Practical LeanAccountingA Proven System for Measuring

and Managing the Lean Enterprise

Second Edition

Brian MaskellBruce Baggaley

Larry Grasso

CRC PressTaylor & Francis Group

Boca Raton London New York

CRC Press is an imprint of theTaylor 6c Francis Croup, an informa business

A PRODUCTIVITY PRESS BOOK

Contents

Preface to the First Edition xixPreface to the 2011 Edition—The Journey Continues xxiiiAcknowledgments xxvIntroduction xxvii

1 Why Is Lean Accounting Important? 1How Standard Costing Can Drive Wrong Behavior 3We Need to Show the Financial Impact of Lean Improvements 5We Need a Better Way to Understand Product Costs 6We Need New Kinds of Lean Performance Measurements 9We Need to Eliminate Waste from Accounting Processes and Systems.... 10We Need Better Ways of Making Decisions 11We Need to Focus Our Business around Customer Value 12Summary 12

2 Maturity Path to Lean Accounting 15The Maturity Path 16

Maturity Path—Stage 1 17Maturity Path—Stage 2 20

Is Lean Accounting a Series of Methods and Tools? 22Maturity Path—Stage 3 23

Getting Started with Lean Accounting 25Summary 26

3 Cell Performance Measurements 29What's Wrong with Traditional Measurements? 29What's Right with Lean Cell Measurements? 30BMA Inc. Performance Measurement Starter Set 31Day-by-the-Hour Report 31

VII

viii • Contents

The Primary Reason the Cell Team Neglects the Day-by-the-Hour Report 35Why by the Hour? 35Our Cells Only Make a Few Products Each Hour and the CycleTimes Vary Considerably 36Alternative Measurements 37

First-Time-Through Report 38How Do I Measure First Time Through? 39How Is the Data Collected? 40How Do I Report FTT? .- 40What Is the Number One Reason for the FTT to Fail? 40Alternative Measurements to FTT 41

WIP-to-SWIP Report 41How Is the Report Calculated? 42How Is the Data Gathered? 42How Do I Report WIP-to-SWIP? 43Alternative Measurements to WIP-to-SWIP 44

Operational Equipment Effectiveness 44How Do I Measure OEE? 45How Do We Gather the Data? 46How Do We Report OEE? 47Is OEE Used for Other Things? 47Alternative Measurements to OEE 48

Other Support Measurements in the Cell 48Cross-Training Chart 49Five S 49Safety 50Absenteeism 50Setup Times : 50

Presenting the Information 52Making the Cell Performance Measurements Work 53Nonproduction Cells and Departments 55

How Does This Relate to Accounting and Control? 57Summary 57

4 Financial Benefits of Lean Manufacturing 61The Problem 6lCreating the Box Score 63

Operational 63

Contents • ix

Financial Information in the Box Score 67Using the Box Score in Planning 70The ECI Current State 70ECI Future State 72

Managing Capacity ; 77What We Mean by Resource Capacity 78Analyzing the Capacity Freed Up -. 79

Making Money from Lean Manufacturing 83Alternative 1: Eliminate the Resources 83Alternative 2: Grow the Business 84

Summary 88

5 Eliminating Wasteful Transactions 91What Must Be in Place? 94Cell Transactions 95Labor Tracking 98Material Costs 100Inventory Tracking 101Summary 102

6 Lean Financial Accounting 103A New Perspective on Internal Accounting Control 103Eliminating Waste from the Financial Accounting Processes 105

Accounts Payable Process 106Accounts Receivable Process 108The General Ledger and Month-End Closing Process 109

Using Lean Tools to Create Change I l lValue Stream Maps and Process Maps 112

Step One: Assign an Improvement Team 113Step Two: Start with the Customer 113Step Three: Identify the Tasks within the Process 113Step Four: Gather the Data 113Step Five: Analyze the Data 114

Kaizen—Lean Continuous Improvement 116Step One: Establish the Team 117Step Two: Develop Performance Measurements 117Step Three: Develop Future State Process Maps 117Step Four: Implement the Future State 119Step Five: Repeat the Process 120

Summary 122

x • Contents

7 Managing by Value Stream 123What Is a Value Stream? 123Different Kinds of Value Streams 124Why Do We Focus on Value Streams? 126Why Should We Manage the Business through the Value Streams? 127

Focus 127Accountability 128Simplicity 129

Continuous Improvement 130The Maturity Path to Lean Value Stream Organization 130Problems and Issues 131

People in More than One Value Stream 132Monuments 132Small Value Streams 133Competition between Value Streams 134What about the People Who Are Not in the Value StreamTeams? 134

How Do We Identify the Value Streams? 135Staple Yourself to an Order 135Production Flow Matrix 135Size of the Value Stream 138Draw the Current State Value Stream Maps 138Machines and Monuments 138Identify the People in the Value Stream 139

Do We Need to Change Our Organization Chart? 140Develop a Plan 143

' Summary..., 143

8 Value Stream Performance Measurements 145What Is the Purpose of Value Stream Performance Measurements? 145Value Stream Continuous Improvement Teams 146Value Stream Measurements and Process Control 147How Do Value Stream Measurements Differ from Traditional Metrics? 148

The Starter Set 149Box Scores 150Sales per Person 150

How Do I Measure Sales per Person? 150What Should Be the Target? 151

Alternative Measurements : 151

Contents • xi

On-Time Shipment 152How Do I Measure On-Time Shipment? 152Alternative Measurements 153

Dock-to-Dock Time : 153How Do I Measure Dock-to-Dock Time? 154How Do I Gather the Data? 154How Is Dock-to-Dock Reported? 156Alternative Measurements 156

First Time Through .". 156How Do I Measure First Time Through? 157A Word of Warning 157Alternative Measurement 158

Average Cost per Unit 158How Do I Measure the Average Cost per Unit? 158How Valid Is the Average Cost? 160How Is the Average Cost Used? 160Alternative Measurements l6l

Accounts Receivable Days Outstanding : 161How Do I Measure AR Days Outstanding? 162

Supporting Measurements 162Safety Cross 162Cross-Training 162Improvement Project Participation 163

Presenting the Information 163Making the Value Stream Performance Measurements Work 165Summary 170

Value Stream Costing 173What Is Wrong with Traditional Standard Costing? 174How Does Value Stream Costing Work? 176

For What Is Value Stream Costing Used? 178Why Is Value Stream Costing Simple? 181How Can We Implement Value Stream Costing? 181How Do We Handle Costs outside the Value Stream? 183How Do We Know the Cost of a Product? 184Value Stream and Plant Profit and Loss Statements 186Calculating the Cost of Inventory..... 187Special Problems Involving Inventory 191Getting Started with Simpler Methods 192

xii • Contents

Summary 193

10 Using the Box Score 195Reporting Value Stream Performance 197Showing the Effects of Lean Improvements 198Showing the Effects of Strategies and Plans 200Summary.. 201

11 Calculating Product Costs—Features and Characteristics 203What Drives Cost in a Lean Value Stream? 205How to Use Features and Characteristics 206

Step 1: Calculate the Average Product Family Cost for theValue Stream 207

How Average Cost Drives a Lean Approach to Inventory 207Step 2: Analyze Available Capacity 210Step 3: Identify the Primary Bottleneck and Pacemaker withinthe Value Stream 210Step 4: Identify How Product Features and CharacteristicsAffect Use of the Bottleneck 213Step 5: Calculate Conversion Costs Using Product Features andCharacteristics' Effects 214Step 6: Calculate the Material Costs 216Step 7: Identify Other Significant Product Features AffectingUse of the Bottleneck Resource 216

Uses of Features and Characteristics Costing 216Summary 217

12 Eliminating More Wasteful Transactions 219Labor Tracking 221Material Costs 228Inventory Tracking 230The Internal Control System 231Summary 233

13 Sales, Operational, and Financial Planning (SOFP) 235Purpose of Lean Sales, Operations, and Financial Planning 236Lean Financial Planning 237Lean Sales, Operations, and Financial Planning 238

SOFP Team 240Value Stream Demand Planning 241

Planning Horizon 242

Contents • xiii

Who Is Responsible for Calculating the Forecast? 242What If Sales Is Not a Part of the Value Stream? 244What Happens If Marketing Product Groups Are Differentfrom Value Stream Product Families? , 244Forecasting Methods '. 245Is the Forecast Accurate? 246

Value Stream Operations Planning 246Short-Term and Long-Term Actions 249Takt Time, Cycle Time, and Level Scheduling 249Identifying Bottlenecks and Value Stream Cost Analysis 250Manning Levels ' 251New Product Introductions 251Capacity Assumptions and Continuous Improvement 253Sales Plans 253Capital Acquisitions 254Raw Material and Component Planning 255Troublesome Components 256Finished Goods Inventory and Backlog 256SOFP Financial Reports and Budgets 258Source of the Financial Information 258

SOFP Planning Meeting 26lOptimizing the Sales Plan : 262Financial Plans and Budgets. 263

Executive SOFP Meeting 266Who Should Attend the Executive SOFP Meeting? 267Outcome of the Executive SOFP Meeting...: 268

Variations on a Theme 268Making It Happen 269Summary ...271

14 Lean Financial Accounting II 273Further Advances in Lean Accounting 275

Financial Accounting Processes 275Accounts Payable 275Accounts Receivable 276General Ledger and Month-End Closing 277

Move toward a Cash Basis of Accounting for Expenses 281How Often Do We Close? 284Internal Control 284

xiv • Contents

The Role of the Accountant 288Summary 290

15 The Lean Enterprise 291What Is a Lean Enterprise? '. 291

Lean Methods 292Lean Culture 293Lean Partnerships 295

What Lean Methods Support the Wider Lean Enterprise? 297Transaction Elimination 297The Wider Value Streams 298Target Costing 299

Why Are Lean Enterprises So Hard on Themselves? 300Summary 300

16 Target Costing 301How Does Target Costing Work? 302Where Is Target Costing Used? 303

Introducing New Value Streams 303Introducing New Products 303Current Products in Current Value Streams 305

What Are the Steps We Take? 305Step 1: Who Is the Customer? 306Step 2: Match Customer Needs to Product Features 306Step 3: Evaluate Customer Satisfaction 308

After Step 3 308Target Costing at ECI, Inc.: Steps 1 through 3 309

Step 1: Who Is the Customer? 310Step 2: Match Customer Needs to Product and Process Features 310Step 3: Evaluate Customer Satisfaction ; 313

Understanding Customer Value 315Step 4: Specifying Customers' Needs 315Step 5: Determining Customer Value 316Step 6: Evaluating Cost and Value 316

Example of Target Costing at ECI: Steps 4 through 6 317Step 4: Specifying Customer Needs 317Step 5: Determining Customer Value 319Step 6: Evaluating Cost and Value 321

Calculating the Target Costs 322Step 7: Calculate Overall Target Cost 323

Contents • xv

Step 8: Analyze Existing Cost by Process 323Step 9: Calculate Target Costs for Major Components 324

Example of Target Costing at ECI: Steps 7 through 9 324Step 7: Calculate Overall Target Cost 324Step 8: Analyze Existing Cost by Process 325Step 9: Target Costs for Major Components 328

Driving to Customer Value 328Step 10: Develop Value versus Cost Strategy 328Step 11: Identify Product Improvement Targets 330Step 12: Identify Process Improvement Targets 330

Example of Target Costing at ECI: Steps 10 through 12 331Step 10: Develop Value versus Cost Strategy 332Step 11: Identify Product Improvement Targets 333Step 12: Identify Process Improvement Targets 333

Summary 336

17 Expanding Value Streams outside Our Four Walls 339The Lean Value Stream Revisited 339

Value 339Value Stream 340Flow and Pull 340Perfection 341Empowerment 341

A Vision of the Expanded Value Stream 341Examining Value and Cost within Our Own Company 345Example of Effective Value Stream Expansion 348Summary 352

18 The Lean Accounting Diagnostic 353The Maturity Path Revisited .353

Overview of the Diagnostic Tool 354Working with the Diagnostic Tool 358Summary 359

19 Performance Measurement Linkage Chart 1 361The Performance Measurement Framework 361

Key Questions about Measurement and Control 362What to Measure? 362How Often to Measure? 364How to Control? 365

xvi • Contents

The Shift in Focus 365The Linkage Analysis Framework 366

Creating the Performance Measurement Starter Set 367Lean Principles 367The Linkage Chart Developed 368The Resulting Measurement Set 370

Steps for Developing Performance Measures in Your Company 370Articulating Strategy 370Linking to Value Stream 372Production Cell or Process Measures 373Implementation Considerations 374

Summary 375

20 Transaction Elimination Maturity Path Table 377How to Use the Maturity Path Table 378

Step 1: Describing the Lean Manufacturing Maturity Path 378Step 2: Assessing Lean Manufacturing Progress 382Step 3: What Transactions and Systems Can Be Eliminated? 382Step 4: Develop an Action Plan 383

Transaction Elimination Process Maps 384Summary 384

21 Value Stream Cost Analysis 387What Is Value Stream Cost Analysis? 389Performing the VSCA Calculations 389Step 1: Define the Value Stream 391

Collect Basic Value Stream Data 391Do They Have Data Boxes? 391Are the Data Boxes Complete? 391

Create an Analytical Framework for Your Calculations 392Step 2: Analyze Capacity 395

Current State 395Gathering the Data 395Posting the Data to Our Analytical Framework 399

Uses of Employee Capacity 399Uses of Machine Capacity 403

Future State 406Step 3: Simulate Uses of Capacity 409Summary 413

Contents • xvii

22 Value Stream Mapping!..... 415Value Stream Maps and Lean Accounting 416More Value Stream Steps on the Value Stream Map 417Data Box Information 417Summary 421Reference 421

Index 423