cube • Sales commissions • Contribution Margin
• Minor impact for capitalized MUV
• MUV & PPV • Minor change of plant
taking on capitalized MUV 9
• Parallel lean forecast P&L • Quarterly bridge • Plant bonus metrics
• Alignment to boxscore • Weekly reporting of
variances replaced with boxscore
• Legacy reports to transition to direct margin • Replace contribution margin • Impact analysis is requested
from IT
• Eliminate non-material variances
• Inventory valued using Lean methodology
• Eliminate topside capitalization of plant variances
• New Lean Sales Cube
Other Mfg Spending
methodology • Material plus labor & overhead
absorption
• Plant manufacturing variances FIFO'd based on inventory turns • Manual, technical and time-
consuming process leading to risk of error
• Booked at the highest level and business leaders do not see this impact
Current State Actual Cost
• Inventory valued in the system at material costs only
• Purchase Price Variance and Material Usage Variance FIFO'd based on inventory turns
• Actual labor and overhead spending FIFO’d based on FG & WP turns • Simplifies achieving the goal of
accurately valuing inventory at current actual costs
• Business teams and manufacturing leaders will have visibility to actual inventory valuation
Lean State
Value added Value added %
Other Manufacturing Cost Freight & Duty FG Whse Costs (Incl Deprec)
Gross Profit Before Var Gross Margin Before Var
VARIANCES: Material Variances:
Material Variances Total
Labor Variances Total
Overhead Variances Total
Total All Variances
Value Add: Less Freight & Handling Adj VA%
Conversion Costs People Costs Utilities Equipment Repairs Supplies Employee Costs Other Expenses Subtotal Conversion Costs
Conversion Profit Conversion Margin
Subtotal Occupancy Costs Subtotal Profit Subtotal Margin%
Corporate Allocations Cash Gross Profit Cash GP%
Cost (To) / From Inventory Fixed Asset Impairments Depreciation Non-Cash Costs of Sales
Gross Profit $ Gross Margin %
Includes total standard waste
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Value added Value added %
Other Manufacturing Cost Freight & Duty FG Whse Costs (Incl Deprec)
Gross Profit Before Var Gross Margin Before Var
VARIANCES: Material Variances:
Material Variances Total
Labor Variances Total
Overhead Variances Total
Total All Variances
Value Add: Less Freight & Handling Adj VA%
Conversion Costs People Costs Utilities Equipment Repairs Supplies Employee Costs Other Expenses Subtotal Conversion Costs
Conversion Profit Conversion Margin
Subtotal Occupancy Costs Subtotal Profit Subtotal Margin%
Corporate Allocations Cash Gross Profit Cash GP%
Cost (To) / From Inventory Fixed Asset Impairments Depreciation Non-Cash Costs of Sales
Gross Profit $ Gross Margin %
Includes total standard waste
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• Easy for everyone to understand
• Transparency of specific costs categories • No standard costs, absorption or
variances
• Impact of changing inventory levels
• Business alignment to one format • Currently multiple P&Ls exist - Examples:
• GP before plant variances • Contribution margin
Immediate Changes
against past variances • “Variance of the variances”
• Challenges: standard cost changes, carry forward GMI consideration, manual, inefficient, sometimes inaccurate and not timely
Conversion Cost Method • Measurement: actual costs relative
to utilization and performance • (Conversion Costs + Total Waste) ÷
Machine Hours = Period Performance Rate
• Benefits: actual costs, easily calculated on PE P&L, ties to weekly box score performance, transparency for decision makers
Cu rr
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• Period performance compared to baselines: SEQ, YOY & YTD • Arrows represent amount of work & time to complete, latency, error, confusion, waste and cost
Possible Changes
Weekly Performance Attempts to represent plant performance impact on profit
Total Plant
Customer Delivery
Forecast Compare
• Challenges: often times there can be a disconnect on weekly reporting and month end profit
• Metrics are relevant and true performance results consider the correlation between other metrics.
• Example: What does high service levels and low inventory turns mean for the business?
Possible Changes
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• Building off of the WAT pilot • WAT – 2 plants : 1 product line • Specialty Tape – 1 plant : many product lines
• Additional complexity in reporting and valuing inventory that feeds into multiple products
• Leveraging financial reporting program to allocate shared costs and promote value streams to begin expensing more direct cost
• Parallel reporting in test Q3 2021, targeting October go-live
• Initial feedback is higher confidence in product line costs
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Budget 2022
• Mostly unchanged
• Standard costs
• No variances
Budget 2023
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