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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
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