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Lean Cost Management at MarquipWardUnited: Lessons Learned
& Corporate Insight: Part I
Jerry SolomonVice President of Operations – MarquipWardUnited - Hunt Valley
Bill StablerGroup Vice President, Finance – Barry-Wehmiller, Inc.
Rosemary Fullerton Associate Professor of Accounting -- Utah State University
AgendaPart I
C b k dPart II
A i h• Company background• Reasons for changing the
accounting system• Organizational prerequisites• Accounting transformation
at MWU – Hunt Valley– Steps required to make the
• Accounting changes to Assembly
• “Plain English” Profit-and-Loss Statements
• Corporate considerations• Auditor concerns• Challenges and benefits
change• Detailed accounting system
changes– Machine Shop– Revisions to process
g• Summary
©Solomon,Fullerton,Stabler LA Summit 2011 1
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Company Background
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Worldwide Presence
5,400+ Associates
42 Facilities with approx. 3.5
Million Square Feet of
Manufacturing &
More than 700 Engineers and
Consultants
Barry-Wehmiller Company was founded in 1885. With a rich history of strategic acquisitions, organic growth initiatives and diverse product offerings, Barry-Wehmiller
Companies, Inc. has emerged as a worldwide industry leader through a process of “Achieving Principled Results on Purpose.”
Assembly Space
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Barry-Wehmiller Revenue GrowthAnnual growth has exceeded 20 percent for more than 20 years, strengthening our position as a great American company serving U.S. and global markets.
$400
$600
$800
$1,000
$1,200
$ M
illio
ns
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$0
$200
FY
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Fiscal Year
$63 $85Corrugated,Folding Carton
IndustrialContainer Manufacturing
Tissue, Nonwovens& Film Converting
Balance of Markets
$17 $36
$175 $44
$215
$36
$209
$63 $85
$197
BFood
Household &Personal Care
OtherPharmaceutical
g& Fine Paper
& Film Converting
Beverage
Snack FoodBarry-Wehmiller has grown from providing equipment for the beverage industry to being a diversified supplier of technology and services across a broad spectrum of industries.
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• $250M+ division of Barry-Wehmiller– Designs, manufactures, & sells custom box making
MarquipWardUnited
g gequipment for the corrugated industry
• Low volume, high cost job shop environment• Machine characteristics:
– Sale price in excess of $1million– Total parts from 10,000 to 15,000– Throughput time is two to three months– Network of approximately 450 suppliers
• Four value streams: new machines, parts, field service and upgrades
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Typical Plant Cost Structure
Decades Ago Today
Labor60 – 70%
Overhead10 – 20%
Overhead25% Labor
15%
Decades Ago Today
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Material20 - 30% Material
60%
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Typical Plant Cost Structure
Decades Ago Today
Labor60 – 70%
Overhead10 – 20%
Overhead25% Labor
15%
Decades Ago Today
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Material20 - 30% Material
60%
Where do we focus our improvement efforts?
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Typical Plant Cost Structure
Decades Ago Today
Labor60 – 70%
Overhead10 – 20%
Overhead25% Labor
15%
Decades Ago Today
But how much is really
direct labor?
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Material20 - 30% Material
60%
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• Incentive is to produce labor hours, not product• No linkage between labor hrs & customer demand
Why Not Standard Costing?
• No linkage between labor hrs & customer demand– Credit received for anything produced
• Labor cost no longer primary cost driver• Very confusing, time consuming, & inaccurate• Variances difficult to manage
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• Examples from MWU sister plant
Why Not Standard Costing?
• In 6-month period: $1.5 M in aggregate standard cost variances for over 15,000 individual variance transactions. No one variance greater than $30,000!
• Annually 252 00 individual direct labor records• Annually, 252,00 individual direct labor records with 120 different shop rates. Over 100,000 mfg work orders closed out.
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"It was not enough to chase out the cost
Why Accounting for Lean?
accountants from the plants. The problem was to chase cost accounting from my people's minds"
Taiichi Ohno, founding father of the Toyota Production System
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Accounting Transformation at MarquipWardUnited – Baltimore
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Production Flow
Vendors
M hi Sh
Stores
Purchased Parts
Raw Materials
Machined Parts
Purchased Parts & Machined Parts
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Machine Shop Assembly
Machined Parts
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Pre - Lean System at MWU
• Standard costs Report inventory and cost of goods sold at pre–Report inventory and cost of goods sold at pre-set standards for material, direct labor, and overhead
• Activity and price variances recorded monthly–Twelve different variances reported
• Budgeted numerous variances–Acknowledged inaccuracy of standard rates
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Standard Rates – Pre - Lean
• Material standards– Constant for yearConstant for year– Most recent year-end prices for each item
• Direct labor standards– Processing times reported for all machining operations– Hourly rates for each part per processing times
• Overhead ratesOverhead rates– Rates several years old – Allocated per relationships to direct labor– Include all indirect product costs
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Reasons for Accounting Changes at MWU
• Inaccurate and outdated overhead standards contribute to poor make/buyand product development decisions
• A tremendous amount of time devoted toaccount for and review variances with littlebenefit
• Month-end close activity is stressful and consumed by work order close-outs and variance analysis
• Only unfavorable variances typicallyreviewed
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Accounting for Lean
• Traditional concepts of standard costing, labor reporting, and variances replaced with performance metrics
• Inventory valuation simplified – material only at detail level, other costs in pools
• Metrics maintained by employees at the
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Metrics maintained by employees at the work cell and form basis for continuous improvement
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Organizational Prerequisites for Accounting for Lean Transformation
Significant progress on Lean manufacturing journeyIdentification of product families/value streamsWillingness to reorganize into value streams
• People/Leadership• Equipment• Space
Identification of monuments and rules for sharingLeadership buy-inRealization and acceptance that financial reporting will change
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Information Flow Prior to Lean Journey
P M PE U A AN R C A C IN R C A C I
S G C H S K NA I H I S VL N N E & OE E & E M IS E B S C
R P S L H II L H Y I NN N O P GG G P
Information Flow Information Flow
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Information Flow Information Flow
Traditional Challenges
1. Work is “pushed” from silo to silo2. Optimization occurs functionally3. Tremendous communication challenges
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MWU Value Streams
C C
Aftermarket Value Stream - May 2005 Start Date
Sales, Engineering, Purchasing & Planning, Assembly, Pack, Ship & Install, Part Time - Accounting, HR and IT
U U
S S
T T
O O
M M
E E
Parts Value Stream - Q1 - 2006 Start Date
New Equipment Value Stream - 2007 Start Date
Sales, Engineering, Purchasing & Planning, Assembly, Pack, Ship & Install, Part Time - Accounting, HR and IT
Sales, Engineering, Purchasing & Planning, Assembly, Pack, Ship & Install, Part Time - Accounting, HR and IT
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Monuments/Shared Resources
Machine shop ( not for long!)
Accounting/HR/IT 26
R RField Service Value Stream - 2009 Start Date
Sales, Ship, Install & TrainPart Time - Accounting, HR and IT
Value Stream Costing
Labor Costs Materials
Value Stream
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Fixed Costs
of Value Stream
Conversion Costs (Consumables & other non – BOM items)
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Steps in Accounting Transformation
1. Define new costing categories – value stream costing2. Restate historical product costs (spending) and month-end
inventory into new categoriesinventory into new categories 3. Establish methodology to track product costs by value
stream 4. Segregate product costs and all other costs into Value
Streams5. Identify costs remaining in overall “Plant” value stream6. Prepare format for monthly “Plain English” P&L’s 7. Determine valuation scheme for inventory by area –
machine shop and assembly
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Steps in Accounting Transformation (continued)
8. Decide on changeover date and restate inventory based on new methodology
9. Educate management about changes10. Discuss changes with corporate11. Identify how required corporate reporting will be
maintained12 Discuss changes with external auditors12. Discuss changes with external auditors13. Review process for improvement ideas
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Accounting System Changes in the Machine Shop
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Accounting for Lean –Machine Shop
Initial questions:1.How to value inventory without detailed trackingy g2.How to manage capacity without
labor reporting3.How to determine part costs without
standard costing4.How to record monthly expenses on financial
statements5.How to charge machine shop costs to three
other value streams
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Inventory Valuation –Pre - Lean
• Record raw materials on balance sheet at standard
• Apply direct labor and overhead through work in process
• Track and record each machining process
C ti ll d t t l i t d• Continually update perpetual inventory records
• Send part to Stores with new part number when completed in machine shop
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Inventory Valuation the Lean way
• Determine relationships of individual inventory components (materials, labor, & conversion p ( , ,costs)
• Determine relationships of individual components of spending costs
• Eliminate tracking of labor & overhead• Value labor conversion & fixed costs in total• Value labor, conversion, & fixed costs in total• Determine ratios for labor, conversion costs, &
fixed costs as a % of material costs
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Inventory Valuation the Lean Way
• Record actual material costs• Expense all labor conversionExpense all labor, conversion,
& fixed spending costs• Determine ending material inventory• Determine ending inventory for labor, conversion
costs, & fixed costs per cost ratios related to materialmaterial
• Adjust ending to/from inventory account on Plain English P&L
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Restatement of Inventory at Year-End and 1st Month of New Year
PackCo Machine Shop Inventory
MonthRaw
Material Direct Labor Overhead Labor Conversion Fixed
Total Inventory
December 31, 2006 - Traditional Close 765,000$ 95,000$ 290,000$ 1,150,000$ January 1, 2007 - Lean Approach 765,000$ -$ -$ 254,513$ 76,801$ 53,686$ 1,150,000$
Month Raw
Material Direct Labor
Overhead Labor
Conversion Fixed
Total Inventory
December 31 2006 Traditional Close 765000$ 95000$ 290000$ $ $ $ 1150000$
PackCo Machine Shop Inventory
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December 31, 2006 - Traditional Close 765,000$ 95,000$ 290,000$ -$ -$ -$ 1,150,000$ January 1, 2007 - Lean Approach $ 765,000 $ - $ - $ 254,513 $ 76,801 $53,686 $ 1,150,000 January 31, 2007 700,000$ -$ -$ 236,255$ 71,292$ 49,835$ 1,057,382$
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Lean Accounting & Recession
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Lean Accounting & Recession Effects
$119$120.0
$140.0Annualized Total Qtrly Orders • In Jan 2009, volume
dropped over 50%$89 $89
$64 $62
$29
$56
$88
$109
$85
$94$88
$40.0
$60.0
$80.0
$100.0
$ M
illio
ns
dropped over 50%
• Faced with such a dramatic event: – Workplace behaviors
changed– Customary key indicators
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$0.0
$20.0
F08 Q1
F08 Q2
F08 Q3
F08 Q4
F09 Q1
F09 Q2
F09 Q3
F09 Q4
F10 Q1
F10 Q2
F10 Q3
F10 Q4
Customary key indicators and ratios needed adjustments
– Lean accounting system needed reevaluation
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Changes to Lean Accounting
• In 2007 and 2008, a steady flow of production made inventory valuation easier—initial lean accounting method worked well
• In 2009 flow came to a halt with the economic downturn;• In 2009, flow came to a halt with the economic downturn; – Suppliers’ inability to respond JIT– Furloughs fluctuated workforce– No layoff policy– Associates worried about future & productivity waned– Artificial demand pushed through plant to keep people working
• As a result our lean approach to inventory valuation methodAs a result, our lean approach to inventory valuation method no longer produced consistent, reliable results. Ratios of costs no longer valid!
Changes needed!!©Solomon,Fullerton,Stabler LA Summit 2011 38
• Original lean accounting inventory valuation approach:– WIP labor & conversion costs determined per ratio of
Lean Accounting Journey
materials – The ratio of labor & conversion costs rarely fluctuated
• Starting in 2009, relationships among materials, labor, & conversion costs became disconnected.
• Needed new approach: operations provided work order data showing completion stage of WIP in terms of labor hoursshowing completion stage of WIP in terms of labor hours
• By applying actual labor & conversion rates to labor hours, in total, month- end inventory more accurately valued than using initial lean method
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Month-End Machine Shop Inventory Valuation Method Today
YEAR Year Oct-10 Nov-10 Dec-10MONTH End FY11OCT FY11NOV FY11DECDays FY 2010 21 18 22
Actual Actual ActualMACHINE SHOP STD HOURSBeginning Parts In Process (Actual Hours) 2,549 2,173 1,790
+ Std Run Labor Hours-Machines 5,582 5,483 6,584 + Std Run Labor Hours-Aftermarket 1,133 976 1,559 + Std Run Labor Hours-Parts 1,761 1,399 1,652 + Total Std Run Labor Hours Reported 8,476 7,858 9,795
Hrs per Day (Check) 404 437 445 - Total Std Hours Closed to Stock (8,852) (8,241) (9,591)
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( , ) ( , ) ( , )
Ending Machine Shop Std Hrs. 2,549 2,173 1,790 1,994
Mach Shop Std Rate Per Hour 86.49$ 86.49$ 86.49$
Total Payroll, Conv. & Fixed $'s in Machine Shop 200,000$ 187,943$ 154,817$ 172,461$ Net Cost (To)/From Inventory 12,057$ 33,126$ (17,644)$
Machine Shop Current State
Current State Machine Shop
GearMaterial
CylinderMaterial
Cross Tie
Cylinder
Machine Shop
Assembly Floor Space
Cross TieMaterial
Gear
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Machine Shop Future State
Future State Machine Shop
CylinderMaterial
Cross TieMaterial Cross Tie
Cylinder
AdditionalAssembly
Floor Space
Assembly Floor Space
Machine Shop
GearMaterial Gear
Managing Machine Shop Capacity
• Eliminate direct labor financial reporting• Maintain direct labor hours• Maintain direct labor hours
– Report physical activity by part • Provide more visibility to material flow• Track actual material costs
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Determining Part Costs
• Calculate individual part costs for decision making outside systemg y
• Separate variable cost file for each part number– Determine variable labor and conversion costs
• Identify significant conversion spending categories: maintenance & tooling
• Identify machine types: manual & automatic
U t k t i & d t• Use to make outsourcing & new product development decisions.
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Current Outsourcing Process
• Machine Shop Sourcing Strategy• Confirm core necessities and therefore non-Confirm core necessities and therefore non
core necessities• Work both ends of the parts spectrum
simultaneously• Outsource non-core parts immediately starting
from the most obvious• Create cells and improve core partsCreate cells and improve core parts
performance
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Current Outsourcing Process• Shaft & Cylinder Machined Parts
• Current StateN b f SKU’ 137• Number of SKU’s – 137
• Estimated current cost - $3,525,000• Number of associates – 10• W-2 of 10 associates - $734,000• Est. # of standard hours per annum – 12,850• Condition of equipment – Various• Spending required WC 218 rebuild $100• Spending required – WC 218 rebuild - $100 -
$200K, others TBD
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Out-Sourcing Option Summary($000’s)
Current State
Outsource Option
1
Premium @ Current
V l
Premium w/Growth
M d l1 Volume ModelTotal Variable Costs $ 2,980
Fixed Costs 545
Total Standard Costs
3,525
Less Non Cash Fi d C t
230Fixed CostsEst. Cash Costs $ 3,295 $ 4,615 $ 1,315 $ 1,975
The next two competitive suppliers had cost increases of about 30 – 50% above option 1 and would only be able to handle a
portion of the product line©Solomon,Fullerton,Stabler LA Summit 2011
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Will we ever really know the cost of an individual part?
• Problems with system generated std and actual part costs– Was the time clocked correctly?– Was the machinist working two machines
simultaneously?– Was this part “batched” with another similar part this
time to reduce the set-up?Were the estimated expenses to arrive at a standard– Were the estimated expenses to arrive at a standard correct?
– Were the estimated hours to arrive at a standard correct?
– Was the lot size the same on all batches?©Solomon,Fullerton,Stabler LA Summit 2010 48
Tips for the Transition
• Track material only discretely
• Shut off all financial reporting of labor & overhead activity by zeroing out appropriate fields in cost system
• Analyze operations from a materials costand variable overhead mindset
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Reporting Monthly Expenses
• All changes in conformity with GAAP• Lean closer to actual than standards• Lean closer to actual than standards• All non-material spending costs expensed • Ending inventories determined using
estimation techniques• Monthly adjustment made from/to• Monthly adjustment made from/to
inventory
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Machine Shop Costs to other Value Streams
• Machine Shop still monumentthat serves other value streams
• Raw material transferred per discrete part value• Labor, conversion, & fixed costs flow to three
value streams based on total hours delivered, not by discrete party p
• Goal to eliminate machine shop monument & create right-sized machine shops for each value stream
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