Bridging The Gap Between Accounting and ... - Lean Frontiers

10/24/2017

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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.

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Barry-Wehmiller Group, Inc.

1. Using BWGI EVA Valuation Methodology

$5.89

$4.94

$7.03

$8.36

$10.73

$10.68

$12.03

$16.70 $18.38

$23.38

$27.67

$31.00

$35.91

$40.10

$47.50

$56.00

$60.06

$69.63

$74.14

$-

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

$/SHARE Share Price Trend 1

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 95%

Up 400%

Up 550%

Up 20%

Up 100%

Negative working capital

Value stream organization

Focus on culture

Lean accounting

2003 2014

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© Solomon and Fullerton 2007. All rights

reserved. 5

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!

Lean

Accounting


reserved. 6

How is Lean Typically Implemented?

Elimination of Waste

Respect for People

Layoffs

Command &

Control

Silos & Local

Optimization

Middle Mgmt.

Struggling

Numbers a

mystery, don’t

know what

winning looks

like

Drive by

Kaizens

Focus on

Shop

Lack of

Alignment

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reserved. 7

How Should Lean be Implemented?

Continuous Improvement

Respect for People

No layoffs

C-Level

Support

Value Stream

Org.

Lean Acctg.

Recognition,

empowerment,

coaching, &

training

Inspirational

Leadership

High Level VS

Mapping

Meaningful

Area

Narrow & Deep

Link all

Kaizens

Hoshin Kanri

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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.

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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.

© Solomon and Fullerton 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!

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reserved.

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Lean is... • Not a cost reduction program or a manufacturing

tactic, 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!

Strategy


Lean is...

• Strategic

• A huge competitive advantage

• Benefits mostly invisible to accounting

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Setup Time Machine Run

Time Lot 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


Typical Plant Cost Structure

Direct Labor

60 – 70%

Overhead

10 – 20%

Material

20 - 30% Material

60%

Overhead

30% Direct Labor

10%

Decades Ago Today

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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

Material 60% 90% 54%

Direct Labor 10% 60% 6%

Overhead 30%

Totals 100%

Cost

Category


Accuracy

Material 60%

Direct Labor 10%

Overhead 30%

Totals 100%


Traditional Cost Accounting

Drill

Mill

Direct Labor Rate/Hr. = $30

Overhead Multiplier = 3X DL

Material Cost per Unit = $10

Product Cost Metrics

Avg. Inventory 5,000

Lead time 8 Weeks

OTP 75%

Pack

Assemble 2 Minutes

4 Minutes 3 Minutes.

6 Minutes

Production Lot Size = 3,000 Pcs.

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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 Metrics

Avg. Inventory 500

Lead time 2 Weeks

OTP 95%

Production Lot Size = 300 Pcs.

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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.


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.

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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



reserved.

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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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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!

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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

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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


Summary – Lean Inventory Valuation Methods

Method Labor, Conversion & Fixed Cost Detail

1. % of material Labor & conversion costs valued as a % of

material costs

2. Daily labor & conversion cost A daily expense rate is determined and

inventory = the daily rate X number of days of

material on hand

3. % completion For long assemblies, total costs are estimated

and inventory is based on % completion data

4. Cost per hour If tracking total hours, cost per hour is

capitalized

5. Turns Conversion & labor capitalized based on

material turns

30 Assumption – Material cost treated the same as in a standard cost system

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Lean Accounting Metrics

Area Quality Delivery Cost

Accounts Payable First Pass Yield Target Backlog % of Time on

Rework

% w/o Supplier

Invoice

Accounts

Receivable

First Pass Yield On Time Billing $’s Late Due to

Disputes

Payroll First Pass Yield On Time Performance Time Spent on

Corrections

Month End Close # of Journal Entries

# Correcting Error

# Correcting 2nd Time

On Time Perf. Overall

On Time Perf. By Item

Balanced Schedule

% Overtime

© Solomon and Fullerton 2007.

All rights reserved.

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Visuals Required and Posted, Value Stream Maps Created, Goals for

Each Item


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……

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Available at www.wcmfg.com

or Amazon.com

Email:[email protected]

Cell: 410-207-3340

http://www.wcmfg.com/

10/24/2017

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Questions

© Solomon & Fullerton 07. All Rights Reserved

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Bridging The Gap Between Accounting and ... - Lean Frontiers