copyright 2006 by orest j. fiume - all rights reserved. 1 lean and accounting: the role of the ceo...

Copyright 2006 by Orest J. Fiume - All rights reserved.

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LEAN AND ACCOUNTING: The Role of the CEO and CFO

Orest J. Fiume

Retired Vice President - FinanceThe Wiremold Company


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LEAN

A Business Strategy

Not

A Manufacturing Tactic

Not

A Cost Reduction Program


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A Simple Example Two Companies in Same Industry Using Same Equipment

Company A

Set Up Takes 1 Hour

Company B

Set Up Takes 1 Minute

• Who Has Lowest Cost?• Who Can Provide Best Customer Service?

A Small Process Improvement ProvidesEnormous Strategic Advantage


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Time-Based Strategies

Lead-Time Reduction

Critical for driving improvement to your customers


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Time-Based Strategies

Lead-Time ReductionLead-Time Reduction

The key is to reduce your processes to “core value”The key is to reduce your processes to “core value”


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But What About Non-Manufacturing Companies

ManufacturingDevelop new products

Take orders

Process orders

Purchase materials

Make products

Payroll

Ship product

Close the books

Accounts receivable

Accounts payable

Hire people

ServiceDevelop new services

Take orders

Process applications

Purchase supplies

Provide services

Payroll

Ship product ?

Close the books

Accounts receivable

Accounts payable

Hire people

All Companies have similar processes


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Why Doesn’t Everyone Do “Lean”?

• Easy to Agree With

• Hard To Do

Why Is It So Hard?


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Most Companies View “Lean” as Some Manufacturing Thing

• Just an Element of Strategy

• Delegate it Down in the Organization - But Don’t Remove the Barriers– Make the Month– Absorption Accounting– MRP and Other Computer Systems– Direct to Indirect Employee Measurements

Must Be Company Strategy To Be Successful


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OBSTACLES TO CHANGE

• “But, those companies aren’t like ours, we have different problems”

• “We’ll change, but let’s do so very slowly”

• “Our auditors won’t accept that”


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What Does It Take ToGo to Lean Thinking?

It’s a Culture ChangeThat Requires Leadership…

Because In The End It’s All About People


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CEO’s Role


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Learn Lean Thinking

• “Lean is a personal journey as well as an institutional one”– Jones, Aguirre and Calderone

• “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


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Out Front-Hands On-Don’t Delegate

• “Lean Thinking…is an entire business model that must be run by the CEO”– Jim Womack

• “If you can’t get the CEO to lead this, then don’t start because you are wasting your time.”– Art Byrne


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Lot’s of Leaps of Faith

• Every decision contains a leap of faith, some more than others– Get a sensei

• Every decision is a prediction of the future


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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


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When Should Metrics be Addressed?

AT THE BEGINNING OF THE LEAN TRANSFORMATION


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Who are the Principal Users of Metrics

The Workers


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How should we 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

We don’t want to be a “make-the-month” company


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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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Provide Air Cover for Early Adopters

• A small number will quickly understand it and like it

• A small number will feel threatened and try to kill it

• What is everyone else doing?

Waiting To See Who Wins


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Eliminate Concrete Heads

But do it the right way…

everyone is watching


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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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Organize Around Value Streams

• Traditional organizational structure hides problems

• Value streams look at the organization horizontally, not vertically

Flatten the organization


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Plan to answer the question:“What’s in it for me?”

Profit Sharing


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CEO’s Role - Summary• Learn Lean Thinking• Out Front - Hands On - Don’t Delegate• Lots of Leaps of Faith• Change Metrics• Create an Environment Where it’s OK to Fail• Provide Air Cover for early adopters• Eliminate Concrete Heads• Have a “no-layoff” policy• Organize around Value Streams• Profit Sharing


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OBSTACLES TO LEAN ACOUNTING

• Transaction focus

• Complex systems

• Absorption Accounting

• Emphasis on Variance Analysis

• No Timely Information

• Focus on Compliance vs. Improvement


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CFO’s Role• Learn Lean by Doing Lean• Change Metrics/Performance Measures• Remove the Obstacles• Understand the difference between

Efficiency and Productivity• Provide Information that non-accountants

can actually use• Avoid the two big “surprises”


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REMOVE THE OBSTACLES

• Commit to break with traditional systems

• Provide education in Lean Thinking

• Reduce clerical activities to free up time

• Reduce unnecessary reports to free up time

• Assign Accounting staff to Operating Teams

• Simplify Business Systems


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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 PhysicalChange -- It’s Not a Financial Thing


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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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EFFICIENCY

The Relationship Between Two Inputs:

Standard Labor Hours vs. Actual Labor Hours

It Presumes That The Standards Are Right


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The Standard Cost P&LThis Year Last Year

Net Sales 100,000 90,000 Cost of Sales:Standard Costs 48,000 45,000Purch Price Var (3,000) 10,000Matl Usage Var (2,000) 5,000Labor Eff Var 7,000 (8,000)Labor Rate Var (2,000) 9,000OH Volume Var 2,000 2,000OH Spend Var (2,000) 8,000OH Eff Var 16,000 (17,000) Total Cost of Sales 64,000 54,000

Gross Profit 36,000 36,000Gross Profit % 36.0% 40.0%

USELESS MANAGEMENT INFORMATION


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How are Standard Costs Calculated?

• Materials = Quantity x Unit Costs– Material Quantity based on engineering design, modified for yield modified for yield

– Material Unit Costs based on quotes, current average or ???quotes, current average or ???

• Labor = Hours x Hourly Rate– Labor Hours based on engineering studies, adjusted for PFD, etcstudies, adjusted for PFD, etc

– Labor Rates based on average rateaverage rate

• Overhead = Labor Hours x Overhead Rate– Overhead Rate based on Budgeted OverheadBudgeted Overhead divided by Budgeted Budgeted

HoursHours

Variance = Actual – Standard (estimates in RedRed)


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The “Plain Language” P&LThe “Plain Language” P&L This Year Last Year +(-)%Net Sales 100,000 90,000 11.1Costs of Sales: Purchases 28,100 34,900 Inventory (Inc) Dec: Mat’l Content 3,600 (6,000)Total Materials 31,700 28,900 9.7 Processing Costs: Factory Wages 11,400 11,500 (0.9) Factory Salaries 2,100 2,000 5.0 Factory Benefits 7,000 5,000 40.0 Services & Sup 2,400 2,500 (8.0) Equipment Depr 2,000 1,900 5.3 Scrap 2,600 4,000 (35.0)Total Processing Costs 27,500 26,900 2.2Occupancy Costs: Building Depr 200 200 0.0 Building Services 2,200 2,000 10.0Total Occupancy Costs: 2,400 2,200 9.1Total Mfg Costs 61,600 58,000 6.2 Manufacturing Gross Profit 38,400 32,000 20.0Inv Incr (Dec): Labor,O/H Content (2,400) 4,000 GAAP Gross Profit 36,000 36,000 0.0

36.0% 40.0%


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Balance SheetCurrent Assets: TY LY Current Liabilities TY LY

Cash xx yy Accts Payable xx yy

Acct Rec xx yy Accruals xx yy

Inventory 14.0 20.0 Other xx yy

Other xx yy Total xx yy

Total xx yy

Long Term Debt xx yy

Fixed Assets xx yy Capital xx yy

Total Assets xx yy Total Liab + Cap. xx yy


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Balance Sheet

Current Assets: TY LY Current Liabilities

TY LY

Cash xx yy Accts Payable xx yy

Acct Rec xx yy Accruals xx yy

Inv-Material 8.4 12.0 Other xx yy

Inv-Def. L+O/H 5.6 8.0 Total xx yy

Total Inv 14.0 20.0

Other xx yy Long Term Debt xx yy

Total xx yy Capital xx yy

Fixed Assets xx yy Total Liab + Cap.

xx yy

Total Assets xx yy


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The “Plain Language” P&LThe “Plain Language” P&L This Year Last Year +(-)%Net Sales 100,000 90,000 11.1Costs of Sales: Purchases 28,100 34,900 Inventory (Inc) Dec: Mat’l Content 3,600 (6,000)Total Materials 31,700 28,900 9.7 Processing Costs: Factory Wages 11,400 11,500 (0.9) Factory Salaries 2,100 2,000 5.0 Factory Benefits 7,000 5,000 40.0 Services & Sup 2,400 2,500 (8.0) Equipment Depr 2,000 1,900 5.3 Scrap 2,600 4,000 (35.0)Total Processing Costs 27,500 26,900 2.2Occupancy Costs: Building Depr 200 200 0.0 Building Services 2,200 2,000 10.0Total Occupancy Costs: 2,400 2,200 9.1Total Mfg Costs 61,600 58,000 6.2 Manufacturing Gross Profit 38,400 32,000 20.0Inv Incr (Dec): Labor,O/H Content (2,400) 4,000 GAAP Gross Profit 36,000 36,000 0.0

36.0% 40.0%


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An Increase in ProductivityDoes Not Automatically

Result in an Increase in Profit

A Fundamental Truth


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How to Actualize Productivity Gains?

• Sell more

• Reduce Overtime

• Hold on to attrition

• In-sourcing

And It’s Management’s Responsibility To Actualize Productivity Gains


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Cash Flow From ManufacturingThis Year Last Year

Gross Profit 36,000 36,000

Equipment Depreciation

2,000 1,900

Building

Depreciation

200 200

Chg. In Inv.

Labor & O/H

2,400 (4,000)

Cash Flow

From Mfg.

40,600

+19%

34,100


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Summary

According to Jim Womack: The Ages of Lean1935 to 1977: Invention and Innovation1977 to 1990: Discovery1990 to Present: Diffusion out of auto

industry1990 to 2006: The Lean “tool” age2007 : The Lean Management Age


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THANK YOU

[email protected]


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Real Numbers:Management Accounting in a Lean Organization

• www.tbmcg.com (go to TBM store)

• www.lean.org (go to Store, then Lean Applications)

• www.amazon.com

copyright 2006 by orest j. fiume - all rights reserved. 1 lean and accounting: the role of the ceo...

Documents

cfo orest

successful slide

lean thinking lean

company art byrne slide

ceos role slide

core value slide

cost reduction program

fiume retired vice president