Post on 03-Jan-2016
September 22, 2015
Presented by Mark C. DeLuzio, CMA – President & CEO
Lean Horizons Consulting, LLC
Presented to: Institute of Management Accountants, NERC 8th Annual Conference
Lean Accounting or Accounting for LeanDo You Know the Difference?
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Introduction
Lean Accounting – Case Study
Accounting for Lean – Case Study
Summary – Q&A
Contents
3
Definitions
Lean Accounting
Accounting for Lean
Applying lean concepts to drive waste out of the
accounting function itself
Modifying the accounting process to properly deliver
information which promotes lean behaviors
Both are necessary in a Lean environment and must work hand-in-hand.
© Lean Horizons Consulting, LLC 2012. All Rights Reserved.
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Why Lean Accounting?
Eliminates waste from the accounting process providing:
More timely information
Improved quality of information
Frees up accounting resources
Allows the accountant to focus on the business:
Becomes a navigator rather than a historian
Allows the accountant to become a partner with management
Customer focused:
Provides the customer what he wants, when he wants it
Eliminates unnecessary reporting
Lean Accounting Benefits
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Why Accounting for Lean?
Accounting for Lean Benefits
Discourages dysfunctional behaviors:
Building unnecessary inventory
Long production runs that do not meet customer demand
Un-Lean decisions based on variance optimization
Capital decisions based on traditional decision making
More accurate financial information:
Focus on Value Stream provides comprehensive cost picture
More accurate product costs since allocations are reduced/limited
Greater accountability:
Cost data is not arbitrary
Financials give management vehicle to control one’s destiny
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Introduction
Lean Accounting – Case Study
Accounting for Lean – Case Study
Summary – Q&A
Contents
7 © Lean Horizons Consulting, LLC 2012. All Rights Reserved.
Situation Analysis – Jake Brake 1988
Sales: $65 million Market Share: 100% and declining Profitability: 3% ROS Inventory Turns: 2X On-time Delivery: 45% Lead Times: 8-12 weeks NPD Lead Time: 72 Months Total Headcount: 550 Accounting Headcount: 25 (See chart)
Department Headcount 1988
Accounts Payable 3
Accounts Receivable 1
General Accounting 2
Payroll 3
Cost Accounting 4
Information Systems 12
Total 25
Accounting Department Headcount
Business was in dire straits, losing market share and profitability
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Accounts Payable Kaizen
Mail is Delivered Mail is Sorted Mail Opened Batch Control Totals
Enter Invoices in System Correct Exceptions File Vouchers
Major Area of Opportunity
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Accounts Payable Quality Defects
AP Quality Errors
MissingPO
UOM WrongQty
NoReceiver
Other
Quality defects were the major contributor to productivity
75% of staff time spent on resolving quality defects
Specific kaizen improvement events conducted for each type of quality defects
Visual control of quality defects critical to making problems obvious to all
Improvements involved many functions (Accounting, Purchasing, Receiving, Engineering, etc.)
Eliminating quality defects resulted in improved quality of payment to vendors, higher productivity and reduction of troubleshooting calls from vendors
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Kaizen Approach
Actions Taken Standard Work developed for Accounts Payable process Accounts Payable Cell designed and implemented One Piece Flow established “Hospital Bed” implemented for quality defects Implemented root-cause quality tracking and improvement system
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Standard Work – Accounts Payable
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Kaizen Results
Item Before After % Improvement
Headcount 3 1 -66%
Productivity
(Vouchers/Hour)8.3 25 +200%
1st Pass Defects (PPM)
650,000 PPM 50,000 PPM -92%
Duplicate Payments
- ELIMINATED -
Duplicate Filing/Docs
- ELIMINATED -
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Overall Improvements
Department Headcount 1988 Headcount 1989 Difference
Accounts Payable 3 1 -2
Accounts Receivable
1 0 -1
General Accounting 2 2 0
Payroll 3 2 -1
Plant Controllers 0 3 +3
Cost Accounting 4 0 -4
Information Systems
12 2 -10
Total 25 10 -15
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Introduction
Lean Accounting – Case Study
Accounting for Lean – Case Study
Summary – Q&A
Contents
15 © Lean Horizons Consulting, LLC 2012. All Rights Reserved.
Situation Analysis – Jake Brake 1988
Traditional “batch and queue” standard cost accounting system MRP-driven work order costing approach Absorption costing – promoted excess inventory build Overhead applied on the basis of direct labor hours Cost accounting variance analysis promoted non-Lean behaviors Inventory records inaccurate and meaningless Exhaustive labor reporting system – cumbersome, tedious and provided little value to
management High volume of inventory and labor transactions Inaccurate product costing
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Actions Taken
Eliminated work orders and MRP shop-level scheduling
Treated all labor as a direct overhead cost
Value streams became profit centers with stand-alone P&L
Eliminated arbitrary overhead allocations: (Direct costs increased from 35% to 80%)
Value stream inventory was back-flushed “wall to wall”
Ability to track cell cost performance in addition to the entire value stream
Accuracy of product costs greatly enhanced
Eliminate variance reporting (more later)
1. Developed Value Stream Costing Methodology
Value Stream Managers had greater control of their destiny!
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Actions Taken - continued
2. Eliminated Overhead Variance Analysis and Absorption Accounting
Variance Non-Lean Outcomes/Behaviors
Absorption Variance• Building of unnecessary inventory• Reluctance to change over equipment
Machine Utilization• Reluctance to change over equipment• Reluctance to perform necessary PM procedures
Purchase Price Variance
• Promotes buying excess inventory due to quantity discounts• May compromise quality and delivery over price considerations
Direct/Indirect Labor Ratio• Used direct operators for indirect purposes• Minimized the importance of indirect labor activities
Direct Labor Variance Analysis
• Use of lowest cost resource regardless of skill set• Piece rate encouraged the building of unnecessary inventory, and compromised quality
Overhead Variance Analysis• Favorable variances interpreted as good, regardless of continuous improvement trend
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Actions Taken - continued
3. Redesigned Capital Appropriation Request (CAR) Procedures
Old CAR Requirements
Revised CAR Requirements
ROI/NPV
• TAKT Time Analysis• Equipment flexibility• Kaizen opportunities of old equip• Quality ratings (Cpk) of new equipment• Changeover capabilities of new equip. • Flexibility vs. Monument• Technical support required
Is the new equipment consistent with the Lean philosophy?
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Actions Taken - continued
4. Established Target Costing
70% of a product’s cost is locked in during the design process
Target costs established based on market pricing Accountants proactively worked with multi-functional design team to reduce costs and
hit desired profitability during the design phase: Material considerations Manufacturing considerations Etc.
Created pro-forma standard work and cell design methodology to simulate new product manufacturing process
Multi-functional involvement: Purchasing, Design Engineering, Manufacturing Engineering, Marketing, Accounting
Old Formula: Cost + Profit = Selling PriceNew Formula: Selling Price – Cost = Profit
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Actions Taken - continued
5. Eliminated Unnecessary Reporting
70% of management reports were deemed non-value added and eliminated Based on Voice of the Customer New computer system provided real time access to necessary information Provided what was necessary, when necessary Reliance on visual management to provide real-time feedback
Most of the information that we were providing was not needed, and we found that we were not providing the required information most of the time
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Actions Taken - continued
6. Implemented Hoshin Planning (Strategy Deployment)
l Implement Warranty Corrective Action Process l m m l ml Implement Six Sigma Quality System l l ml l Develop "Pull" Production System l l l m m
l Develop Sales & Operations Planning Process l l m l m m ml Develop Distribution Network for High Speed Contollers l l m m ml Reengineer N.P.D. Process for High Speed Controllers l m m m m l
Achie
ve S
ix Si
gma Q
uality
Leve
ls by
12/31
/09
Achie
ve 98
% O
n Tim
e Deli
very
to R
eque
st Da
te by
12/31
/08
Achie
ve $2
0 milli
on R
even
ue fr
om H
igh S
peed
Con
trolle
rs by
12/31
/08
Achie
ve $5
Milli
on of
Boo
ked S
ales f
or H
igh S
peed
Con
trolle
rs by
12/31
/07
Secu
re 50
New
Dist
ributo
rs by
12/31
/07
Impr
ove O
n-Tim
e Deli
very
to R
eque
st Da
te fro
m 65
% to
90%
by 12
/31/07
Impr
ove L
eadti
me fr
om 12
Wee
ks to
2 W
eeks
by 12
/31/07
Impr
ove I
ntern
al Qu
ality
from
3400
0 PPM
to 20
00 P
PM by
12/31
/07
Impr
ove E
xtern
al Qu
ality
from
8000
PPM
to 50
0 PPM
by 12
/31/07
VP O
pera
tions
& S
upply
Cha
in - B
ob H
amilto
n
VP S
ales -
Jim
Hunte
r
VP M
arke
ting -
Bill
Turn
er
VP F
inanc
e & IT
- Ki
m Ri
char
ds
VP H
uman
Res
ourc
es -
Barb
ara M
ilford
VP E
ngine
ering
/NPD
- Di
ck R
uther
ford
l Primary Responsibilitym Secondary Responsibility
Resources
Alpha Beta Company - Top Level Strategy Deployment
1st Level Annual Improvement
Priorities
1-3 Year Breakthrough
Objectives
Target to Improve
Strategic DeploymentSD Planning
SD Implementation
Focuses on the implementation of breakthrough objectives
Links breakthrough objectives with specific resources
Aligns resources within the company
Facilitates on-going review of progress (PDCA)
Results in specific action plans and measurements
Is always a dynamic process
Strategic Deployment fosters management to work ON the business not IN the business
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Actions Taken - continued
7. Reassigned Roles of Accountants
Moved accounting staff to the shop floor Cost Accountants were promoted to Plant Controllers Assigned to cross functional business teams and Value Streams Gained experience – “business within a business” Became navigators rather than historians Responsibilities included:
Target Costing Value Stream Costing and Reporting Capital Expenditure Analysis and Reporting Product Costing Cost Improvement Initiatives
23 © Lean Horizons Consulting, LLC 2012. All Rights Reserved.
Introduction
Lean Accounting – Case Study
Accounting for Lean – Case Study
Summary – Q&A
Contents
24 © Lean Horizons Consulting, LLC 2012. All Rights Reserved.
Sales RevenueHeadcountFloor Space (Sq Ft)Inventory TurnsOn-Time DeliveryProductivityLead-TimeQualityOperating IncomeDevelopment Cycle
1988$ 65 Million
550240,000
2X<20%3.0
85 Days75,000 PPM
4%72 Months
1999$ 200 Million
575240,000
25X99%35.0
2 Days<5,000 PPM
>30%16 Months
Jake Brake Results
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Mark DeLuzio, President & CEO +1 860-430-1174 mark.deluzio@leanhorizons.com
www.leanhorizons.com
Contact Information