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Accounting for Lean Pilot Update
September 2021
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Why is IPG changing to Accounting for Lean?
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• Support IPS, Lean manufacturing and business leaders
• Standard costing is an antiquated means of product costing• “Variable” costs are fixed – example on next slide
• Variances have not been an accurate predictor of profitability or measure of plant performance
• Lack of confidence in accurate inventory valuation • Complexity and sensitivity on inventory turns used for plant variances
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Accounting for Lean
Lean Accounting• Eliminating waste & frustration within the Accounting Department• Consolidated JEs & SOX items, new balance sheet, department scoreboard
Accounting for Lean• Measuring the company with timely, actionable information that is
respectful, understandable and promotes Lean behavior• Plain English P&L, Box Scores, Value Stream Costing
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The core principle of Lean is to eliminate waste – “more for less”
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Lean Accounting
• Align Finance department with IPS
• Visual communication on progress
• Highlights areas of opportunity
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Interesting Finding: Labor Controllable, not Variable
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-48% (weak) correlation
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Accounting for Lean Project
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Provide relevant, reliable, and easy to understand information in a format that shows how actual costs are incurred
Simplify manufacturing accounting
Leverage the current IPS system
Improve measurement of plant performance and eliminate variances
Support Lean Manufacturing initiative in IPG
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Progress of WAT Pilot
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Parallel ReportingTraditional
• Plant variance FIFO• Plant and CM P&Ls• Weekly variances• Quarterly bridge
Lean - Ops Prefers• Cost (to) / from inventory• Plain English P&L• Weekly Box Score• Conversion & total waste
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Hybrid Lean Accounting – Transition Phase
• Standard costs in ERP• Forecast• Consolidated P&L
• New cost (to)/from inventory line
• PVMC• Minor impact for timing?
• Sales Cube• Sales commissions• Contribution Margin
• Minor impact for capitalized MUV
• MUV & PPV• Minor change of plant
taking on capitalized MUV9
• Parallel lean forecast P&L• Quarterly bridge• Plant bonus metrics
• Alignment to boxscore• Weekly reporting of
variances replaced with boxscore
• Legacy reports to transition to direct margin • Replace contribution margin• Impact analysis is requested
from IT
No change / Minimal Impact Possible Changes
• Eliminate non-material variances
• Plant P&L reported in new Lean format
• Inventory valued using Lean methodology
• Eliminate topside capitalization of plant variances
• New Lean Sales Cube
Immediate Changes
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Variances Eliminated:LEV, LRV, OHSV, Vol & Mix,
Other Mfg Spending
Inventory Valuation
Standard Costs• Inventory valued using standard cost
methodology• Material plus labor & overhead
absorption
• Purchase Price Variance FIFO'd based on inventory turns
• Plant manufacturing variances FIFO'dbased on inventory turns• Manual, technical and time-
consuming process leading to risk of error
• Booked at the highest level and business leaders do not see this impact
Current State Actual Cost
• Inventory valued in the system at material costs only
• Purchase Price Variance and Material Usage Variance FIFO'd based on inventory turns
• Actual labor and overhead spending FIFO’d based on FG & WP turns• Simplifies achieving the goal of
accurately valuing inventory at current actual costs
• Business teams and manufacturing leaders will have visibility to actual inventory valuation
Lean State
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Immediate Changes
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SalesCost of Materials @ Std
Value addedValue added %
Direct Labor @ StdManufacturing OH @ Std
Gross Profit @ StdGross Margin @ Std
Other Manufacturing CostFreight & DutyFG Whse Costs (Incl Deprec)
Gross Profit Before VarGross Margin Before Var
VARIANCES:Material Variances:
PPVUsageSMOGMaterial FIFO Adjustment
Material Variances Total
Labor Variances:Labor EfficiencyLabor RateLabor FIFO Adjustments
Labor Variances Total
Overhead Variances:Manufacturing Overhead - Spending VarianceOverhead VolumeOverhead MixOH FIFO Adjustment
Overhead Variances Total
Total All Variances
Gross Profit $Gross Margin
Plant P&L (Current)
SalesMaterial
Value AddVA%
Freight Out And Distribution CostsDistribution Center Charges-Services
Value Add: Less Freight & HandlingAdj VA%
Conversion CostsPeople CostsUtilitiesEquipment RepairsSuppliesEmployee CostsOther ExpensesSubtotal Conversion Costs
Conversion ProfitConversion Margin
Occupancy CostsBuilding CostsTaxes/Insurance/Regulatory
Subtotal Occupancy CostsSubtotal ProfitSubtotal Margin%
Corporate AllocationsCash Gross ProfitCash GP%
Cost (To) / From InventoryFixed Asset ImpairmentsDepreciationNon-Cash Costs of Sales
Gross Profit $Gross Margin %
Plain English P&L (Future)
Includes total standard waste
KeyRed = MaterialBlue = LaborGreen = Overhead
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SalesCost of Materials @ Std
Value addedValue added %
Direct Labor @ StdManufacturing OH @ Std
Gross Profit @ StdGross Margin @ Std
Other Manufacturing CostFreight & DutyFG Whse Costs (Incl Deprec)
Gross Profit Before VarGross Margin Before Var
VARIANCES:Material Variances:
PPVUsageSMOGMaterial FIFO Adjustment
Material Variances Total
Labor Variances:Labor EfficiencyLabor RateLabor FIFO Adjustments
Labor Variances Total
Overhead Variances:Manufacturing Overhead - Spending VarianceOverhead VolumeOverhead MixOH FIFO Adjustment
Overhead Variances Total
Total All Variances
Gross Profit $Gross Margin
Plant P&L (Current)
SalesMaterial
Value AddVA%
Freight Out And Distribution CostsDistribution Center Charges-Services
Value Add: Less Freight & HandlingAdj VA%
Conversion CostsPeople CostsUtilitiesEquipment RepairsSuppliesEmployee CostsOther ExpensesSubtotal Conversion Costs
Conversion ProfitConversion Margin
Occupancy CostsBuilding CostsTaxes/Insurance/Regulatory
Subtotal Occupancy CostsSubtotal ProfitSubtotal Margin%
Corporate AllocationsCash Gross ProfitCash GP%
Cost (To) / From InventoryFixed Asset ImpairmentsDepreciationNon-Cash Costs of Sales
Gross Profit $Gross Margin %
Plain English P&L (Future)
Includes total standard waste
KeyRed = MaterialBlue = LaborGreen = Overhead
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New Plain English P&L Format
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Benefits of moving to Plain English P&L
• Easy for everyone to understand
• Transparency of specific costs categories• No standard costs, absorption or
variances
• Cash view of operations
• Impact of changing inventory levels
• Business alignment to one format• Currently multiple P&Ls exist - Examples:
• GP before plant variances• Contribution margin
Immediate Changes
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Longview – New Lean Hierarchy
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Immediate Changes
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Quarterly Plant Performance
Quarterly Bridge Method• Measurement: plant variances
against past variances• “Variance of the variances”
• Challenges: standard cost changes, carry forward GMI consideration, manual, inefficient, sometimes inaccurate and not timely
Conversion Cost Method• Measurement: actual costs relative
to utilization and performance• (Conversion Costs + Total Waste) ÷
Machine Hours = Period Performance Rate
• Benefits: actual costs, easily calculated on PE P&L, ties to weekly box score performance, transparency for decision makers
Curr
ent S
tate
Lean State
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• Period performance compared to baselines: SEQ, YOY & YTD• Arrows represent amount of work & time to complete, latency, error, confusion, waste and cost
Possible Changes
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Weekly PerformanceAttempts to represent plant performance impact on profit
Total Plant
Variance
MUV
LEV Spending Variance
Vol/Mix Variance
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Lean Performance
Financial Delivery
• Yield• Conversion Cost• Inventory Turns
Customer Delivery
• Quality• On-time Service
Current Performance
Budget &
Forecast Compare
• Challenges: often times there can be a disconnect on weekly reporting and month end profit
• Metrics are relevant and true performance results consider the correlation between other metrics.
• Example: What does high service levels and low inventory turns mean for the business?
Possible Changes
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Multi-Product Line Plant Pilot – In Progress
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• Building off of the WAT pilot• WAT – 2 plants : 1 product line• Specialty Tape – 1 plant : many product lines
• Additional complexity in reporting and valuing inventory that feeds into multiple products
• Leveraging financial reporting program to allocate shared costs and promote value streams to begin expensing more direct cost
• Parallel reporting in test Q3 2021, targeting October go-live
• Initial feedback is higher confidence in product line costs
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Path Forward
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End of 2021
• 20% of plants in lean hybrid phase
Budget 2022
• Mostly unchanged
• Standard costs
• No variances
End of Q3 2022
• 55% of plants in lean hybrid phase
Budget 2023
• All standards eliminated
• All plants transition to lean reporting
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