Fiume Breakout Understanding the Role of Lean...
Transcript of Fiume Breakout Understanding the Role of Lean...
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Lean Accounting Summit September 13, 2012
Understanding The Role of
Lean Leadership
Orest J. Fiume Retired VP – Finance
The Wiremold Company 1 Copyright 2012 Orest J Fiume-All
rights reserved
Wiremold Results: 1987 – 1990
1987 – 1990 Sales 20% Operating Profit (82%)
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Wiremold’s Status in 1990-1991 • Low Profits • No Cash • Bad Customer Service (< 50%) • Losing Market Share • But…
Ø We raised the awareness of everyone (including the union) of the need for change Ø We believed that the Toyota way of doing business was the right way
Time for a Change
Sept 1991:Hired Art Byrne as President 3
LEAN IS
A Business Strategy
Not
A Manufacturing Tactic
Not
A Cost Reduction Program 4
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Wiremold Before and After Lean 1990 2000
Assessed Value $30 Million $770 Million
West Hartford:
Sales per Employee $90K $240K
Gross Profit 37.8% 50.8%
Throughput Time 4-6 Weeks 1 Hours – 2 Days
Product Dev’l Time 2-3 Years 3-12 Months
# Suppliers 320 43
Inventory Turns 3.4 17.0
Working Cap % Sales* 21.8% 6.7% * W/C = A/R + Inv – Trade Payables
1990-2000 Wiremold Stock CAG = 34.7% per year 1990-2000 S&P500 CAG = 15.5% per year
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Lean is Not something you do while you run your business…
Lean is the Way you run your business
The Goal is Not to implement Lean…it is to accelerate operational excellence to create sustainable
competitive advantage
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Why Doesn’t Everyone Do “Lean”?
• Easy to Agree With
• Hard To Do
Why Is It So Hard? 7
Most CEO’s View Lean as “Some Manufacturing Thing”
• Just an Element of Strategy • Delegate it Down in the Organization - But
Don’t Remove the Barriers Ø Make the Month Ø Standard Cost Absorption Accounting Ø MRP and Other Computer Systems Ø Inappropriate Performance Measurement
Must Be Company Strategy To Be Successful 8
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Implementing Lean Thinking
It is a Cultural Change That Requires Leadership…
Because in the End It’s All About People
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Fundamental Wiremold Premise
Companies are just collec1ons (teams) of people trying to
outperform other collec1ons of people to sa1sfy a set of
customers
The best, most motivated and focused team wins
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Leadership: Three Models
• Old Dictator Style:
• 1970’s Empowerment Style
• Lean Style
• “Do it My Way”
• “Do it Your Way”
• “Follow me and we will figure this out together”
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Question: Poker and business seem to have a lot in common. Would a good CEO make a good poker player? Answer: I’ve played poker with CEO’s. They have to set their egos aside and say, “I’m obviously a very talented individual. I could become good at poker, but I have to be willing to learn. I have to be willing to open my mind to the possibility that I’m wrong and to listen to other people.” That’s hard for someone who’s gotten to the top.
Annie Duke, World Championship Poker Player
The Learning Leader
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The Lean Leaders’s Role • Learn Lean Thinking • Out Front - Hands On - Don’t Delegate • Set Stretch Goals • Create an Environment Where it’s OK to Fail • Have a “no-layoff” policy • Eliminate Concrete Heads • Organize around Value Streams • Change compensation systems that don’t
support Lean • Change Metrics • Adopt Lean Accounting
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Learn Lean Thinking
• “Lean is a personal journey as well as an institutional one”
--Jones, Aguirre and Calderon
• “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 14
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Plunge into Operations’ Lean Activities
Learn Lean by Doing Lean
“ Leaders that participate in Kaizen quickly begin to realize that most of their beliefs about the conduct of business are incorrect, from which new beliefs, behaviors, and competencies can arise…Unfortunately, most leaders embarking on the lean path do not participate in Kaizen and thus miss important opportunities to learn and explicitly support the establishment of new beliefs.”
M.L Emiliani
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Hands-On, Can’t Delegate
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The Disconnect Between What Senior Managers Believe and Reality
Senior Managers
Middle Managers
The company has good leadership
82% 52%
The company’s “espoused values” are reflected in what is actually happening
74% 25%
Roffey Park Institute 2008 study
“When you are a leader there is no such thing as a trivial act; our actions speak volumes to our organizations”
Anand Sharma
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Set Stretch Goals
“ Anyone can achieve a 5-10% improvement just by working harder. The purpose of a stretch goal is to challenge people and making them realize that they have to do things differently.”
--Art Byrne
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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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Have a “No Lay-off’ Policy
No one will lose their
employment as a result of
productivity gains!
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Eliminate Concrete Heads… No Excuses, No Exceptions
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Organize Around Value Creation
• Traditional organizational structure hides problems
• Value streams look at the organization horizontally, not vertically
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Change compensation systems that don’t support Lean
Factory: – piece work incentives – narrow job classifications and many pay grades
Middle management: – Bonus based on individual performance
Sales: – Bonus based on meeting quota
Senior Management: – Incentive Compensation based on individual
performance
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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 25
When Should Metrics be Addressed?
AT THE BEGINNING OF THE LEAN
TRANSFORMATION 26
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Who are the Principal Users of Metrics
The Workers
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How should Management 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
A Lot Easier to Say Than Do for Most Managers 28
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What is Process Focus
• Focus of a Traditional Company – Results, Results, Results
• Focus of a Lean Company – Process, Process, Process…and Results
• Lean Companies care about how the get Results in order to make them Repeatable
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Performance Measurement • Support the Strategy • Not too many • Mostly non-financial • Motivate the right behavior (i.e., eliminate waste) • Simple, easy to understand • Measure the process, not the people • Measure Actual vs. Goals • Don’t use Ratios … they’re too confusing • Don’t combine measures of different things into a single
index • Must be timely … hourly, daily, weekly ... • Must be visual and tracked over time to show trends
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Wiremold High Level Measurements
• 100% Customer Service
• 20% Annual Productivity
• 20x Inventory Turns
• 50% Annual Reduction in defects (quality)
• 5c’s and degree of visual management
• 20% Profit sharing 31
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PRODUCTIVITY = WEALTH
Arthur P. Byrne
Understand the difference between Efficiency and Productivity
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Productivity Is The Relationship Between Quantity of Output vs.
Quantity of Resources Consumed
• Sales $ = Quantity x Price • Material $ = Quantity x Price • Labor $ = Quantity x Price • O/H $ = Quantity x Price
Changing the “Q’s” Requires Physical Change -- It’s Not a Financial Thing
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EFFICIENCY
The Relationship Between Two Inputs: Standard Labor Hours vs. Actual Labor Hours
It Presumes That The Standards Are Right
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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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Implement Lean Accounting
• Commit to break with traditional systems • Provide education in Lean Thinking to all in
Accounting • Mandate that all professional accountants be
on at least two Kaizens per year
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Apply Lean Principles to All Business and Accounting Processes
• Simplify: – Reduce clerical, non-value added activities
to free up time – Reduce unnecessary reports to free up
time • Assign Accounting staff to Operating
Teams
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Eliminate Standard Cost Accounting 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)
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Provide Information that Non-Accountants can Actually Use*
This Year Last Year +(-)%
New Sales 100,000 90,000 11.1
Cost of Sales
Materials:
Purchases 28,100 34,900
Inventory (Incr)Decr: Mat’l Content 3,600 (6,000)
Total Materials 31,700 28,900 9.7
Processing Costs:
Factory Labor 11,400 11,500 (0.9)
Factory Salaries 2,100 2,000 5.0
Factory Benefits 7,000 5,000 40.0
Services & Supplies 2,400 2,500 (8.0)
Scrap 2,600 4,000 (35.0)
Equipment Depreciation 2,000 1,900 5.3
Total Processing Costs 27,500 26,900 2.2
Occupancy Costs:
Building Depreciation/Rent 200 200 0
Building Services 2,200 2,000 10.0
Total Occupancy Costs 2,400 2,200 9.1
Total Manufacturing Costs 61,600 58,000 6.2
Manufacturing Gross Profit 38,400 32,000 20.0
Inv Incr(Decr): Labor & Overhead Content (2,400) 4,000
GAAP Gross Profit 36,000 36,000 0
GAAP Gross Profit % 36.0% 40.0%
Plain English P&L By Value Stream
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Educate to Avoid The Two Big Surprises
• Reductions in WIP &FG inventory will result in a non-cash charge to earnings due to prior period’s capitalized labor and overhead coming off of the Balance Sheet
• Productivity gains don’t result in increased profits until management does something to actualized them
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Lean Accounting and Finance Transformation
Consulting
Analysis
Transactions
Consulting Analysis
Transactions
Activi
ties
Time
Ask yourself:
Are your Leaders creating a Lean Organization
Or An Organization Just Doing
Lean Stuff?
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“It is not the strongest species that survives, or the most intelligent but the most responsive to change”
--Charles Darwin “It is not necessary to change…survival is
not mandatory” --W. Edwards Deming
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