bridging the gap between accounting and...

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Bridging The Gap Between Accounting and

Operations

Jerry Solomon

Retired - Vice President of Operations – MarquipWardUnited, Hunt

Valley, A Division of Barry-Wehmiller, Inc.

• $2.4 billion annual revenues

• One of the largest capital

goods producers in the

Western Hemisphere

• More than 11,000 team

members

• Over 65 locations worldwide

• 19% compound annual revenue

growth for 21 years

• Well-balanced and financially

solid company

• Privately held by 400+

shareholders with an outside

Board of Directors

Barry-Wehmiller Cos.

Video of Machine

4

MWU Hunt Valley, Then & Now

Orders

Revenues

Operating income

Investment in R&D

Team members

Inventory Turns

Working capital investment

Functional/silo organization

Focus on Lean tools

Standard cost system

Up 110%

Up 90%

Up 400%

Up 550%

Up 20%

Up 100%

Negative working capital

Value stream organization

Focus on culture

Lean accounting

2003 2014

© Solomon and Fullerton 2007. All rights reserved. 6

What is Lean?Elimination of Waste Respect for People

Utilization of

Lean tool kit

in pursuit of

perfection in

safety,

quality,

delivery, &

cost!

Inspirational

leadership,

profound

cultural &

organizational

change

required!


How is Lean Typically Implemented?

Elimination of Waste

Respect for People

Layoffs

Command &

Control

Silos & Local

Optimization

Middle Mgmt.

Struggling

“Managing”

Drive by

Kaizens

Focus on

Shop

Lack of

Alignment


How Should Lean be Implemented?

Continuous Improvement

Respect for People

No layoffs

C-Level

Support

Value Stream

Org.

Recognition,

empowerment,

coaching, &

training

Inspirational

Leadership

Lean

Accounting

High Level VS

Mapping

Meaningful

Area

Narrow & Deep

Link all

Kaizens

Hoshin Kanri

9

Are Your Financial Reports/Information Respectful To

All Customers?

• It’s all about RESPECT!

• Do the financial statements and reports

– Make the numbers easy to understand?

– Promote Lean behavior?

– Illustrate Lean benefits?

– Provide actionable information in a timely manner?

– Promote alignment between manufacturing and

accounting?© Solomon and Fullerton 2007. All rights reserved.

10

Lean Accounting

Lean Accounting – The Accounting Department

• Use of Lean tools to eliminate waste/frustration in the

accounting department

Accounting for Lean – The Company Scorecard

• Plain English P & L, Box Scores & Value Stream Costing

• Actionable information that is understandable and

promotes Lean behavior

© Solomon 2016. All rights reserved.


Caution !!!!

• Lean improvements initially invisible to

accounting

• The greater the initial success with Lean,

the more likely earnings will be

negatively impacted, and

• Accounting is often one of the biggest

roadblocks to a successful Lean

journey!


Lean is...

• Strategic

• A huge competitive advantage

• Benefits mostly invisible to accounting

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Setup TimeMachine Run

TimeLot Size

Number of Different Part

Numbers Produced

2 Hours 6 Hours 512 1

1 Hour 6 Hours 256 2

30 Minutes 6 Hours 128 4

15 Minutes 6 Hours 64 8

7.5 Minutes 6 Hours 32 16

3.75 Minutes 6 Hours 16 32

113 Seconds 6 Hours 8 64




L

E

A

N

L. Rubrich & M. Watson, Implementing World Class Manufacturing, (Ft. Wayne, IN, WCM Associates, 2000) p. 312.

Improvements Are Invisible


Lean is...

• Not a cost reduction program, it is a

• Cash flow generator,

• Customer service program,

• Capacity generator, and most of all, a

• People system

• Benefits of Lean based on how these improvements are utilized!


Typical Plant Cost Structure

Direct Labor

60 – 70%

Overhead

10 – 20%

Material

20 - 30% Material

60%

Overhead

30%Direct Labor

10%

Decades Ago Today

How Accurate Are Your Costs at the SKU Level?

Cost

Category

Weighting Accuracy Weighted

Accuracy

Material 60%

Direct Labor 10%

Overhead 30%

Totals 100%


• What goes into the rates?

• How are the costs spread?

• How accurate are they?

Cost

Category


Accuracy

Material 60% 90% 54%

Direct Labor 10%

Overhead 30%

Totals 100%

Cost

Category


Accuracy


Direct Labor 10% 60% 6%

Overhead 30%

Totals 100%

Cost

Category


Accuracy


Direct Labor 10% 60% 6%

Overhead 30% 30% 9%

Totals 100% 69%

© Solomon and Fullerton 2007. All rights reserved.17

Traditional Cost Accounting

Drill

Mill

Direct Labor Rate/Hr. = $30

Overhead Multiplier = 3X DL

Material Cost per Unit = $10

Product Cost

D. Labor $7.50

Overhead $22.50

Material $10.00

Total $40.00

Metrics

Avg. Inventory 5,000

Lead time 8 Weeks

OTP 75%

Pack

Assemble2 Minutes

4 Minutes 3 Minutes.

6 Minutes

Production Lot Size = 3,000 Pcs.Total Minutes = 15

Cost per Minute = $0.50


Kaizen Event

• U – shaped cell

• All equipment right sized & co-located

• Material kanbanned and lot size reduced

© Solomon and Fullerton 2007. All rights reserved.

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After Kaizen/Traditional Costing

Dots

(Drill holes on

manual machines)

Pins

(Mill slots)

Taping

(Assemble

components)

Pack Out(Inspect & pack)

4 Minutes 4 Minutes

6 Minutes 4 Minutes

Direct Labor Rate/Hr. =$30

Overhead Multiplier = 3X

Material Cost per Unit = $10

Product Cost

D. Labor $9.00

Overhead $27.00

Material $10.00

Total $46.00

Metrics

Avg. Inventory 500

Lead time 2 Weeks

OTP 95%

Production Lot Size = 300 Pcs.

Total Minutes = 18

Cost per Minute = $0.50


What Really Happened Besides Co-locating Activities In a Cell, Right

Sizing Equipment, and Balancing the Process?

Metric Before After % Improvement

Inventory 5,000 500 90%

Lead Time 8 Weeks 2 Weeks 75%

On Time Performance 75% 95% 27%

Batch Size 3,000 300 90%

Sq. Footage 8,000 3,000 63%

Quality 50 PPM 15 PPM 70%

# of Transactions Many Few Dramatic

Throughput ? ? ?

Flexibility & Teamwork Poor Improved Dramatic

Unit Cost per Cost Acctg. $40 $46 (15%)


What Really Happened Besides Co-locating Activities In a Cell, Right

Sizing Equipment, and Balancing the Process?

Metric Before After % Improvement

Inventory 5,000 500 90%

Lead Time 8 Weeks 2 Weeks 75%

On Time Performance 75% 95% 27%

Batch Size 3,000 300 90%

Sq. Footage 8,000 3,000 63%

Quality 50 PPM 15 PPM 70%

# of Transactions Many Few Dramatic

Throughput 10 10 No Change

Flexibility & Teamwork Poor Improved Dramatic

Unit Cost per Cost Acctg. $40 $46 (15%)

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Accounting for Lean

Value Stream Costing

"It was not enough to chase out the cost 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

Why Accounting for Lean?

23LA Summit 2010

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Value Stream

Labor (Salaried, Hourly,

Benefits, etc.)

Materials

Fixed Costs of Value Stream Conversion Costs (Consumables)

Allocated Costs are Excluded


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Sample Product Costing using Value Stream CostingLabor $ 10,000

Conversion (Consumables) $ 3,000

Materials $ 25,000

Fixed costs $ 6,000

Total cost $ 44,000

Units produced 4,000

Average cost per box $ 11.00


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Pins

(Mill slots)

Taping

(Assemble

components)

Units/Hour =

Value Stream Cost/Hr = $200

Material Cost/Unit = $100

Cost/Unit =

Pack Out

(Inspect & pack)

Dots

(Drill holes on multi-

axis CNC machine)

12 Minutes

6 Minutes 2 Minutes

4 Minutes

5

$140

Units/Hour =



Cost/Unit =

5

$140

5

$100/120/125/133

Units/Hour =



Cost/Unit =

6 Minutes

6 Minutes12 Minutes

0 Minutes

8 Minutes

4 Minutes

6 Minutes

10 Minutes


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Accounting for Lean

“Plain English” P & L’s

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Traditional Company

Profit & Loss Statement

$(000) %

Sales 1,303 100%

Cost of Sales @ Standard 787 60%

Purchase Price Variance 20 2%

Material Usage Variance 30 2%

Labor Rate Variance 10 1%

Labor Usage Variance 15 1%

Overhead Variance 50 4%

Total Cost of Sales 912 70%

Gross Margin 391 30%

Operating Expenses 250 19%

Operating Income 141 11%


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Lean Company

“Plain English” Profit & Loss Statement

$(000) %

Sales 1,303 100%

Cost of Sales

Material 517 40%

Shop Supplies 67 5%

Shipping & Receiving Supplies 5 0%

Equipment Repairs 22 2%

Hardware 32 2%

Sub-Total Variable Cost of Sales 643 49%

Variable Margin 660 51%

Labor Costs 190 15%

Fixed Costs 42 3%

Cost (To)/From Inventory 37 3%

Sub-Total Fixed Costs 269 21%





Conversion Costs


© Solomon and Fullerton 2007. All rights

reserved.

30

Lean Company

“Plain English” Profit & Loss Statement

$(000) %

Sales 1,303 100%

Cost of Sales

Material 600 46%

Shop Supplies 80 6%

Shipping & Receiving Supplies 8 1%

Equipment Repairs 25 2%

Hardware 35 3%

Sub-Total Variable Cost of Sales 748 57%

Variable Margin 555 43%

Labor Costs 222 17%

Fixed Costs 42 3%

Cost (To)/From Inventory (100) -8%

Sub-Total Fixed Costs 164 13%





Conversion Costs

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Accounting for Lean

• Standard costing, labor reporting and variances

replaced with actual costs and performance

metrics

• Metrics maintained by employees at the work

cell and form basis for continuous improvement

• Metrics reinforce Lean activities and promote

continuous improvement



Financial Impact of

Inventory Reductions

During a Lean

Conversion


Inventory Over Time at ANY Company

$ Inventory

Start Up Today

Overhead

Labor

Material

How much labor and overhead

resides on your Balance Sheet

today will determine the “hit” to

profit resulting from improved

inventory management/turns!


When Improving Inventory Turns it’s Payback

Time!

$ Inventory

Today Future

Overhead

Labor

Material

The reduction in labor and overhead

must flow through the P & L!


Results from Improved Inventory Turns

2 4 6 8 10 12 14 16 18 20 22 24

Turns

Impact on

Income &

Cash Flow

$

$$

$$$

$$$$

Change in cash flo

w

Change in income


How Do We Make Lean Improvements Visible?

• As we physically change processes during the Lean

journey, manufacturing & accounting must work

together to transition to Lean Accounting.

– New financial statements – In “Plain English”

• No standard costs, absorption or variances

• Easy for everyone to understand - RESPECTFUL

– Box scores

• Illustrate improvements in Lean operating metrics and capacity

– Value stream costing

– Focus on cash flow

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Summary - Why Companies Need an Alliance Between

Manufacturing & Accounting

• To create a scorecard that is both supportive of the Lean journey and is understood and owned by all associates

• To have accounting and manufacturing jointly anticipate financial impact of Lean initiatives - no surprises

•

• To highlight and understand the full value of Lean improvements

• To be one team and respect each other!

© Solomon & Fullerton 07. All Rights Reserved

For Further Information……

38

Available at www.wcmfg.com

or Amazon.com

Email:[email protected]

Cell: 410-207-3340

http://www.wcmfg.com/

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