Lean Cost Management at MarquipWardUnited: Lessons Learned & Corporate Insight: Part I

Transcription

1 Lean Cost Management at MarquipWardUnited: Lessons Learned & Corporate Insight: Part I Jerry Solomon Vice President of Operations MarquipWardUnited - Hunt Valley Bill Stabler Group Vice President, Finance Barry-Wehmiller, Inc. Rosemary Fullerton Associate Professor of Accounting -- Utah State University Agenda Part I Company background Reasons for changing the accounting system Accounting transformation at MWU Hunt Valley Steps required to make the change Detailed accounting system changes Machine Shop Revisions to process Part II Accounting changes to Assembly Plain English Profit-and- Loss Statements Corporate considerations Auditor concerns Challenges and benefits Summary 1 1

2 Company Background LA Summit 2010 Solomon,Fullerton,Stabler 2 5,400+ Associates Worldwide Presence 42 Facilities Comprising Close to 3.0 Million Square Feet of Manufacturing & Assembly Space More than 700 Engineers and Consultants Barry-Wehmiller Company was founded in 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. 3 2

3 Barry-Wehmiller Revenue Growth $ Millions $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 FY '87 FY '88 FY '89 FY '90 FY '91 FY '92 FY '93 FY '94 FY '95 FY '96 FY '97 FY '98 FY '99 FY '00 FY '01 FY '02 FY '03 FY '04 FY '05 FY '06 FY '07 FY '08 FY '09 FY '10 Services Equipment 4 MarquipWardUnited $200M+ division of Barry-Wehmiller Designs, manufactures, & sells custom box making equipment 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 350 suppliers Three product lines: new machines, parts, and field upgrades 5 3

4 6 7 4

5 8 Video of Machine 9 5

6 Typical Plant Cost Structure Decades Ago Today Overhead 10 20% Labor 60 70% Overhead 25% Labor 15% Material 20-30% Material 60% 10 Typical Plant Cost Structure Decades Ago Today Overhead 10 20% Labor 60 70% Overhead 25% Labor 15% Material 20-30% Material 60% Where do we focus our improvement efforts? 11 6

7 Typical Plant Cost Structure Decades Ago Today Overhead 10 20% Labor 60 70% Overhead 25% Labor 15% But how much is really direct labor? Material 20-30% Material 60% 12 Why Not Standard Costing? Incentive is to produce labor hours, not product 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 13 7

8 Why Accounting for Lean? "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 14 Accounting Transformation at MarquipWardUnited Baltimore Solomon,Fullerton,Stabler LA Summit

9 Production Flow Vendors Stores Raw Materials Purchased Parts Machined Parts Purchased Parts & Machined Parts Machine Shop Assembly Machined Parts Solomon,Fullerton,Stabler LA Summit Pre - Lean System at MWU Standard costs Report inventory and cost of goods sold at preset 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 Solomon,Fullerton,Stabler LA Summit

10 Standard Rates Pre - Lean Material standards Constant for year Most recent year-end prices for each item Direct labor standards Processing times reported for all machining Hourly rates for each part per processing times Overhead rates Rates several years old Allocated per relationships to direct labor Include all indirect product costs Solomon,Fullerton,Stabler LA Summit Reasons for Accounting Changes at MWU Inaccurate and outdated overhead standards contribute to poor make/buy and product development decisions A tremendous amount of time devoted to account for and review variances with little benefit Month-end close activity is stressful and consumed by work order close-outs and variance analyses Only unfavorable variances are typically reviewed LA Summit 2010 Solomon,Fullerton,Stabler 19 10

11 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 work cell and form basis for continuous improvement Solomon,Fullerton,Stabler LA Summit Organizational Prerequisites for Accounting for Lean Transformation Significant progress on Lean manufacturing journey Identification of product families/value streams Willingness to reorganize into value streams People/Leadership Equipment Space Identification of monuments and rules for sharing Leadership buy-in Realization and acceptance that financial reporting will change 21 11

12 Information Flow Prior to Lean Journey P M P E U A A N R C A C I S G C H S K N A I H I S V L N N E & O E E & E M I S E B S C R P S L H I I L H Y I N N N O P G G G P Information Flow Information Flow Traditional Challenges 1. Work is pushed from silo to silo 2. Optimization occurs functionally 3. Tremendous communication challenges 22 MWU Value Streams C U S T O M E R Aftermarket Value Stream Start Date Sales, Engineering, Purchasing & Planning, Assembly, Pack, Ship & Install, Part Time - Accounting, HR and IT Parts Value Stream Start Date Sales, Engineering, Purchasing & Planning, Assembly, Pack, Ship & Install, Part Time - Accounting, HR and IT New Equipment Value Stream Start Date Sales, Engineering, Purchasing & Planning, Assembly, Pack, Ship & Install, Part Time - Accounting, HR and IT C U S T O M E R Monuments/Shared Resources Machine shop (for now) Accounting/HR/IT 23 12

13 Value Stream Costing Labor Costs Materials Value Stream Fixed Costs of Value Stream Conversion Costs (Consumables & other non BOM items) Solomon,Fullerton,Stabler LA Summit Steps in Accounting Transformation 1. Define new costing categories value stream costing 2. Restate historical product costs (spending) and month-end inventory into new categories 3. Establish methodology to track product costs by value stream 4. Segregate product costs and all other costs into Value Streams 5. Identify costs remaining in overall Plant value stream 6. Prepare format for monthly Plain English P&L s 7. Determine valuation scheme for inventory by area machine shop and assembly Solomon,Fullerton,Stabler LA Summit

14 Steps in Accounting Transformation (continued) 8. Decide on changeover date and restate inventory based on new methodology 9. Educate management about changes 10. Discuss changes with corporate 11. Identify how required corporate reporting will be maintained 12. Discuss changes with external auditors 13. Review process for improvement ideas Solomon,Fullerton,Stabler LA Summit Accounting System Changes in the Machine Shop 27 14

15 Accounting for Lean Machine Shop Initial questions: 1.How to value inventory without detailed tracking 2.How to manage capacity without labor reporting 3.How to determine part costs without standard costing 4.How to record monthly expenses on financial statements 5.How to charge machine shop costs to three other value streams 28 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 Continually update perpetual inventory records Send part to Stores with new part number when completed in machine shop 29 15

16 Inventory Valuation the Lean way Determine relationships of individual inventory components (materials, labor, & conversion costs) Determine relationships of individual components of spending costs Eliminate tracking of labor & overhead Value labor, conversion, & fixed costs in total Determine annual spending ratios for labor, conversion costs, & fixed costs 30 Historical Month-End MS Inventory PackCo Machine Shop Inventory 2006 Machine Shop WIP Inventory - Traditional Reporting Method Month Raw Material Direct Labor Overhead Total WIP Jan-06 $ 680,000 $ 95,000 $ 300,000 $ 1,075,000 Feb-06 $ 780,000 $ 100,000 $ 300,000 $ 1,180,000 Mar-06 $ 730,000 $ 100,000 $ 275,000 $ 1,105,000 Apr-06 $ 765,000 $ 95,000 $ 295,000 $ 1,155,000 May-06 $ 750,000 $ 90,000 $ 290,000 $ 1,130,000 Jun-06 $ 740,000 $ 95,000 $ 290,000 $ 1,125,000 Jul-06 $ 815,000 $ 105,000 $ 315,000 $ 1,235,000 Aug-06 $ 850,000 $ 110,000 $ 300,000 $ 1,260,000 Sep-06 $ 775,000 $ 95,000 $ 290, $ ,160,000 Oct-06 $ 785,000 $ 100,000 $ 305,000 $ 1,190,000 Nov-06 $ 810,000 $ 95,000 $ 295,000 $ 1,200,000 Dec-06 $ 765,000 $ 95,000 $ 290,000 $ 1,150,000 FY '06 Avgs. $ 770,417 $ 97,917 $ 295,417 $ 1,163,750 % of Material 12.7% 38.3% 31 16

17 Proportion of MS Inventory by Cost Component PackCo Machine Shop Inventory Proportion of Machine Shop Inventory by Cost Component Month Raw Material Direct Labor Overhead Total Jan % 8.8% 27.9% 100.0% Feb % 8.5% 25.4% 100.0% Mar % 9.0% 24.9% 100.0% Apr % 8.2% 25.5% 100.0% May % 8.0% 25.7% 100.0% Jun % 8.4% 25.8% 100.0% Jul % 8.5% 25.5% 5% 100.0% 0% Aug % 8.7% 23.8% 100.0% Sep % 8.2% 25.0% 100.0% Oct % 8.4% 25.6% 100.0% Nov % 7.9% 24.6% 100.0% Dec % 8.3% 25.2% 100.0% Averages 66.2% 8.4% 25.5% 32 Traditional MS Historical Spending PackCo Machine Shop Annual Spending 2006 Machine Shop Spending - Traditional Reporting Method Total Machine Raw Material Direct Labor Overhead Shop Month Spending Spending Spending Spending Jan-06 $ 800,000 $ 140,000 $ 475,000 $ 1,415,000 Feb-06 $ 950,000 $ 155,000 $ 525,000 $ 1,630,000 Mar-06 $ 750,000 $ 150,000 $ 500,000 $ 1,400,000 Apr-06 $ 850,000 $ 165,000 $ 475,000 $ 1,490,000 May-06 $ 1,050,000 $ 175,000 $ 475,000 $ 1,700,000 Jun-06 $ 850,000 $ 160,000 $ 500,000 $ 1,510,000 Jul-06 $ 700,000 $ 145,000 $ 500,000 $ 1,345,000 Aug-06 $ 775,000 $ 150,000 $ 475,000 $ 1,400,000 Sep-06 $ 700,000 $ 150,000 $ 450,000 $ 1,300,000 Oct-06 $ 700,000 $ 155,000 $ 475,000 $ 1,330,000 Nov-06 $ 875,000 $ 165,000 $ 500,000 $ 1,540,000 Dec-06 $ 850,000 $ 160,000 $ 525,000 $ 1,535,000 Totals - FY '06 $ 9,850,000 $ 1,870,000 $ 5,875,000 $ 17,595,000 Avgs - FY '06 $ 820,833 $ 155,833 $ 489,583 $ 1,466,250 % of Material 19.0% 59.6% 33 17

18 Differences between Spending & Inventory PackCo Inventory & Spending by Cost Component Category Raw Material Direct Labor Overhead Total Machine Shop Inventory - Trad'l 66.2% 8.4% 25.4% 100% Spending - Trad'l 56.0% 10.6% 33.4% 100% 34 Inventory Valuation the Lean Way Record actual material costs Expense all labor, conversion, & fixed spending costs Determine ending material inventory Determine ending inventory for labor, conversion costs, & fixed costs per cost ratios related to material Adjust ending to/from inventory account on plain English P&L 35 18

19 Restated MS Spending per New Cost Categories PackCo Machine Shop Annual Spending 2006 Machine Shop Spending - P&L Lean Reporting Method Historical Traditional Information Reconfigured for Labor, Conversion, & Fixed Costs Conversion Total MS Month Raw Material Labor Costs Costs Fixed Costs Spending Jan-05 $ 800,000 $ 410,000 $ 125,000 $ 90,000 $ 1,425,000 Feb-05 $ 950,000 $ 455,000 $ 135,000 $ 90,000 $ 1,630,000 Mar-05 $ 750,000 $ 430,000 $ 130,000 $ 90,000 $ 1,400,000 Apr-05 $ 850,000 $ 420,000 $ 125,000 $ 90,000 $ 1,485,000 May-05 $ 1,050,000 $ 435,000 $ 125,000 $ 90,000 $ 1,700,000 Jun-05 $ 850,000 $ 435,000 $ 135,000 $ 90,000 $ 1,510,000 Jul-05 $ 700,000 $ 430,000 $ 125,000 $ 90,000 $ 1,345,000 Aug-05 $ 775,000 $ 410,000 $ 125,000 $ 90,000 $ 1,400,000 Sep-05 $ 700,000 $ 390,000 $ 120,000 $ 90,000 $ 1,300,000 Oct-05 $ 700,000 $ 410,000 $ 125,000 $ 90,000 $ 1,325,000 Nov-05 $ 875,000 $ 440,000 $ 135,000 $ 90,000 $ 1,540,000 Dec-06 $ 850,000 $ 455,000 $ 140,000 $ 90,000 $ 1,535,000 Totals - FY '06 $ 9,850,000 $ 5,120,000 $ 1,545,000 $ 1,080,000 $ 17,595,000 Avgs - FY '06 $ 820,833 $ 426,667 $ 128,750 $ 90,000 $ 1,466,250 % of Material 52.0% 15.7% 11.0% 36 Restated MS Spending in Conformance with Lean Costing Traditional Ratios - Annual Spending Direct Labor Direct Labor Spending FY '06 $ 1,870, % Sum Raw Materials Spending FY '06 = $ 9,850,000 = 78.6% Overhead Overhead Spending FY '06 $ 5,875, % Raw Materials Spending FY '06 = $ 9,850,000 = Lean Cost Management Ratios - Annual Spending Labor Labor Spending FY '06 $ 5,120, % Raw Materials Spending FY '06 = $ 9,850,000 = Conversion Conversion Spending FY '06 $ 1,545, % Sum Raw Materials Spending FY '06 = $ 9,850,000 = 78.6% Fixed Fixed Spending FY '06 $ 1,080, % Raw Materials Spending FY '06 = $ 9,850,000 = 37 19

20 MS Annual Spending of Non-Material Components Lean Cost Management Ratios - Split of Non-Material Costs Labor Labor Spending FY '06 $ 5,120, % Non-Material Spending FY '06 = $ 7,745,000 = Conversion Conversion $ Spent FY '06 $ 1,545, % Sum Non-Material Spending FY '06 = $ 7,745,000 = 100.0% Fixed Fixed $ Spent FY '06 $ 1,080, % Non-Material Spending FY '06 = $ 7,745,000 = These ratios were used to restate historical inventory balances for non-material components on Balance Sheet. 38 Restated MS Lean Month-End Inventory PackCo Restated Machine Shop Month - End WIP Inventory - Lean Reporting Historical Inventory Reconfigured for Labor, Conversion & Fixed Costs Month Raw Material Labor Conversion Fixed Total Inventory - Lean Method Jan-06 $ 680,000 $ 261,123 $ 78,796 $ 55,081 $ 1,075,000 Feb-06 $ 780,000 $ 264,429 $ 79,793 $ 55,778 $ 1,180,000 Mar-06 $ 730,000 $ 247,902 $ 74,806 $ 52,292 $ 1,105,000 Apr-06 $ 765,000 $ 257,818 $ 77,799 $ 54,383 $ 1,155,000 May-06 $ 750,000 $ 251,207 $ 75,804 $ 52,989 $ 1,130,000 Jun-06 $ 740,000 $ 254,513 $ 76,801 $ 53,686 $ 1,125,000 Jul-06 $ 815,000 $ 277,650 $ 83,783 $ 58,567 $ 1,235,000 Aug-06 $ 850,000 $ 271,039 $ 81,788 $ 57,172 $ 1,260,000 Sep-06 $ 775,000 $ 254,513 $ 76,801 $ 53,686 $ 1,160,000 Oct-06 $ 785,000 $ 267,734 $ 80,791 $ 56,475 $ 1,190,000 Nov-06 $ 810,000 $ 257,818 $ 77,799 $ 54,383 $ 1,200,000 Dec-06 $ 765,000 $ 254,513 $ 76,801 $ 53,686 $ 1,150,000 FY '06 Avgs. $ 770,417 $ 260,022 $ 78,464 $ 54,848 $ 1,163,750 % of Material 33.8% 10.2% 7.1% 39 20

21 Restatement of Inventory at Year-End and 1 st Month of New Year Month PackCo Machine Shop Inventory Raw Material Direct Labor Overhead Labor Conversion Fixed Total Inventory December 31, Traditional Close $ 765,000 $ 95,000 $ 290,000 $ 1,150,000 January 1, Lean Approach $ 765,000 $ - $ - $ 254,513 $ 76,801 $ 53,686 $ 1,150,000 PackCo Machine Shop Inventory Month Raw Material Direct Labor Overhead Labor Conversion Fixed Total Inventory December 31, Traditional Close $ ,000 $ 95,000 $ 290, $ - $ - $ - $ 1,150, January 1, 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, Managing Machine Shop Capacity Eliminate direct labor financial reporting Maintain direct labor hours Report physical activity by part Provide more visibility to material flow Track actual material costs Check estimated inventory relationships to actual labor hours 41 21

22 Determining Part Costs Calculate individual part costs for decision making outside system 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 Use to make outsourcing & new product development decisions. 42 Lean Accounting & Recession 43 22

23 Lean Accounting & Recession Effects $ Millions $140.0 $120.0 $100.0 $80.0 $60.0 $40.0 $20.0 $0.0 $89 $89 F08 Q1 F08 Q2 $119 F08 Q3 Annualized Total Qtrly Orders $64 F08 Q4 $62 F09 Q1 $29 F09 Q2 $56 F09 Q3 $88 F09 Q4 $109 F10 Q1 $85 F10 Q2 $94 F10 Q3 $88 F10 Q4 In Jan 2009, volume dropped over 50% Faced with such a dramatic event: Workplace behaviors changed Customary key indicators needed adjustments Lean accounting system needed reevaluation 44 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; 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 method no longer produced consistent, reliable results. Changes needed!! 45 23

24 Lean Accounting Journey Original lean accounting inventory valuation approach: WIP labor & conversion costs determined per ratio of 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 hours By applying actual labor & conversion rates to labor hours, month- end inventory more accurately valued than using initial lean method 46 Tips for the Transition Track material only discretely Maintain labor reporting hours until family cells implemented and relationships stable Shut off all financial reporting of labor & overhead activity by zeroing out appropriate fields in cost system Analyze operations from a materials cost and variable overhead mindset 47 24

25 Reporting Monthly Expenses All changes in conformity with GAAP Lean closer to actual than standards All non-material spending costs expensed Ending inventories determined using Lean estimation techniques Monthly adjustment made from/to inventory 48 Machine Shop Costs to other Value Streams Machine Shop still monument that serves other value streams Raw material transferred per discrete part value Labor, conversion, & fixed costs flow to three value streams based on relationship to raw materials transferred Goal to eliminate machine shop monument & create right-sized machine shops for each value stream 49 25

26 Questions 50 26