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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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THANK YOU

ojfiume@comcast.net

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