LEAN ACCOUNTING

Copyright 2006 by Orest J. Fiume - All rights reserved.1LEAN AND ACCOUNTING: The Role of the CEO and CFOOrest J. FiumeRetired Vice President - FinanceThe Wiremold Company1Copyright 2006 by Orest J. Fiume - All rights reserved.2LEANA Business Strategy

Not

A Manufacturing Tactic

Not

A Cost Reduction ProgramCopyright 2006 by Orest J. Fiume - All rights reserved.3A Simple Example Two Companies in Same Industry Using Same EquipmentCompany A

Set Up Takes 1 HourCompany B

Set Up Takes 1 Minute Who Has Lowest Cost? Who Can Provide Best Customer Service?A Small Process Improvement ProvidesEnormous Strategic AdvantageCopyright 2006 by Orest J. Fiume - All rights reserved.4Time-Based StrategiesLead-Time ReductionCritical for driving improvement to your customers

4Copyright 2006 by Orest J. Fiume - All rights reserved.5Time-Based Strategies Lead-Time Reduction

The key is to reduce your processes to core value5Speakers Notes:Despite the widespread productivity and cost-saving initiatives of the past several years, there is still an incredible amount of waste in almost every manufacturing system, much of it in the form of time. This chart illustrates the typical U.S. manufacturing process. Its not unusual to find that more than 90% of the products total lead-time adds no value to the production process - that is, its taken up by material handling chores, inefficient production flow, waiting, etc. which leaves plenty of room for improvement.Copyright 2006 by Orest J. Fiume - All rights reserved.6But What About Non-Manufacturing CompaniesManufacturingDevelop new products Take ordersProcess ordersPurchase materialsMake productsPayrollShip productClose the booksAccounts receivable Accounts payableHire people

ServiceDevelop new servicesTake ordersProcess applicationsPurchase suppliesProvide servicesPayrollShip product ?Close the booksAccounts receivableAccounts payableHire peopleAll Companies have similar processes6Copyright 2006 by Orest J. Fiume - All rights reserved.7Why Doesnt Everyone Do Lean?Easy to Agree With

Hard To DoWhy Is It So Hard?Copyright 2006 by Orest J. Fiume - All rights reserved.8Most Companies View Lean as Some Manufacturing ThingJust an Element of StrategyDelegate it Down in the Organization - But Dont Remove the BarriersMake the MonthAbsorption AccountingMRP and Other Computer SystemsDirect to Indirect Employee Measurements

Must Be Company Strategy To Be SuccessfulCopyright 2006 by Orest J. Fiume - All rights reserved.9OBSTACLES TO CHANGEBut, those companies arent like ours, we have different problemsWell change, but lets do so very slowlyOur auditors wont accept thatCopyright 2006 by Orest J. Fiume - All rights reserved.10What Does It Take ToGo to Lean Thinking?Its a Culture ChangeThat Requires LeadershipBecause In The End Its All About PeopleCopyright 2006 by Orest J. Fiume - All rights reserved.11 CEOs RoleCopyright 2006 by Orest J. Fiume - All rights reserved.12Learn Lean ThinkingLean is a personal journey as well as an institutional oneJones, Aguirre and CalderoneIf the CEO doesnt know Lean and how to do it, youre not going to be successful at implementing it in that companyArt ByrneCopyright 2006 by Orest J. Fiume - All rights reserved.13Out Front-Hands On-Dont DelegateLean Thinkingis an entire business model that must be run by the CEOJim WomackIf you cant get the CEO to lead this, then dont start because you are wasting your time.Art ByrneCopyright 2006 by Orest J. Fiume - All rights reserved.14Lots of Leaps of FaithEvery decision contains a leap of faith, some more than othersGet a senseiEvery decision is a prediction of the futureCopyright 2006 by Orest J. Fiume - All rights reserved.15Change Metrics

Why are Metrics Important?Metrics send a message to employees as to what management thinks is importantEmployees want to appear to be doing what management wants them to doMETRICS SHAPE BEHAVIORCopyright 2006 by Orest J. Fiume - All rights reserved.16

When Should Metrics be Addressed?AT THE BEGINNING OF THE LEAN TRANSFORMATION

Copyright 2006 by Orest J. Fiume - All rights reserved.17Who are the Principal Users of MetricsThe Workers17Copyright 2006 by Orest J. Fiume - All rights reserved.18How should we use metrics?Leaders may be judged by he numbers they deliver, but thats not the way they should run the companyRowan GibsonThe winners will be those companies that focus on their processes, not their resultsArt Byrne

We dont want to be a make-the-month companyCopyright 2006 by Orest J. Fiume - All rights reserved.19

Create an environment where it is OK to fail

Failure vs. Making Mistakes

Every failure teaches a man something, if he will learnCharles DickensCopyright 2006 by Orest J. Fiume - All rights reserved.20Provide Air Cover for Early AdoptersA small number will quickly understand it and like itA small number will feel threatened and try to kill itWhat is everyone else doing?

Waiting To See Who WinsCopyright 2006 by Orest J. Fiume - All rights reserved.21Eliminate Concrete HeadsBut do it the right wayeveryone is watchingCopyright 2006 by Orest J. Fiume - All rights reserved.22Have a no lay-off policyNo one will lose their employment as a result of productivity gainsCopyright 2006 by Orest J. Fiume - All rights reserved.23Organize Around Value StreamsTraditional organizational structure hides problemsValue streams look at the organization horizontally, not vertically

Flatten the organizationCopyright 2006 by Orest J. Fiume - All rights reserved.24Plan to answer the question:Whats in it for me?Profit SharingCopyright 2006 by Orest J. Fiume - All rights reserved.25CEOs Role - SummaryLearn Lean ThinkingOut Front - Hands On - Dont DelegateLots of Leaps of FaithChange MetricsCreate an Environment Where its OK to FailProvide Air Cover for early adoptersEliminate Concrete HeadsHave a no-layoff policyOrganize around Value StreamsProfit SharingCopyright 2006 by Orest J. Fiume - All rights reserved.26OBSTACLES TO LEAN ACOUNTINGTransaction focusComplex systemsAbsorption AccountingEmphasis on Variance AnalysisNo Timely InformationFocus on Compliance vs. ImprovementCopyright 2006 by Orest J. Fiume - All rights reserved.27CFOs RoleLearn Lean by Doing LeanChange Metrics/Performance MeasuresRemove the ObstaclesUnderstand the difference between Efficiency and ProductivityProvide Information that non-accountants can actually useAvoid the two big surprises

Copyright 2006 by Orest J. Fiume - All rights reserved.28REMOVE THE OBSTACLESCommit to break with traditional systemsProvide education in Lean ThinkingReduce clerical activities to free up timeReduce unnecessary reports to free up timeAssign Accounting staff to Operating TeamsSimplify Business SystemsCopyright 2006 by Orest J. Fiume - All rights reserved.29PRODUCTIVITY = WEALTHArthur P. ByrneUnderstand the difference between Efficiency and ProductivityCopyright 2006 by Orest J. Fiume - All rights reserved.30Productivity 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 PriceChanging the Qs Requires PhysicalChange -- Its Not a Financial ThingCopyright 2006 by Orest J. Fiume - All rights reserved.31IMPROVEMENT REQUIRES PHYSICAL CHANGEPhysically group production by product familiesPhysically change process layout to facilitate one piece flowPhysically eliminate central parts storage - store at the point of usePhysically reduce set up time 95%+Co-locate people: Marketing & Product Dev.Purchasing, Production Control and OperationsCredit and Customer ServiceCopyright 2006 by Orest J. Fiume - All rights reserved.32EFFICIENCYThe 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.33The Standard Cost P&LThis YearLast Year Net Sales100,00090,000 Cost of Sales:Standard Costs 48,00045,000Purch Price Var (3,000)10,000Matl Usage Var (2,000) 5,000Labor Eff Var 7,000(8,000)Labor Rate Var (2,000) 9,000OH Volume Var 2,000 2,000OH Spend Var (2,000) 8,000OH Eff Var 16,000 (17,000) Total Cost of Sales 64,000 54,000

Gross Profit 36,000 36,000Gross Profit % 36.0% 40.0%USELESS MANAGEMENT INFORMATIONCopyright 2006 by Orest J. Fiume - All rights reserved.34How are Standard Costs Calculated?Materials = Quantity x Unit CostsMaterial Quantity based on engineering design, modified for yield Material Unit Costs based on quotes, current average or ???

Labor = Hours x Hourly RateLabor Hours based on engineering studies, adjusted for PFD, etcLabor Rates based on average rate

Overhead = Labor Hours x Overhead RateOverhead Rate based on Budgeted Overhead divided by Budgeted HoursVariance = Actual Standard (estimates in Red)34Copyright 2006 by Orest J. Fiume - All rights reserved.35The Plain Language P&L This Year Last Year +(-)%Net Sales100,00090,00011.1Costs of Sales: Purchases 28,10034,900 Inventory (Inc) Dec: Matl Content3,600(6,000)Total Materials 31,700 28,900 9.7 Processing Costs: Factory Wages 11,40011,500 (0.9) Factory Salaries 2,100 2,000 5.0 Factory Benefits 7,000 5,000 40.0 Services & Sup 2,400 2,500 (8.0) Equipment Depr 2,000 1,900 5.3 Scrap 2,600 4,000 (35.0)Total Processing Costs 27,50026,900 2.2Occupancy Costs: Building Depr 200 200 0.0 Building Services 2,200 2,00010.0Total Occupancy Costs: 2,400 2,200 9.1Total Mfg Costs 61,60058,000 6.2 Manufacturing Gross Profit 38,400 32,000 20.0Inv Incr (Dec): Labor,O/H Content (2,400) 4,000 GAAP Gross Profit 36,00036,000 0.0 36.0% 40.0%Copyright 2006 by Orest J. Fiume - All rights reserved.36Balance SheetCurrent Assets:TYLYCurrent LiabilitiesTYLY Cashxxyy Accts Payablexxyy Acct Recxxyy Accrualsxxyy Inventory14.020.0 Otherxxyy Otherxxyy Totalxxyy TotalxxyyLong Term DebtxxyyFixed AssetsxxyyCapitalxxyyTotal AssetsxxyyTotal Liab + Cap.xxyyCopyright 2006 by Orest J. Fiume - All rights reserved.37Balance SheetCurrent Assets:TYLYCurrent LiabilitiesTYLY Cashxxyy Accts Payablexxyy Acct Recxxyy Accrualsxxyy Inv-Material 8.412.0 Otherxxyy Inv-Def. L+O/H 5.6 8.0 Totalxxyy Total Inv14.020.0 OtherxxyyLong Term Debtxxyy TotalxxyyCapitalxxyyFixed AssetsxxyyTotal Liab + Cap.xxyyTotal AssetsxxyyCopyright 2006 by Orest J. Fiume - All rights reserved.38The Plain Language P&L This Year Last Year +(-)%Net Sales100,00090,00011.1Costs of Sales: Purchases 28,10034,900 Inventory (Inc) Dec: Matl Content3,600(6,000)Total Materials 31,700 28,900 9.7 Processing Costs: Factory Wages 11,40011,500 (0.9) Factory Salaries 2,100 2,000 5.0 Factory Benefits 7,000 5,000 40.0 Services & Sup 2,400 2,500 (8.0) Equipment Depr 2,000 1,900 5.3 Scrap 2,600 4,000 (35.0)Total Processing Costs 27,50026,900 2.2Occupancy Costs: Building Depr 200 200 0.0 Building Services 2,200 2,00010.0Total Occupancy Costs: 2,400 2,200 9.1Total Mfg Costs 61,60058,000 6.2 Manufacturing Gross Profit 38,400 32,000 20.0Inv Incr (Dec): Labor,O/H Content (2,400) 4,000 GAAP Gross Profit 36,00036,000 0.0 36.0% 40.0%Copyright 2006 by Orest J. Fiume - All rights reserved.39An Increase in ProductivityDoes Not Automatically Result in an Increase in ProfitA Fundamental TruthCopyright 2006 by Orest J. Fiume - All rights reserved.40How to Actualize Productivity Gains?Sell moreReduce OvertimeHold on to attritionIn-sourcingAnd Its Managements Responsibility To Actualize Productivity GainsCopyright 2006 by Orest J. Fiume - All rights reserved.41Cash Flow From ManufacturingThis YearLast YearGross Profit36,00036,000Equipment Depreciation2,0001,900BuildingDepreciation200200Chg. In Inv.Labor & O/H2,400(4,000)Cash Flow From Mfg.40,600+19%34,100Copyright 2006 by Orest J. Fiume - All rights reserved.42SummaryAccording to Jim Womack: The Ages of Lean1935 to 1977: Invention and Innovation1977 to 1990: Discovery1990 to Present: Diffusion out of auto industry1990 to 2006: The Lean tool age2007 : The Lean Management AgeCopyright 2006 by Orest J. Fiume - All rights reserved.43THANK YOUojfiume@comcast.netCopyright 2006 by Orest J. Fiume - All rights reserved.44Real Numbers:Management Accounting in a Lean Organizationwww.tbmcg.com (go to TBM store)www.lean.org (go to Store, then Lean Applications)www.amazon.com