Lean Manufacturing: A finance perspective @fabio malagisi

Lean Manufacturing:A finance perspective

Fabio Malagisi

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The Customer is King

Customer Satisfaction is…

Reduced Cycles – Get Data/Analysis Faster. Reduce Bottlenecks. Flow.

Better Delivery – Simplification. Standard Formats/Processes. Targeted Metrics.

More Capacity – Reduce Transactional and Increase Analysis.

Better Quality – Reduce Errors. Predictable Forecasting.

Productivity – Predictable, Accurate and Repeatable.

Lean drives customer satisfaction

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Customers… Want things done correctly the first time. Don’t value what they won’t pay for. Pay for only what they perceive adds value to the product.

The customer defines what is value add vs non value add.

Value add = Customer Requirement that they will pay for.If you itemized it on a bill…would the customer be ok paying for that activity?

Eliminate the non value add as it is wasting resources and not being demanded (or paid for) by the customer.

Your customer could be Internal (ex: CEO, General Mgr) or External (Board of Directors, Shareholdsers, Consumers)

The Customer defines “Value”

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Eliminate Waste in your Processes.

Mura - waste due to unevenness…variation

Muri - waste due to overburdening and unreasonableness.

Muda – General term for a wasteful activity.Type I muda — Non-value added but necessary for the system as

it is today to work properly. Type II muda — Non-value added and unnecessary.

Eliminate Type II muda first and then move toward eliminating type I.

Eliminate Waste:

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1) Defective Parts = Bad Feeds, Rework on calculations, Manual JEs2) Overproduction = Excess analysis…Excess Data…not demanded by customer3) Inventory = Excess data trackers, non value add reports stored on shared drives. 4) Motion = Manual Journal Entries, Key punching into templates5) Processing Transactions = Multiple post close templates, manual journal entries6) Transportation = Multiple systems feeding eachother. Manual reclasses7) Waiting = Wait time for Data from systems/people, Batch Runs

Waste adds no value….waste only raises cost.

The 7 Types of waste (Muda)

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Examples in finance:

An incorrect system feedA manual journal entry to correct a bookingA PO mapped to the incorrect accountA report filled out with incorrect data An incorrect version of a report taken off a shared driveAn excel formula errorA sub-ledger not tying out to a ledgerOutdated lookup tables or databases

Question every time a human needs to intervene!

Defective Parts

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Extracting excess data that isn’t demanded by the customerProducing reports “Just in case” someone asksDownloading excess data into spreadsheets or databasesMeasuring performance of factors that aren’t “demanded”Excess reports/templates to support internal department meetingsAuditing/tracking without regard to materiality

Focus on the ability to react and produce Just in time

Overproduction

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Multiple databases stored in excel/access Everyone having their own personal “stocking” of data reportsReports maintained that aren’t used...“Obsolete”/”Slow Moving”Data produced at the wrong time…too early or too lateUnneeded offsite storage of records Multiple people producing the same data reportingExcess formats articulating the same dataIncomplete analysisData held in multiple locations requiring excess reconciliations

Inventory is a tool to hide problems…don’t allow problems to be hidden

Inventory


Unnecessary key punchingRunning wasteful reportsManual journal entriesManual categorization of data for analysisReconciliations that aren’t materialManual cross referencesUnnecessary filing / printingUnnecessary phone callsUnnecessary update meetings/emailsUnnecessary manual reconciliations of systems

Eliminate unneeded physical activity that is wasteful and time consuming

Motion

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Systems that don’t talk to each otherErrors due to lack of training/understandingRework due to changing of scope (lack of standardization)System errors that need to be manually correctedMultiple systems processing the same data in separate processesDuplicate processing of data due to lack of coordinationData integrity checks due to unreliable systemsUncoordinated activities that need to be trackedApprovals at the end of a process vs during the process.

Automation is critical to eliminating this waste.

Processing Transactions

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Data that passes through multiple sub-ledgers and ledgers. Transactions that get re-classed manually in a ledgerData categorized multiple ways through multiple, separate lookup tables Multiple templates pulling the same dataUnconnected databases that get updated separatelyReports that travel to multiple people for inputExcess systems that have to “talk” to one anotherUnnecessary approval chainsEmailing files back and forth

Every step adds complexity and is an opportunity for a defect.

Transportation

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Waiting for turn at shared resources (system log ins, spreadsheets etc)Unbalanced flow…waiting for data from someone/something. Waiting for a decisionsWaiting for review/approvalsWaiting for batch feeds to runWaiting for feedback on a processIdle time due to uncoordinated time zones and flow of dataIdle time due to uncoordinated timelines and due dates/expectations

Waiting takes away from our ability to add value through analysis.

Waiting

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Waste = Any activity which absorbs resources but does not create value (defined by customer…not you!)

Understanding waste helps us train ourselves to “see” waste when it occurs

Relentlessly drive pursuit of perfect process to eliminate waste

Waste adds cost but does not add value as the customer is not willing to pay for it

Waste summary

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Common Muda Examples in Finance:

Uneven stress levels/Closing Crunch.

Too many manual journal entries. Equivalent to Rework.

Batch feeds. Wait time in closing process.

Uncoordinated functional inputs during forecasting efforts.

Redundant templates for analysis. How far is the data traveling?

Excess analysis due to lack of standard work.

Complicated spreadsheets. Not apparent what the message is.

Formula errors.

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Lean is visualLean uses visual indicators to communicate simply and effectively. The goal is to know what’s going on at any time, simply by seeing.

Visual Indicators can….Prevent an error – Ex: Black out cells that shouldn’t be touched in a spreadsheet. Flag a defect or abnormality – Ex: cell turns red when a balance sheet doesn’t balanceCommunicates status – Ex: Output on track to plan and shows a green status. Share information – Ex: Trend chart on order rates.

ExamplesConditional formatting in spreadsheetsDaily meeting boardsStatus dashboardsSimplify spreadsheet and graphsError proof…add checks in formulasStandard views and indicatorsColor codingVideo vs written training/standard operating procedures

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5S is critical to creating a visual system.

Sort – Easy access to data. Eliminate unneeded reports/data.

Set in Order – Organize data. Set Metrics and Control Limits. Create the “Critical Few” and manage the outliers.

Shine – Continuously eliminate waste….Attack Data feed issues, excess data, wait time etc.

Standardize – Std work, Std analysis, Std format, Std schedule. Repeatable and accurate processes.

Sustain – Continuous flow of data analysis with process controls (Visual Mgmt). Std work and repeatable processes. Develop a “takt time” with daily routines.

5S – Starting a visual system

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Define what is needed and get rid of what is unneeded.

• Pay attention to “aged WIP”. Half done analysis that is driving clutter.

• Old/excess equipment.• Outdated processes. • Unneeded documents and email.• Eliminate storage. Don’t allow things to build up again. • Purge shared drives.• Documents from former employees that are never looked at. • How can people tag things that aren’t needed? What is

going to be your “red tag” method on data? • Pay attention to document retention policies for compliance.

Sort

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Organize what is needed. Put it in a logical place and make it stand out when its not in its place.

• Location needs to be self explanatory• Re-Label• Color code common items• Rename and Reorder• Put files where they are functional…how will they be used and

when?• Needs to be self evident…to all.

A place for everything and everything in its place.

Set in Order

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Set controls and audit routines. Ensure you are sticking with the program.

• Have a routine• Check color coding, labeling etc• Find abnormalities and clean them up• Make it visual• Make it mistake proof• Fix deviations on the spot

Shine

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Make 5S part of your standard work. Embrace it as how you operate.

• You can’t fix anything until its stable. • Communicate errors and defects so all can learn from it. • Everyone should know what is normal and abnormal and

what the thresholds are. • Define the routines. In a routine, abnormality sticks out more. • Focus on scheduling and sequencing. • Drive documentation. Document procedures and standards.• Train everyone. Interchangeable processes not reliant on

specific people• Anyone should be able to notice what the abnormality is.

Standardize

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Keep sustainable processes in place. Don’t let things regress.

• Requires a discipline toward the process. • Checklists to monitor compliance• Rely on visual management to know what is going on. • Reward positive momentum.• Make it fun. Celebrate success• Need a 360 degree feedback loop.• Everyone must commit and reinforce. Mgmt at all levels. • Accountability • Continuous improvements…constantly challenge the status

quo

Sustain

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TPS (Toyota Production System) Considered the best practice and guide for a set of lean tools.

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Establish stability despite erratic demand

Need to Level and Sequence our financial processes.

• Daily/Weekly/Hourly Standard Analysis vs Month/Qtr end Crunch.

• Continuous metrics vs ad hoc analysis.

• Forecasting built into your process vs qtrly. Assumptions tied out.

• Functional sequencing…Procurement, Commercial, Mktg, Mfg.

• No all nighters…..Daily routines.

Heijunka

Wk3Wk4

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Strive for Standard Work

Determine your quality standards and control limits

Standardize your processes. Do things consistently.

Document your work instructions and procedures.

Allow for flexibility across people. Process drives effectiveness.

Standardization allows abnormalities to be more noticeable.

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• Kai – Change / Zen - continuous improvement• Kaizen allows you to Implement and control processes….and

continuously improve them.• Kaizen engages people in the lean effort• Kaizen is essential to drive lean • A kaizen event (1-5 days) is a focused dedicated event with the

goal to drive lean process improvements in a specified area.

1.Plan

2.Create a plan

3.Do

4.Try it out

5.Check

6.Examine

7.Act

8.Implement changes

Kaizen

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• A Daily Rhythm of analysis

• No wait time on data.

• No Excess analysis…Simplification.

• Automation…feed templates. Reduce Key Punching and manual.

• Re-active analysis = Quality defect/rework.

• “Instant indicators”/ Performance Metrics create “flow”.

• Pull system – Customer triggers the activity vs pushing the activity onto the customer.

Just In Time (JIT)

Provide customers what is needed, when its needed and the amount that isneeded.

Develop a Takt time and strive for continuous flow in your data.

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Detect abnormality and stopping when abnormality is detected.

Jidoka

Process controls that allow for detection of abnormalities:

•Built in checks

•Control Limits on your data.

•Manage the outliers, not every piece of data.

•Process Controls drive compliance vs reactive audits.

•Build all critical activities into process…eliminate post analysis.

•Instant Indicators = Visual Management

•Quality on the front line – Don’t rely on approvals.

When it gets to a “quality inspector”…its too late.

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From the Japanese, yokeru – to prevent, and poka – inadvertent errors

Simple visual methods which prevent mistakes from being made.

It’s visual…manage with your eyes.

Poka-Yoke the process to mistake proof your process.

Some Examples of Poka-YokeConditional formatting in spreadsheetsError proof…add checks in formulasColor coding to relay sequencing information.Audit checks that are visual. Blacking out cells that shouldn’t be input into. Protecting cells. Trend charts with control limits

Poka-Yoke

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Quality at the source

A “mistake” is caught at the source….a “defect” is a mistake that moves on to the next step in the process

Mistake proof your processes and don’t allow a mistake to become a defect.

Strive for quality at the source vs relying on auditors, manager approvals,

Audit as you go. SOX test as you go.

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Ask why 5 times in order to train your mind to get to the real root cause of an issue.

Problem: Sales are decreasing year over year on prod line x.

Why 1: All regions are showing growth except for region X. Why 2: In October, customer A, decreased their order rate by 10%, causing the short fall in the region. Why 3: Customer A, decided to dual source and is moving there orders to a competitor. Why 4: Customer A thinks our prices are too high for what they need. Why 5: Customer A only needs the mid range version of product A for their application and we only offer the advanced range, forcing them to pay more for features they don’t need.

The 5 Whys

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Process map – details out each step in the process

A Value Stream Map….Maps out each step in the processAssigns a value add vs non value add distinction to each step. Assigns a time value to each step. Focuses on all inputs (vs just a few) to the activities

•Man•Machine•Information•Materials•Method•Environment

Is often more far reaching/all encompassing than a process map.

Value stream map is a powerful tool to identify where there is waste in a process.

Value Stream Mapping

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Lean is continuousThe goal is a perfect process

There will always be more ways to improve

Constantly challenge the status quo

Be relentless against waste….it will always exist

Engage people. Lean is bottoms up, supported by the top

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The future for accounting/finance

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•We will see more separation between managerial accounting methods (internally how we manage) from financial accounting methods (how we report; legal and regulatory compliance).•Currently many companies view them as the same in order to drive consistency.•Lean is embedded in the managerial side and must separate from financial accounting to work. •Conversion processes from internal rptg to external rptg will be a key challenge to overcome.

Managerial Accounting vs Financial Accounting

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Focus on value metricsFocus on metrics and accountability

Determine what activities are adding value to the bottom line

Create metrics that are continuous, standard and visible

Measurement frequency should be part of the process vs a report put out after closing.

Focus on activities vs departments

Use the 5 whys to get to the root of the activity. Ex: Don’t measure sales…. measure leads generated today, the conversion rate of the leads and the sales value of each leads.

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• Standard Costs

• Actual cost vs. Budget • (by functional departments)

• Records Results•Gross Margin (absorption) method•Complex metrics and calculations

• Average Costs• (Total Value Stream Cost/#units shipped to customer)

• Actual cost vs Budget• (by Value Stream)

• Understand Causes•Contribution method•Simplified operational metrics that anyone can interpet

•Lean & Accounting

•Based upon Principles of Mass Production

•Based upon Principles of Mass Production

•Traditional Approach… •Lean Approach…

•Promotes Continuous Improvement

•Promotes Continuous Improvement

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A change in perspectiveThe past….

Absorption CostingOverhead allocationsStandard cost focusFunctional/Department budgetsPresent resultsAudit for complianceTactical focus. Deliver the numbers Focus on numbers, bottom line.P&L and balance sheet focusKnow competitorsQuality control/Assurance (Internal Audit, Approval Sign offs)

The future…Contribution marginDon’t allocate overheadActual cost focus..standards are just a point in timeValue stream/Integrated focus vs department splitsPresent root causes and solutionsAudit for compliance AND wasteStrategic focus…deliver value, understand the customerFocus on metrics. Drive value of parts to deliver the wholeCash flow focus. Integrated focus. Drive value and income will come. Know customersQuality at the source through Poke-Yoke

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Thank You

Contact Me Anytime! Would love to chat!

Fabio [email protected]

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