Understanding The Role of Lean Leadership Lean Accounting Summit October 21, 2014 Copyright 2012 Orest J Fiume-All rights reserved Orest J. Fiume Retired VP Finance The Wiremold Company 1 Wiremold Results: 1987 1990 1987 1990 Sales 20% Operating Profit (82%) 2 1
Wiremold s Status in 1990-1991 Low Profits No Cash Bad Customer Service (< 50%) Losing Market Share But We raised the awareness of everyone (including the union) of the need for change We believed that the Toyota way of doing business was the right way 3 Time for a Change Sept 1991:Hired Art Byrne as President LEAN IS A Business Strategy Not A Manufacturing Tactic Not A Cost Reduction Program 4 2
Wiremold Before and After Lean 1990 2000 Assessed Value $30 Million $770 Million West Hartford: Sales per Employee $90K $240K Gross Profit 37.8% 50.8% Throughput Time 4-6 Weeks 1 Hours 2 Days Product Dev l Time 2-3 Years 3-12 Months # Suppliers 320 43 Inventory Turns 3.4 17.0 Working Cap % Sales* 21.8% 6.7% * W/C = A/R + Inv Trade Payables 1990-2000 Wiremold Stock CAG = 34.7% per year 1990-2000 S&P500 CAG = 15.5% per year 5 Lean is Not something you do while you run your business Lean is the Way you run your business The Goal is Not to implement Lean it is to accelerate operational excellence to create sustainable competitive advantage 3
Why Doesn t Everyone Do Lean? Easy to Agree With Hard To Do Why Is It So Hard? 7 Most CEO s View Lean as Some Manufacturing Thing Just an Element of Strategy Delegate it Down in the Organization - But Don t Remove the Barriers Make the Month Standard Cost Absorption Accounting MRP and Other Computer Systems Inappropriate Performance Measurement Must Be Company Strategy To Be Successful 8 4
Implementing Lean Thinking It is a Cultural Change That Requires Leadership Because in the End It s All About People 9 Fundamental Wiremold Premise Companies are just collections (teams) of people trying to outperform other collections of people to satisfy a set of customers The best, most motivated and focused team wins 10 5
Leadership: Three Models Old Dictator Style: 1970 s Empowerment Style Lean Style Do it My Way Do it Your Way Follow me and we will figure this out together 11 The Learning Leader Question: Poker and business seem to have a lot in common. Would a good CEO make a good poker player? Answer: I ve played poker with CEO s. They have to set their egos aside and say, I m obviously a very talented individual. I could become good at poker, but I have to be willing to learn. I have to be willing to open my mind to the possibility that I m wrong and to listen to other people. That s hard for someone who s gotten to the top. Annie Duke, World Championship Poker Player 12 6
The Lean Leaders s Role Learn Lean Thinking Out Front - Hands On - Don t Delegate Set Stretch Goals Create an Environment Where it s OK to Fail Have a no-layoff policy Eliminate Concrete Heads Organize around Value Streams Change compensation systems that don t support Lean Change Metrics Adopt Lean Accounting 13 Learn Lean Thinking Lean is a personal journey as well as an institutional one --Jones, Aguirre and Calderon If the CEO doesn t know Lean and how to do it, you re not going to be successful at implementing it in that company --Art Byrne 14 7
Learn Lean by Doing Lean Plunge into Operations Lean Activities 15 Leaders that participate in Kaizen quickly begin to realize that most of their beliefs about the conduct of business are incorrect, from which new beliefs, behaviors, and competencies can arise Unfortunately, most leaders embarking on the lean path do not participate in Kaizen and thus miss important opportunities to learn and explicitly support the establishment of new beliefs. M.L Emiliani 8
Hands-On, Can t Delegate 17 But, Naturally, We Are All Above Average 18 9
The Disconnect Between What Senior Managers Believe and Reality The company has good leadership The company s espoused values are reflected in what is actually happening Senior Middle Managers Managers 82% 52% 74% 25% When you are a leader there is no such thing as a trivial act; our actions speak volumes to our organizations Anand Sharma Roffey Park Institute 2008 study 19 Set Stretch Goals Anyone can achieve a 5-10% improvement just by working harder. The purpose of a stretch goal is to challenge people and making them realize that they have to do things differently. --Art Byrne 20 10
Create an Environment where it is OK to Fail Failure vs. Making Mistakes Every failure teaches a man something, if he will learn --Charles Dickens 21 It s fine to celebrate success, but it is more important to heed the lessons of failure Bill Gates Richest person in America for 21 consecutive years 22 11
Have a No Lay-off Policy No one will lose their employment as a result of productivity gains! 23 Eliminate Concrete Heads No Excuses, No Exceptions 12
Organize Around Value Creation Traditional organizational structure hides problems Value streams look at the organization horizontally, not vertically 25 Change compensation systems that don t support Lean Factory: piece work incentives narrow job classifications and many pay grades Middle management: Bonus based on individual performance Sales: Bonus based on meeting quota Senior Management: Incentive Compensation based on individual performance 26 13
Change Metrics Why are Metrics Important? Metrics send a message to employees as to what management thinks is important Employees want to appear to be doing what management wants them to do METRICS SHAPE BEHAVIOR 27 When Should Metrics be Addressed? AT THE BEGINNING OF THE LEAN TRANSFORMATION 28 14
Who are the Principal Users of Metrics The Workers 29 How should Management Use Metrics? Leaders may be judged by he numbers they deliver, but that s not the way they should run the company --Rowan Gibson The winners will be those companies that focus on their processes, not their results --Art Byrne A Lot Easier to Say Than Do for Most Managers 30 15
What is Process Focus Focus of a Traditional Company Results, Results, Results Focus of a Lean Company Process, Process, Process and Results Lean Companies care about how the get Results in order to make them Repeatable 31 Performance Measurement Support the Strategy Not too many Mostly non-financial Motivate the right behavior (i.e., eliminate waste) Simple, easy to understand Measure the process, not the people Measure Actual vs. Goals Don t use Ratios they re too confusing Don t combine measures of different things into a single index Must be timely hourly, daily, weekly... Must be visual and tracked over time to show trends 32 16
Wiremold High Level Measurements 100% Customer Service 20% Annual Productivity 20x Inventory Turns 50% Annual Reduction in defects (quality) 5c s and degree of visual management 20% Profit sharing 33 Understand the difference between Efficiency and Productivity PRODUCTIVITY = WEALTH Arthur P. Byrne 34 17
Productivity Is The Relationship Between Quantity of Output vs. Quantity of Resources Consumed Sales $ = Quantity x Price Material $ = Quantity x Price Labor $ = Quantity x Price O/H $ = Quantity x Price Changing the Q s Requires Physical Change -- It s Not a Financial Thing 35 EFFICIENCY The Relationship Between Two Inputs: Standard Labor Hours vs. Actual Labor Hours It Presumes That The Standards Are Right 36 18
IMPROVEMENT REQUIRES PHYSICAL CHANGE Physically group production by product families Physically change process layout to facilitate one piece flow Physically eliminate central parts storage - store at the point of use Physically reduce set up time 95%+ Co-locate people: p Marketing & Product Dev. Purchasing, Production Control and Operations Credit and Customer Service 37 Implement Lean Accounting Commit to break with traditional systems Provide education in Lean Thinking to all in Accounting Mandate that all professional accountants be on at least two Kaizens per year 38 19
Apply Lean Principles to All Business and Accounting Processes Simplify: Reduce clerical, non-value added activities to free up time Reduce unnecessary reports to free up time Assign Accounting staff to Operating Teams 39 Eliminate Standard Cost Accounting How are Standard Costs Calculated? Materials = Quantity x Unit Costs Material Quantity based on engineering design, modified for yield Material Unit Costs based on quotes, current average or??? Labor = Hours x Hourly Rate Labor Hours based on engineering studies, adjusted for PFD, etc Labor Rates based on average rate Overhead = Labor Hours x Overhead Rate Overhead Rate based on Budgeted d Overhead divided id d by Budgeted d Hours Variance = Actual Standard (estimates in Red) 40 20
Plain English P&L By Value Stream Provide Information that Non-Accountants can Actually Use* This Year Last Year +(-)% New Sales 100,000 90,000 11.1 Cost of Sales Materials: Purchases 28,100 34,900 Inventory (Incr)Decr: Mat l Content 3,600 (6,000) Total Materials 31,700 28,900 9.7 Processing Costs: Factory Labor 11,400 11,500 (0.9) Factory Salaries 2,100 2,000 5.0 Factory Benefits 7,000 5,000 40.0 Services & Supplies 2,400 2,500 (8.0) Scrap 2,600 4,000 (35.0) Equipment Depreciation 2,000 1,900 5.3 Total Processing Costs 27,500 26,900 2.2 Occupancy Costs: Building Depreciation/Rent 200 200 0 Building Services 2,200 2,000 10.0 Total Occupancy Costs 2,400 2,200 9.1 Total Manufacturing Costs 61,600 58,000 6.2 Manufacturing Gross Profit 38,400 32,000 20.0 Inv Incr(Decr): Labor & Overhead Content (2,400) 4,000 GAAP Gross Profit 36,000 36,000 0 Educate to Avoid The Two Big Surprises Reductions in WIP &FG inventory will result in a non-cash charge to earnings due to prior period s capitalized labor and overhead coming off of the Balance Sheet Productivity gains don t result in increased profits until management does something to actualized them 42 21
Lean Accounting and Finance Transformation Consulting Consulting Analysis Analysis Transactions Transactions 43 Ask yourself: Are your Leaders creating a Lean Organization Or An Organization Just Doing Lean Stuff? 44 22
It is not the strongest species that survives, or the most intelligent but the most responsive to change --Charles Darwin It is not necessary to change survival is not mandatory --W. Edwards Deming 45 THANK YOU ojfiume@comcast.net 46 23