September 22, 2015 Presented by Mark C. DeLuzio, CMA – President & CEO Lean Horizons Consulting, LLC Presented to: Institute of Management Accountants,

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?

2 © Lean Horizons Consulting, LLC 2012. All Rights Reserved.

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.


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


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


Introduction



Summary – Q&A

Contents


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


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


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


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


Standard Work – Accounts Payable


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 -


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


Introduction



Summary – Q&A

Contents


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


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!


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



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?



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



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



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

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Leve

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12/31

/09

Achie

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12/31

/08

Achie

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Achie

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Secu

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Impr

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Impr

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Impr

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Impr

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VP O

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Jim

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VP M

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Bill

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Barb

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VP E

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/NPD

- Di

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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



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


Introduction



Summary – Q&A

Contents


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


Mark DeLuzio, President & CEO +1 860-430-1174 [email protected]

www.leanhorizons.com

Contact Information

Documents

September 22, 2015 Presented by Mark C. DeLuzio, CMA – President & CEO Lean Horizons Consulting, LLC Presented to: Institute of Management Accountants,