Flow Accounting

8/10/2019 Flow Accounting

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Flow Accounting

Acknowledgements to Kate Mackle

John Darlington (University of Buckingham & Value Flow Consulting)


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Introductions


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The Objective of this short Module

To expose you to some of the reservations about current cost

accounting practices applied in an improvement context

To introduce you to Flow Accounting as a means of providing a

common framework to represent your enterprise as a system in

order to:

Understand the current state as described by performanceand money

To provide you with an example of how to develop a Big

Picture Financial Map

To open up the discussion about the role of accounting

information in an improvement process


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How effectively is the system performing?

Demand onSuppliers or

Partners

Demand fromcustomers

Money from

delivering the

services

Money to

Suppliers orPartners

The information that converts

demand into instructions to

deliver the product or service

The physical flow that delivers

the product or service

Defining the

System in

terms of

Boundary Walls& Structure is

an important

first step

CAPACITY

How much value do we generate for the money consumed by the system?

How long does it take for the system to respond to the demands placed upon it?

Is the natural

budgetary

boundary wall

an impediment

to patient care?


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There is a problem with conventional accounting systems

Actively work against flow

Lead us to the wrong decisions

Are confusing and complex to people

1. Encourages Unit cost thinking, a tired

manufacturing concept to dominate decision

making

2. Treat bottlenecks and non bottlenecks the

same

1. Focus on costs instead of value

2. Drive to reduce length of stay and risk

premature discharge re-admission and excess

costs

1. Give credit for activity over purpose:

tests/treatments not required2. Encourage cost reductions which often prove

to be mirages


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Cost Accounting .Rest In Peace


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% Scrap Reduction

000s

Annual savings

Investment needed

The cost concept

blocks us from

achieving

competitive edge

through sixsigma

35

30

25

20

15

10

5

DO

5% to 2%

MAY

DO

2% to 1%

DO NOT

DO

1% to 0.5%

The Cost Concept - Quality


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s M

The cost concept

blocks us from

achieving the

competitive edge

through highinventory turns.

*Assuming starting inventory of 16m and 25% carrying cost

2.5

2.0

1.5

1.0

0.5

Inventory Turns

DO

5 to 10

MAY

DO

10 to 20

DO NOT

DO

20 to 40

Annual savings

Investment needed

The Cost Concept - Inventory Turns


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Examples of the problems withthe unit cost mechanics


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Unit Costing Mechanics

Raw

material Slitting

17 seconds

Cutting

18 seconds

Pressing

23 seconds

Welding

20 seconds

Costs

38,000

Costs

45,000

Costs

32,000

Costs

46,00037 hour week

Cost per

Second

0.2853

Cost per

Second

0.3378

Cost per

Second

0.2402

Cost per

Second

0.3453

Process Flow

Cost per

process4.850

Cost per

process6.081

Cost per

process5.526

Cost per

process6.907

Cost per

Process23.364

If we half the

process time dowe half the cost?!

These costs

includes allocation

of overhead so

there are NO

changes to real

costs if we do

process

improvements

Constraints govern

Throughput; time

saved on a

constraint is time

saved for the

overall system.


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Disturbing trend.in Service

To forget the purpose of the organisation and try to Control the cost

There is a difference between the bottom line impact and cost accountingpractice

Bigger batches use more precious cash!! Housing Maintenance

Allocation of peoples time to different jobs appears to alter the cost perjob but the salary is unmoved and it is the salary which hits the bottom line

To follow manufacturing practices including unit cost thinking


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Disturbing trend.in Service

Justice System cost per caseyou are over-manned on section X by 6heads

Highways agency cost per hole.. we would like help to calculate the cost

more accurately

Business School.. You will become profitable after the re-organisationbecause we will slice the overhead differently

To follow manufacturing practices including unit cost thinking


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So can we devise a different way of looking at lean and the

accounting information to assist it?

In operations lets play down the various fancy tools with Japanesenames.

In accounting lets go back to basics (theres already plenty of goodpractice around)

A combined common sense approach


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Flow Accounting


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Two Uses of Accounting data

Accounting data

Statutory

Regulatorybased

GovernmentReporting

Unit cost

Management

Preferencebased

Lead/ResponseTime

Time basedmeasures

FlowAccounting

Current Accounting Systems


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What is Flow Accounting?

Flow accounting is amanagement accounting methodology.

The objectives of a flow accounting implementation are -

To show in monetary terms how the systems interacts withthe outside world

To make sure that sub systems understand how to contributepositively to the overall goal of the organisation

To assist in working out the scope for improvement in money

To encourage the right lean behaviours.

It is based on common sense and developed out of practicalapplication.


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Flow Accounting- The Principles

The final arbiter of performance is the customer

Measurements should be easy to understand

They should be accessible and reflect responsibility

Where possible they should appeal visually

They should display trends and relationships

They should emphasise lead time to respond

Accounting should be capable of encouraging different agenciesto collaborate and deliver better overall care by crossing agencyboundaries

In the NHS is the final arbiter the patient?


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With any systematic approach there is usually some principles and terminology to

learn; a standard way of describing the different aspects of the system. Flow accounting

is no different.

It is useful to explain these now before we start handling the data and drawing

conclusions about what it is telling us about the financial consequences of our current

state or way of working

Terminology and Definitions


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Financial Measures

NPNet Profit

ROIReturn on

Investment

CFCash Flow

UP UPUP


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Three Operational Measures

Profit Making Orgs Throughput

The rate that money is

generated by the company

through sales

Inventory The money which is

invested by the company

to purchase things which it

intends to sell

Operating Expense The money the company

spends in order to turn

inventory into throughput

Non-Profit Making Orgs Throughput

The rate at which the

purpose of the

organisation is fulfilled

Inventory The response time of the

organisation to the

demands placed upon it

Operating Expense

The money theorganisation spends in

order to respond in an

acceptable time to

customers


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Boundary measures

T

O.E s

I

Understand control at the

Plant walls:-

Real cash flow

Real costs


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Delivering Improvements

TThroughput

IResponse Time

OEOperatingExpense

UP

DOWN

DOWN


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Measures (Simultaneously)

NPNet Profit

UP CFCash Flow

UPROIReturn on

Investment

UP

TThroughput

UP IResponse Time

DOWN

OEOperatingExpense

DOWN

?

Inventory and carrying charges. The traditional view


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Response Time

Both Ford and Ohno followed four concepts Improving flow (lead time) is a primary objective of operations.

This primary objective should be translated into a practical

mechanism that guides the operation when not to produce

(prevents overproduction). Ford used space; Ohno used

inventory. Local efficiency measures must be abolished.

A focusing process to improve flow must be in place. Ford used

direct observation. Ohno used the gradual reduction of the

number of containers and then gradual reduction of parts per

container.


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The Balanced Facility, Ward Dept., Etc.

Plan Each Resource to Have

ENOUGH

but NO MORE

Capacity to meet the Demand

Result, - an Efficient

Facility

?


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Balanced v Unbalanced Capacity

0 80 85 100

LEAD

TIME

(WIP)

UTILISATION

When combined with Dependent Events, Statistical Fluctuations

accumulate they do not average out

Reducing the severity of the StatisticalFluctuations and/or number of

Dependent Events flattens the curveand moves the kick to the right.


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Structure of the Flow Accounting Process

Financially quantified current state

Financial consequences of the future state agreed

Tackle the

whole in one

Break down into

chunks

Clarification of the financial consequences of the current state

Quantitative financial assessment of the initial future state

Big Picture Financial

Map - a diagnosis ofthe Current State

Demand Analysis Capacity Analysis Response AnalysisPolicy Analysis

Value Flow Accounting

& Decision Making

Value Flow

Performance Measures

Data Acquisition

Structure & Modelling


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A Flow Accounting Case Study

Childrens Social Services

Marie Jones

Operations Manager Business & Performance

Children & Families Services

Conwy County Borough Council


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Terminology:

Throughput ?

The rate theorganisational goal is

achieved.......

to safe guard and

protect the welfare of

vulnerable children

and their families

through reducing

vulnerability,

increasing resilience

and managing risk.


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Terminology

Inventory?

All the money tied up in the

things it intends to sell.

..all the children & families

waiting for something.

Operating Expense ?

All the money converting

Inventory into Throughput

..the service expenditure


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Constructing the Big Picture Financial Map

Shared Process

Contact/Referral

Shared

Process

Initial

Assessment

Children with

Disability

Assess and

Plan Transfer to

Adult services

Close

Shared Process

Review

Child in

NeedPlan

Shared Process

Review

Retain Short

Term

Transfer to Long

TermTeam

Core

Assessment

Transition to

Adult services

Closure

Shared Process

Review

Child

Protection Retain Short

Term

Transfer to Long

TermTeam

Shared Process

Review

Shared Process

Conference Plan

Shared Process

ReviewS47

Core

Assessment

Concern

Decrease Child in

Need

Concern Increase

Looked after

Child

Children with

Disability

Looked After

Child

Independent

Living

Plan Shared Process

Review

Retain Short

Term

Transfer to

Long Term

Team

Core

Assessm

ent

Shared

Process

Review

Court Work

Return home

Child in Need

Adoption

Permanent Care

Transition to

Leaving Care

Children with

Disability


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Arrival pattern is random

Referrals (value work) accounts for only 11%

of all demand.

The prevalence of Contact amplifies demand

on the system.


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Demand amplification arises from:-

Multiple referral in regard to the same incident. Repeat referrals for the same client

Comparing demand over time was tricky

Operational definitions had changed so notcomparing like with like.

The Police 42% of demand

But of this only 7% entered the system.


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Analysing Demand

Shared ProcessContact/Referral

Shared

Process Initial

Assessment

Children with

Disability

Assess and

Plan Transfer to

Adult services

Close

Shared Process

Review

Child in

NeedPlan

Shared Process

Review

Retain Short

Term

Transfer to Long

TermTeam

Core

Assessment

Transition to

Adult services

Closure

Shared Process

Review

Child


Term

Transfer to Long

TermTeam

Shared Process

Review

Shared Process

Conference Plan

Shared Process

ReviewS47

Core

Assessment

Concern

Decrease Child in

Need

Concern Increase

Looked after

Child

Children with

Disability

Looked After

Child

Independent

Living

Plan Shared Process

Review

Retain Short

Term

Transfer to

Long Term

Team

Core

Assessm

ent

Shared

Process

Review

Court Work

Return home

Child in Need

Adoption

Permanent Care

Transition to

Leaving Care

Children with

Disability

All Demand

=7112

Contact =

6387

Referral 725

725

475

IA = 7

days

40.2%

(179/475

Avg 32

days

Decision in

1 working

day

59%

428/725


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Inventory Analysis

How to identify?

Follow the procedural workflow of CS

Work waiting at decision points or tasks wouldbecome apparent.

Low levels of data being reported

No confidence in the reports ? Technical error or under-reporting


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Inventory Analysis


Shared

Process Initial

Assessment

Children with

Disability

Assess and

Plan Transfer to

Adult services

Close

Shared Process

Review

Child in

NeedPlan

Shared Process

Review

Retain Short

Term

Transfer to Long

TermTeam

Core

Assessment

Transition to

Adult services

Closure

Shared Process

Review

Child


Term

Transfer to Long

TermTeam

Shared Process

Review

Shared Process

Conference Plan

Shared Process

ReviewS47

Core

Assessment

Concern

Decrease Child in

Need

Concern Increase

Looked after

Child

Children with

Disability

Looked After

Child

Independent

Living

Plan Shared Process

Review

Retain Short

Term

Transfer to

Long Term

Team

Core

Assessm

ent

Shared

Process

Review

Court Work

Return home

Child in Need

Adoption

Permanent Care

Transition to

Leaving Care

Children with

Disability

All Demand

= 7112

Contact =

6387

Referral 725

725

475

34585 73 169

Short

TermLong

Term

CWD

Decision in

1 working

day

59%

428/725

IA = 7

days

40.2%

(179/475

Avg 32

days

170

146

1

43

74

158

4

184


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Operating Expense


Shared

Process Initial

Assessment

Children with

Disability

Assess and

Plan Transfer to

Adult services

Close

Shared Process

Review

Child in

NeedPlan

Shared Process

Review

Retain Short

Term

Transfer to Long

TermTeam

Core

Assessment

Transition to

Adult services

Closure

Shared Process

Review

Child


Term

Transfer to Long

TermTeam

Shared Process

Review

Shared Process

Conference Plan

Shared Process

ReviewS47

Core

Assessment

Concern

Decrease Child in

Need

Concern Increase

Looked after

Child

Children with

Disability

Looked After

Child

Independent

Living

Plan Shared Process

Review

Retain Short

Term

Transfer to

Long Term

Team

Core

Assessm

ent

Shared

Process

Review

Court Work

Return home

Child in Need

Adoption

Permanent Care

Transition to

Leaving Care

Children with

Disability

All Demand

= 7112

Contact =

6387

Referral 725

725

475

34585 73 169

170

146

1

43

74

158

Short term

449,397Long Term

1,052,991

Dedicated CWD 1,558,471

Decision in

1 working

day

59%

428/725

IA = 7

days

40.2%

(179/475

Avg 32

days

Dedicated CP 80,470

Dedicated LAC 5,420,105

184


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Shared

Process Initial

Assessment

Children with

Disability

Assess and

Plan Transfer to

Adult services

Close

Shared Process

Review

Child in

NeedPlan

Shared Process

Review

Retain Short

Term

Transfer to Long

TermTeam

Core

Assessment

Transition to

Adult services

Closure

Shared Process

Review

Child


Term

Transfer to Long

TermTeam

Shared Process

Review

Shared Process

Conference Plan

Shared Process

ReviewS47

Core

Assessment

Concern

Decrease Child in

Need

Concern Increase

Looked after

Child

Children with

Disability

Looked After

Child

Independent

Living

Plan Shared Process

Review

Retain Short

Term

Transfer to

Long Term

Team

Core

Assessm

ent

Shared

Process

Review

Court Work

Return home

Child in Need

Adoption

Permanent Care

Transition to

Leaving Care

Children with

Disability

All Demand

= 7112

Contact =

6387

Referral 725

725

475

34585 73 169

170

146

1

43

74

158

Short term

449,397Long Term

1,052,991

Dedicated CWD 1,558,471

Decision in

1 working

day

59%

428/725

IA = 7

days

40.2%

(179/475

Avg 32

days

Dedicated CP 80,470

Dedicated LAC

5,420,105

Shared Service Resources 1,274,253 Overhead Costs 1,558,471

184


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What did it tell us?

INVENTORY

TOTAL 717

CIN TOTAL 500

CWDS 170

ST 184

LT 146

CP TOTAL 48

CWDS 1

ST 4

LT 43

LAC TOTAL 169

CWDS 4

ST 7

LT 158

OPERATING EXPENSE

TOTAL 10,853,648

OVERHEAD 1,558,471

SHARED

RESOURCES

1,274,253

CWDs 1,017,961

SHORT-

TERM

449,397

CP 80,470

LONG-TERM 1,052,991

LAC 5,420,105

THROUGHPUT

All Demand 7112

C=6387

R= 725

Referral

Decisions

428/725 (59%)

made in one

working day

Initial

Assessment

179/475

(40.2%)

complete within

7 working days

32 days average


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The Flow Cost (opening state)Annual Throughput (Demand) 7112/12 = Monthly of 593

Inventory = 717 x 30 days = Average response time of 36.2

Demand = 593

Operating Expense Annual 10,853,648/12 = Monthly of 904,470

Flow Cost

Step 1 Adjust for the length of time in the System

= 904,470 x 36.2 days = 1,091 393

30 days

Step 2 Apply the Throughput

= 1,091,393 = 1840

593

904,470

36.2 days Throughput593


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The Improvement

INVENTORY

TOTAL 638

CIN TOTAL 429

CWDS 156

ST 137LT 136

CP TOTAL 42

CWDS 6

ST 2

LT 34

LAC TOTAL 167

CWDS 4

ST 5

LT 159

OPERATING

EXPENSE

TOTAL 11,430,697

OVERHEAD 1,551,610

SHARED

RESOURCES

1,343,442

CWDs 1,088,768

SHORT-

TERM

502,231

CP 93,094

LONG-TERM 947,268

LAC 5,904,284

THROUGHPUT

All Demand 7773

C= 7084

R= 689

Referral

Decisions

662/689 (96%)

made in one

working day

Initial

Assessment

344/525

(65.5%)

complete within

7 working days

16 days average


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The Flow Cost (First future state)Annual Throughput (Demand) 7773/12 = Monthly of 648

Inventory = 638 x 30 days = Average response time of 29.5

Demand = 648

Operating Expense Annual 11,430,697/12 = Monthly of 952,558

Flow Cost

Step 1 Adjust for the length of time in the System

= 952,558 x 29.5 days = 936,682

30 days

Step 2 Apply the Throughput

= 936,682 = 1445

648

952,558

29.2 days Throughput648


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Was the system performing better?Flow Cost Before = 1840

Flow Cost After = 1445

An improvement of 21%

How can you improve the flow cost?

By increasing Throughput

By reducing Response Time

By reducing Operating Expense


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Was the system performing better?Never forget systems Purpose

Any idiot can reduce expense and many are trying in the UK right now

Time will only laugh at cost savings if you forget purpose

to safe guard and protect the welfare of vulnerable children

and their families through reducing vulnerability, increasingresilience and managing risk.


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Next Steps now the system is more

stable?

INVENTORY

TOTAL 638

CIN TOTAL 429

CWDS 156

ST 137

LT 136

CP TOTAL 42

CWDS 6

ST 2

LT 34

LAC TOTAL 167

CWDS 4

ST 5

LT 159

OPERATING

EXPENSE

TOTAL 11,430,697

OVERHEAD 1,551,610

SHARED

RESOURCES

1,343,442

CWDs 1,088,768

SHORT-

TERM

502,231

CP 93,094

LONG-TERM 947,268

LAC 5,904,284

THROUGHPUT

All Demand 7773

C= 7084

R= 689

Referral

Decisions

662/689 (96%)

made in one

working day

Initial

Assessment

344/525

(65.5%)

complete within

7 working days

16 days average


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The Big Picture Financial Map (BPFM) should tell us

The pareto of the most important aspects of the business

The overall capability of the system to fulfil the demand placed on itin terms of money

A feel for the relative emphasis & importance; Throughput, Inventory,lead time, throughput as a % operating expenses

A view as to where the more detailed mapping activity should focus

An assessment of the required level of improvement activity:

considering:

Customer demands

Competitive pressure

Group aspirations

The scope for improvement


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When Policies can be quantified they

are called Key Performance

Indicators


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Key Performance Indicators orHow do you

know if you have had a good day?

MANUFACTURING

On Time in Full

Promise Lead Time

Days Inventory Raw Materials

Work in Progress

Bought-out Finished Goods

Quality

Productivity

NON-PROFIT MAKING

Achievement of Purpose orTarget

Response Time for system

Broken down how? Front Desk

Backroom expert/dept ??????

Quality

Productivity

In both instances be on the look out for Flow

measures versus local optimisation


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Cause and effect analysis

Medium to strong negative correlation of -0.64. Bonus Incentives (25%) tomake volume of parts over the right mix of parts could be a contributory factor

(If Null were true a correlation as great as this would occur by chance alone

with a probability of less than 2.5%)


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Cause and effect analysis

Medium to strong negative correlation of -0.56. OEE does NOT tell you if you are

making the right parts at the right time and is only appropriate for individual

resources. The highest levels of customer service have been during the lowestperiods of OEE. Batch sizing is very closely related to OEE. (If Null were true a

correlation as great as this would occur by chance alone with a probability of

less than 4%)


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Summary Flow Accounting

Current Cost Accounting

Actively works against flow

Lead us to the wrong decisions

Are confusing and complex to people

Flow Accounting

Analyses and Interprets accountancy data in an different way resulting in Flow:

Improved customer service

Reduced lead times

Focus on total cost

Clearer understanding of the operating expenses of current capacity

Improved results

Flow Accounting

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