Bridging The Gap Between Accounting and Operations

Bridging The Gap Between Accounting and Operations Jerry Solomon Retired - Vice President of Operations MarquipWardUnited, Hunt Valley, A Division of Barry-Wehmiller, Inc. 1

Barry-Wehmiller Cos. $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

Video of Machine 4

MWU Hunt Valley, Then & Now 2003 2014 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

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! Solomon and Fullerton 2007. All rights reserved. 6

How is Lean Typically Implemented? Elimination of Waste Respect for People Drive by Kaizens Focus on Shop Lack of Alignment Layoffs Command & Control Silos & Local Optimization Middle Mgmt. Struggling Managing Solomon and Fullerton 2007. All rights reserved. 7

How Should Lean be Implemented? Respect for People High Level VS Mapping Meaningful Area Narrow & Deep Link all Kaizens Hoshin Kanri Continuous Improvement No layoffs C-Level Support Value Stream Org. Recognition, empowerment, coaching, & training Inspirational Leadership Lean Accounting Solomon and Fullerton 2007. All rights reserved. 8

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. 9

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. 10

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! Solomon and Fullerton 2016. All rights reserved. 11

Improvements Are Invisible Setup Time Machine Run Time Lot Size Number of Different Part Numbers Produced 2 Hours 6 Hours 512 1 L 1 Hour 6 Hours 256 2 E 30 Minutes 6 Hours 128 4 15 Minutes 6 Hours 64 8 A 7.5 Minutes 6 Hours 32 16 N 3.75 Minutes 6 Hours 16 32 113 Seconds 6 Hours 8 64 56 Seconds 6 Hours 4 128 28 Seconds 6 Hours 2 256 14 Seconds 6 Hours 1 512 L. Rubrich & M. Watson, Implementing World Class Manufacturing, (Ft. Wayne, IN, WCM Associates, 2000) p. 312. 13

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! Solomon and Fullerton 2007. All rights reserved. 14

How Accurate Are Your Costs at the SKU Level? What goes into the rates? How are the costs spread? How accurate are they? Cost Category Weighting Accuracy Weighted Accuracy Material 60% 90% 54% Direct Labor 10% 60% 6% Overhead 30% 30% 9% Totals 100% 69% Solomon and Fullerton 2007. All rights reserved. 16

Traditional Cost Accounting 2 Minutes Drill Assemble 6 Minutes Production Lot Size = 3,000 Pcs. Total Minutes = 15 Cost per Minute = $0.50 4 Minutes 3 Minutes. Mill Pack Direct Labor Rate/Hr. = $30 Overhead Multiplier = 3X DL Material Cost per Unit = $10 Solomon and Fullerton 2007. All rights reserved. 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% 17

After Kaizen/Traditional Costing Pins (Mill slots) Dots (Drill holes on manual machines) 4 Minutes 4 Minutes 6 Minutes 4 Minutes Total Minutes = 18 Cost per Minute = $0.50 Taping (Assemble components) Pack Out (Inspect & pack) Production Lot Size = 300 Pcs. 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% 19 Solomon and Fullerton 2007. All rights reserved.

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%) Solomon and Fullerton 2007. All rights reserved. 20

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%) Solomon and Fullerton 2007. All rights reserved. 21

Accounting for Lean Value Stream Costing 22

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 LA Summit 2010 23

Value Stream Costing Labor (Salaried, Hourly, Benefits, etc.) Materials Value Stream Fixed Costs of Value Stream Conversion Costs (Consumables) Allocated Costs are Excluded Solomon and Fullerton 2007. All rights reserved. 24

Value Stream Costing Sample Product Costing using Value Stream Costing Labor $ 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 Solomon and Fullerton 2007. All rights reserved. 25

Value Stream Costing 12 Minutes 12 Minutes 0 Minutes Pins (Mill slots) Dots (Drill holes on multiaxis CNC machine) 4 Minutes 6 Minutes 6 Minutes 6 Minutes 2 Minutes 8 Minutes Taping Pack Out 6 Minutes (Assemble 4 Minutes (Inspect & pack) 10 Minutes components) Units/Hour = 5 Units/Hour = 5 Units/Hour = 5 Value Stream Cost/Hr = $200 Material Cost/Unit = $100 Value Stream Cost/Hr = $200 Material Cost/Unit = $100 Value Stream Cost/Hr = $200 Material Cost/Unit = $100 Cost/Unit = $140 Cost/Unit = $140 Cost/Unit = $100/120/125/133 26 Solomon and Fullerton 2007. All rights reserved.

Accounting for Lean Plain English P & L s 27

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% Solomon and Fullerton 2007. All rights reserved. 28

Lean Company Plain English Profit & Loss Statement $(000) % Sales 1,303 100% Conversion Costs 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% Total Cost of Sales 912 70% Gross Margin 391 30% Operating Expenses 250 19% Operating Income 141 11% Solomon and Fullerton 2007. All rights reserved. 29

Lean Company Plain English Profit & Loss Statement $(000) % Sales 1,303 100% Conversion Costs 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% Total Cost of Sales 912 70% Gross Margin 391 30% Operating Expenses 250 19% Operating Income 141 11% Solomon and Fullerton 2007. All rights 30

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 Solomon and Fullerton 2007. All rights reserved. 31

Inventory Over Time at ANY Company How much labor and overhead resides on your Balance Sheet today will determine the hit to profit resulting from improved inventory management/turns! Overhead $ Inventory Labor Material Start Up Today Solomon and Fullerton 2007. All rights reserved. 33

When Improving Inventory Turns it s Payback Time! The reduction in labor and overhead must flow through the P & L! $ Inventory Overhead Labor Material Today Future Solomon and Fullerton 2007. All rights reserved. 34

Results from Improved Inventory Turns $$$$ $$$ Impact on Income & Cash Flow $$ Change in cash flow Change in income $ 2 4 6 8 10 12 14 16 18 20 22 24 Turns Solomon and Fullerton 2007. All rights reserved. 35

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 Solomon and Fullerton 2007. All rights reserved. 36

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 37

For Further Information Available at www.wcmfg.com or Amazon.com Email:Jerrymsolomon@gmail.com Cell: 410-207-3340 38