Lean Management System. Management Based on business fundamentals. Operating Performance & Control Path to improved profits

Transcription

1 The Lean CFO Architect of the Lean Management System Presented by Nick Katko, Senior Consultant, BMA Inc. Lean Management Accounting System Users Measure & Manage Decision Making Management Based on business fundamentals Operating Performance & Control Path to improved profits General framework Improve Profitability

2 ing the Lean Management System Design Move Tear Down The Economics of Lean $how me the Flow Measure Performance not Profits Manage Spending Not Costs Value of Measuring Capacity Decisions, Decisions, Decisions Standard Costing: Simplify Today, Eliminate Tomorrow Tame the ERP Beast 1. The Economics of Lean Design

3 Economics of Lean Design Demand Deliver Exact Customer Value Supply of Resources Productivity: 1. Maintain rate regardless of demand 2. Annual improvements Increasing Rate of Growth of Revenue Slower Rate of Growth of Spending 2. $how Me the Flow Design

4 What is Flow? Design Redesign Processes Using Lean Practices Deliver Value Eliminate waste Improve Productivity Manage variability Rate of Flow = Rate of Profits Design Order Fulfillment Value Streams From Suppliers Flow To Customers In the Office

5 3. Measure Performance Not Profits CFO s Role Operating Performance Financial Results

6 Lean Operating Behavior: Drives the Economics of Lean Quality Productivity Flow Delivery Lead Time Cost per Unit The Lean CFO: Integrity of the Measurement System Performance measurements Problem Solving & Improvement Lean Performance System Visual Controls Daily & Weekly Meetings

7 4. Manage Spending not Costs CFO s Role: Explain Financial Results

8 Economics of Lean How much did the Value Stream ship? How much did the Value Stream actually spend? Lean: Identify & Solve Problems Reduce Costs & Increase Profits Assess Current Situation Using Actual Spending Develop New Standard Work ACT PLAN Change Operating Behavior CHECK DO Identify Root Causes of Spending Generate Solutions

9 Materials: Actual Cost of Purchases Material Purchased is Shipped, Scrapped or Stocked Labor: Actual Cost of People Maintain & improve Productivity to control spending

10 Actual Machine Costs: Function of Productivity Downtime, Change-Overs, Unavailability 1. Actual costs for revenue generating Value Streams Value Stream Profit and Loss Statement: Unlock Financial Potential VALUE STREAMS New Product Design Support Costs TOTAL DIVISION 3. Non revenue Motors Systems Spare Parts generating NPD Value StreamSales $326,240 $748,894 $453,215 $1,528,349 Additional Revenue $0 $0 $12,422 $12,422 Material Costs $111,431 $232,774 $149,561 $87,909 $12,764 $594, All costs Conversion Costs $57,628 $70,406 $81,579 $203,769 $37,645 not controlled $451,027 by Outside Process Costs $32,433 $22,991 $22,661 $7,531 Value Stream $85,616 teams Other Costs $16,040 $57,816 $29,459 $72,721 $176,036 Tooling Costs $4,843 $12,544 $6,588 $23,975 Value Stream Profit $103,865 $352,363 $175,789 ($364,399) ($57,940) $209,678 ROS 31.8% 47.1% 38.8% -23.7% -3.8% 13.7% 2. Operating profit of the value streams Opening Inventory Closing Inventory Inventory Change $925,314 $918,807 ($6,507) 5. Financial adjustments for financial reporting Corporate Overhead Division Profit Division ROS $51,147 $152, %

11 Value Stream Profit and Loss Statement: Unlock Financial Potential VALUE STREAMS Motors Systems Spare Parts New Product Design Support Costs TOTAL DIVISION Sales $326,240 $748,894 $453,215 $1,528,349 Additional Revenue $0 $0 $12,422 $12,422 Material Costs $111,431 $232,774 $149,561 $87,909 $12,764 $594,439 Conversion Costs $57,628 $70,406 $81,579 $203,769 $37,645 $451,027 Outside Process Costs $32,433 $22,991 $22,661 $7,531 $85,616 Other Costs $16,040 $57,816 $29,459 $72,721 $176,036 Tooling Costs $4,843 $12,544 $6,588 $23,975 Value Stream Profit $103,865 $352,363 $175,789 ($364,399) ($57,940) $209,678 ROS 31.8% 47.1% 38.8% -23.7% -3.8% 13.7% Opening Inventory Closing Inventory Inventory Change $925,314 $918,807 ($6,507) Corporate Overhead Division Profit Division ROS $51,147 $152, % 5. Value of Measuring Capacity

12 Capacity measures Time Based on the Process Design Productive Activities Activities that create value Nonproductive Activities All other activities Continuous Improvement: Process Redesign Eliminate Nonproductive Creates capacity (more time) Create opportunity to. Improve Delivering Value Increase revenue Increase profits with no cost Improve Productivity Increase output with same resources Cost control

13 Lean CFO: Integrity of Capacity Numbers FINANCIAL OPERAT TIONAL CAPACITY CURRENT FUTURE STATE STATE Sales per Person $7,472 $7,472 On-Time Shipment 92% 94% First Time Through 71% 78% Dock-to-Dock Days Average Cost $ $ Accounts Receivable Days Productive Capacity 51% 43% Non-Productive Capacity 30% 19% Available Capacity 19% 37% Productive Capacity 53% 53% Non-Productive Capacity 32% 17% Available Capacity 15% 29% Revenue $332,569 $332,569 Material Costs $111,431 $108,446 Conversion Costs $116,753 $116,753 Total Costs $228,184 $225,199 Value Stream Profit $104,385 $107,370 Return on Sales 31% 32% Inventory Value $209,336 $113,026 Cash Flow $123,117 $288,926 Employee Machines Measures reflect improvements as waste is eliminated Elimination of waste changes non-productive capacity into available capacity The cost of capacity remains the same 6. Decisions, Decisions, Decisions Move

14 The Issue Move Standard Costing rooted in Decision Making Processes of Companies Standard Costing Data Conflicts with Economics of Lean Reducing labor vs. deliver value Absorption of overhead vs. improve productivity Utilization vs. Flow Move Lean CFO: Financial Benefits of Lean using Box Score Sell more Created or Available Capacity Re-deploy resources Financial Impact of Lean Eliminate resources

15 Box Score: Standard Work for Decision Making CAPACITY OPERA ATIONAL FINANCIAL Employee Machines CURRENT FUTURE STATE STATE Sales per Person $7,472 $7,472 On-Time Shipment 92% 94% First Time Through 71% 78% Dock-to-Dock Days Average Cost $ $ Accounts Receivable Days Productive Capacity 51% 43% Non-Productive Capacity 30% 19% Available Capacity 19% 37% Productive Capacity 53% 53% Non-Productive Capacity 32% 17% Available Capacity 15% 29% Revenue $332,569 $332,569 Material Costs $111,431 $108,446 Conversion Costs $116,753 $116,753 Total Costs $228,184 $225,199 Value Stream Profit $104,385 $107,370 Return on Sales 31% 32% Inventory Value $209,336 $113,026 Cash Flow $123,117 $288,926 Move INCREASE SALES $9,904 94% 78% 8.5 $ % 24% 16% 69% 20% 12% $427,938 $139,545 $115,557 $255,102 $172,836 40% $62,086 $156,921 Decision Making with a Box Score Move MEASURE IMPACT OF FUTURE STATE VALUE STREAM PROFITABILITY OF DECISIONS IMPACT OF IMPROVEMENT PROJECTS CAPITAL EQUIPMENT AND HIRING PEOPLE INSOURCE vs. OUTSOURCE BOX SCORE FOR SALES, OPERATIONS AND FINANCIAL PLANNING

16 7. Standard Costing Simplify Today; Eliminate Tomorrow Tear Down Tear Down Traditional Uses of Standard Costing Inventory Valuation (Replaced by Box Score) Profitability Analysis (Replaced by Box Score) Operating Performance

17 Lean CFO: Simplify Today Tear Down Material Cost Labor Overhead Simplify bills of material Last price paid One rate Fewer router steps One rate Minimal cost allocations Tear Down Lean CFO: Eliminate Tomorrow Less Inventory Materiality number: 30 days Material Capitalizing labor & overhead Actual cost Probably keep in ERP Turn off rates in ERP Do Manual journal entry

18 8. Tame the ERP Beast Tear Down Tear Down Transaction Intensive Processes 4.Cost Accounting 1.Production Work Orders 3.Inventory Tracking 2.Purchase Orders & Accounts Payable

19 Tear Down Financial Control Map Current State Financial Control Map Future State Tear Down

20 Lean CFO: Simplify ERP Tear Down Create transaction elimination plan with operations Include all stakeholders Transaction elimination maturity path Measure maturity of lean controls Eliminate transactions & adjust ERP Wrap Up: Create the Lean Management System

21 Current State: Traditional Management Accounting Reported Profits Highly influenced by Inventory Accounting Standard Costing Needed Inventory Accounting Highly Subjective many factors Traditional Manufacturing Achieve Plan Utilization, Efficiency, Absorption Future State: Lean Management System Reported Profits Highly influenced by Flow Inventory Accounting immaterial Inventory Accounting Lean Operations Deliver Value Flow Improve Productivity

22 Implementing the Lean Management System Early Lean Lean Established Pilot Box Score Eliminate i traditional i measurements Begin simplifying Standard Costing & ERP Box Score Decision Making throughout company Continue Simplifying Systems Link Box Scores to External Reporting Mature Lean Eliminate Standard Costing Office Box Scores The Lean CFO: Architect of the Lean Management System Design Move Tear Down The Economics of Lean $how me the Flow Measure Performance not Profits Manage Spending Not Costs Value of Measuring Capacity Decisions, Decisions, Decisions Standard Costing: Simplify Today, Eliminate Tomorrow Tame the ERP Beast

23 Get The New Book! Pick up a copy at BMA s Sponsor Table here at Summit From BMA s web site: From Amazon: ISBN: From the Publisher: CRC / Productivity Press Visit BMA website Learn More BMA Webinars Recorded webinars available for purchase on web site Live webinars can be scheduled Contact BMA or Nick information@maskell.com or nkatko@maskell.com To receive free Lean Accounting resources by download To read articles, case studies & blogs about Lean Accounting Visit and click the Download Free Resources button Visit and choose the Lean Accounting Tab Join the Lean Accounting SuperGroup (free) Join the BMA Lean Accounting Group on LinkedIn (free) Visit Blogs, forums, videos, and more Visit and either join or sign in. Go to the Groups tab, search on BMA Lean Accounting and join in. Blogs, networking, and more