Accounting for Lean Pilot Update

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9/13/21 1 1 Accounting for Lean Pilot Update September 2021 1 2 2

Transcript of Accounting for Lean Pilot Update

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Accounting for Lean Pilot Update

September 2021

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Why is IPG changing to Accounting for Lean?

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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

Lean Accounting• Eliminating waste & frustration within the Accounting Department• Consolidated JEs & SOX items, new balance sheet, department scoreboard

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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Lean Accounting

• Align Finance department with IPS

• Visual communication on progress

• Highlights areas of opportunity

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Interesting Finding: Labor Controllable, not Variable

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-48% (weak) correlation

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Accounting for Lean Project

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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

Leverage the current IPS system

Improve measurement of plant performance and eliminate variances

Support Lean Manufacturing initiative in IPG

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Progress of WAT Pilot

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Parallel ReportingTraditional

• 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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Hybrid Lean Accounting – Transition Phase

• 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 MUV9

• 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

No change / Minimal Impact Possible Changes

• Eliminate non-material variances

• Plant P&L reported in new Lean format

• Inventory valued using Lean methodology

• Eliminate topside capitalization of plant variances

• New Lean Sales Cube

Immediate Changes

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Variances Eliminated:LEV, LRV, OHSV, Vol & Mix,

Other Mfg Spending

Inventory Valuation

Standard Costs• Inventory valued using standard cost

methodology• Material plus labor & overhead

absorption

• Purchase Price Variance FIFO'd based on inventory turns

• Plant manufacturing variances FIFO'dbased 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

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Immediate Changes

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SalesCost of Materials @ Std

Value addedValue added %

Direct Labor @ StdManufacturing OH @ Std

Gross Profit @ StdGross Margin @ Std

Other Manufacturing CostFreight & DutyFG Whse Costs (Incl Deprec)

Gross Profit Before VarGross Margin Before Var

VARIANCES:Material Variances:

PPVUsageSMOGMaterial FIFO Adjustment

Material Variances Total

Labor Variances:Labor EfficiencyLabor RateLabor FIFO Adjustments

Labor Variances Total

Overhead Variances:Manufacturing Overhead - Spending VarianceOverhead VolumeOverhead MixOH FIFO Adjustment

Overhead Variances Total

Total All Variances

Gross Profit $Gross Margin

Plant P&L (Current)

SalesMaterial

Value AddVA%

Freight Out And Distribution CostsDistribution Center Charges-Services

Value Add: Less Freight & HandlingAdj VA%

Conversion CostsPeople CostsUtilitiesEquipment RepairsSuppliesEmployee CostsOther ExpensesSubtotal Conversion Costs

Conversion ProfitConversion Margin

Occupancy CostsBuilding CostsTaxes/Insurance/Regulatory

Subtotal Occupancy CostsSubtotal ProfitSubtotal Margin%

Corporate AllocationsCash Gross ProfitCash GP%

Cost (To) / From InventoryFixed Asset ImpairmentsDepreciationNon-Cash Costs of Sales

Gross Profit $Gross Margin %

Plain English P&L (Future)

Includes total standard waste

KeyRed = MaterialBlue = LaborGreen = Overhead

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SalesCost of Materials @ Std

Value addedValue added %

Direct Labor @ StdManufacturing OH @ Std

Gross Profit @ StdGross Margin @ Std

Other Manufacturing CostFreight & DutyFG Whse Costs (Incl Deprec)

Gross Profit Before VarGross Margin Before Var

VARIANCES:Material Variances:

PPVUsageSMOGMaterial FIFO Adjustment

Material Variances Total

Labor Variances:Labor EfficiencyLabor RateLabor FIFO Adjustments

Labor Variances Total

Overhead Variances:Manufacturing Overhead - Spending VarianceOverhead VolumeOverhead MixOH FIFO Adjustment

Overhead Variances Total

Total All Variances

Gross Profit $Gross Margin

Plant P&L (Current)

SalesMaterial

Value AddVA%

Freight Out And Distribution CostsDistribution Center Charges-Services

Value Add: Less Freight & HandlingAdj VA%

Conversion CostsPeople CostsUtilitiesEquipment RepairsSuppliesEmployee CostsOther ExpensesSubtotal Conversion Costs

Conversion ProfitConversion Margin

Occupancy CostsBuilding CostsTaxes/Insurance/Regulatory

Subtotal Occupancy CostsSubtotal ProfitSubtotal Margin%

Corporate AllocationsCash Gross ProfitCash GP%

Cost (To) / From InventoryFixed Asset ImpairmentsDepreciationNon-Cash Costs of Sales

Gross Profit $Gross Margin %

Plain English P&L (Future)

Includes total standard waste

KeyRed = MaterialBlue = LaborGreen = Overhead

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New Plain English P&L Format

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Benefits of moving to Plain English P&L

• Easy for everyone to understand

• Transparency of specific costs categories• No standard costs, absorption or

variances

• Cash view of operations

• Impact of changing inventory levels

• Business alignment to one format• Currently multiple P&Ls exist - Examples:

• GP before plant variances• Contribution margin

Immediate Changes

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Longview – New Lean Hierarchy

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Immediate Changes

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Quarterly Plant Performance

Quarterly Bridge Method• Measurement: plant variances

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

Curr

ent S

tate

Lean State

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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

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Weekly PerformanceAttempts to represent plant performance impact on profit

Total Plant

Variance

MUV

LEV Spending Variance

Vol/Mix Variance

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Lean Performance

Financial Delivery

• Yield• Conversion Cost• Inventory Turns

Customer Delivery

• Quality• On-time Service

Current Performance

Budget &

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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Multi-Product Line Plant Pilot – In Progress

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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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Path Forward

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End of 2021

• 20% of plants in lean hybrid phase

Budget 2022

• Mostly unchanged

• Standard costs

• No variances

End of Q3 2022

• 55% of plants in lean hybrid phase

Budget 2023

• All standards eliminated

• All plants transition to lean reporting

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