Copyright 2006 by Orest J. Fiume - All rights reserved. 1 LEAN AND ACCOUNTING: The Role of the CEO and CFO Orest J. Fiume Retired Vice President - Finance The Wiremold Company
Dec 19, 2015
Copyright 2006 by Orest J. Fiume - All rights reserved.
1
LEAN AND ACCOUNTING: The Role of the CEO and CFO
Orest J. Fiume
Retired Vice President - FinanceThe Wiremold Company
Copyright 2006 by Orest J. Fiume - All rights reserved.
2
LEAN
A Business Strategy
Not
A Manufacturing Tactic
Not
A Cost Reduction Program
Copyright 2006 by Orest J. Fiume - All rights reserved.
3
A Simple Example Two Companies in Same Industry Using Same Equipment
Company A
Set Up Takes 1 Hour
Company B
Set Up Takes 1 Minute
• Who Has Lowest Cost?• Who Can Provide Best Customer Service?
A Small Process Improvement ProvidesEnormous Strategic Advantage
Copyright 2006 by Orest J. Fiume - All rights reserved.
4
Time-Based Strategies
Lead-Time Reduction
Critical for driving improvement to your customers
Copyright 2006 by Orest J. Fiume - All rights reserved.
5
Time-Based Strategies
Lead-Time ReductionLead-Time Reduction
The key is to reduce your processes to “core value”The key is to reduce your processes to “core value”
Copyright 2006 by Orest J. Fiume - All rights reserved.
6
But What About Non-Manufacturing Companies
ManufacturingDevelop new products
Take orders
Process orders
Purchase materials
Make products
Payroll
Ship product
Close the books
Accounts receivable
Accounts payable
Hire people
ServiceDevelop new services
Take orders
Process applications
Purchase supplies
Provide services
Payroll
Ship product ?
Close the books
Accounts receivable
Accounts payable
Hire people
All Companies have similar processes
Copyright 2006 by Orest J. Fiume - All rights reserved.
7
Why Doesn’t Everyone Do “Lean”?
• Easy to Agree With
• Hard To Do
Why Is It So Hard?
Copyright 2006 by Orest J. Fiume - All rights reserved.
8
Most Companies 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– Absorption Accounting– MRP and Other Computer Systems– Direct to Indirect Employee Measurements
Must Be Company Strategy To Be Successful
Copyright 2006 by Orest J. Fiume - All rights reserved.
9
OBSTACLES TO CHANGE
• “But, those companies aren’t like ours, we have different problems”
• “We’ll change, but let’s do so very slowly”
• “Our auditors won’t accept that”
Copyright 2006 by Orest J. Fiume - All rights reserved.
10
What Does It Take ToGo to Lean Thinking?
It’s a Culture ChangeThat Requires Leadership…
Because In The End It’s All About People
Copyright 2006 by Orest J. Fiume - All rights reserved.
11
CEO’s Role
Copyright 2006 by Orest J. Fiume - All rights reserved.
12
Learn Lean Thinking
• “Lean is a personal journey as well as an institutional one”– Jones, Aguirre and Calderone
• “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
Copyright 2006 by Orest J. Fiume - All rights reserved.
13
Out Front-Hands On-Don’t Delegate
• “Lean Thinking…is an entire business model that must be run by the CEO”– Jim Womack
• “If you can’t get the CEO to lead this, then don’t start because you are wasting your time.”– Art Byrne
Copyright 2006 by Orest J. Fiume - All rights reserved.
14
Lot’s of Leaps of Faith
• Every decision contains a leap of faith, some more than others– Get a sensei
• Every decision is a prediction of the future
Copyright 2006 by Orest J. Fiume - All rights reserved.
15
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
Copyright 2006 by Orest J. Fiume - All rights reserved.
16
When Should Metrics be Addressed?
AT THE BEGINNING OF THE LEAN TRANSFORMATION
Copyright 2006 by Orest J. Fiume - All rights reserved.
17
Who are the Principal Users of Metrics
The Workers
Copyright 2006 by Orest J. Fiume - All rights reserved.
18
How should we 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
We don’t want to be a “make-the-month” company
Copyright 2006 by Orest J. Fiume - All rights reserved.
19
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
Copyright 2006 by Orest J. Fiume - All rights reserved.
20
Provide Air Cover for Early Adopters
• A small number will quickly understand it and like it
• A small number will feel threatened and try to kill it
• What is everyone else doing?
Waiting To See Who Wins
Copyright 2006 by Orest J. Fiume - All rights reserved.
21
Eliminate Concrete Heads
But do it the right way…
everyone is watching
Copyright 2006 by Orest J. Fiume - All rights reserved.
22
Have a “no lay-off’ policy
“No one will lose their employment as a result of
productivity gains”
Copyright 2006 by Orest J. Fiume - All rights reserved.
23
Organize Around Value Streams
• Traditional organizational structure hides problems
• Value streams look at the organization horizontally, not vertically
Flatten the organization
Copyright 2006 by Orest J. Fiume - All rights reserved.
24
Plan to answer the question:“What’s in it for me?”
Profit Sharing
Copyright 2006 by Orest J. Fiume - All rights reserved.
25
CEO’s Role - Summary• Learn Lean Thinking• Out Front - Hands On - Don’t Delegate• Lots of Leaps of Faith• Change Metrics• Create an Environment Where it’s OK to Fail• Provide Air Cover for early adopters• Eliminate Concrete Heads• Have a “no-layoff” policy• Organize around Value Streams• Profit Sharing
Copyright 2006 by Orest J. Fiume - All rights reserved.
26
OBSTACLES TO LEAN ACOUNTING
• Transaction focus
• Complex systems
• Absorption Accounting
• Emphasis on Variance Analysis
• No Timely Information
• Focus on Compliance vs. Improvement
Copyright 2006 by Orest J. Fiume - All rights reserved.
27
CFO’s Role• Learn Lean by Doing Lean• Change Metrics/Performance Measures• Remove the Obstacles• Understand the difference between
Efficiency and Productivity• Provide Information that non-accountants
can actually use• Avoid the two big “surprises”
Copyright 2006 by Orest J. Fiume - All rights reserved.
28
REMOVE THE OBSTACLES
• Commit to break with traditional systems
• Provide education in Lean Thinking
• Reduce clerical activities to free up time
• Reduce unnecessary reports to free up time
• Assign Accounting staff to Operating Teams
• Simplify Business Systems
Copyright 2006 by Orest J. Fiume - All rights reserved.
29
PRODUCTIVITY = WEALTH
Arthur P. Byrne
Understand the difference between Efficiency and Productivity
Copyright 2006 by Orest J. Fiume - All rights reserved.
30
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 PhysicalChange -- It’s Not a Financial Thing
Copyright 2006 by Orest J. Fiume - All rights reserved.
31
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:
– Marketing & Product Dev.– Purchasing, Production Control and Operations– Credit and Customer Service
Copyright 2006 by Orest J. Fiume - All rights reserved.
32
EFFICIENCY
The Relationship Between Two Inputs:
Standard Labor Hours vs. Actual Labor Hours
It Presumes That The Standards Are Right
Copyright 2006 by Orest J. Fiume - All rights reserved.
33
The Standard Cost P<his Year Last Year
Net Sales 100,000 90,000 Cost of Sales:Standard Costs 48,000 45,000Purch Price Var (3,000) 10,000Matl Usage Var (2,000) 5,000Labor Eff Var 7,000 (8,000)Labor Rate Var (2,000) 9,000OH Volume Var 2,000 2,000OH Spend Var (2,000) 8,000OH Eff Var 16,000 (17,000) Total Cost of Sales 64,000 54,000
Gross Profit 36,000 36,000Gross Profit % 36.0% 40.0%
USELESS MANAGEMENT INFORMATION
Copyright 2006 by Orest J. Fiume - All rights reserved.
34
How are Standard Costs Calculated?
• Materials = Quantity x Unit Costs– Material Quantity based on engineering design, modified for yield modified for yield
– Material Unit Costs based on quotes, current average or ???quotes, current average or ???
• Labor = Hours x Hourly Rate– Labor Hours based on engineering studies, adjusted for PFD, etcstudies, adjusted for PFD, etc
– Labor Rates based on average rateaverage rate
• Overhead = Labor Hours x Overhead Rate– Overhead Rate based on Budgeted OverheadBudgeted Overhead divided by Budgeted Budgeted
HoursHours
Variance = Actual – Standard (estimates in RedRed)
Copyright 2006 by Orest J. Fiume - All rights reserved.
35
The “Plain Language” P<he “Plain Language” P&L This Year Last Year +(-)%Net Sales 100,000 90,000 11.1Costs of Sales: Purchases 28,100 34,900 Inventory (Inc) Dec: Mat’l Content 3,600 (6,000)Total Materials 31,700 28,900 9.7 Processing Costs: Factory Wages 11,400 11,500 (0.9) Factory Salaries 2,100 2,000 5.0 Factory Benefits 7,000 5,000 40.0 Services & Sup 2,400 2,500 (8.0) Equipment Depr 2,000 1,900 5.3 Scrap 2,600 4,000 (35.0)Total Processing Costs 27,500 26,900 2.2Occupancy Costs: Building Depr 200 200 0.0 Building Services 2,200 2,000 10.0Total Occupancy Costs: 2,400 2,200 9.1Total Mfg Costs 61,600 58,000 6.2 Manufacturing Gross Profit 38,400 32,000 20.0Inv Incr (Dec): Labor,O/H Content (2,400) 4,000 GAAP Gross Profit 36,000 36,000 0.0
36.0% 40.0%
Copyright 2006 by Orest J. Fiume - All rights reserved.
36
Balance SheetCurrent Assets: TY LY Current Liabilities TY LY
Cash xx yy Accts Payable xx yy
Acct Rec xx yy Accruals xx yy
Inventory 14.0 20.0 Other xx yy
Other xx yy Total xx yy
Total xx yy
Long Term Debt xx yy
Fixed Assets xx yy Capital xx yy
Total Assets xx yy Total Liab + Cap. xx yy
Copyright 2006 by Orest J. Fiume - All rights reserved.
37
Balance Sheet
Current Assets: TY LY Current Liabilities
TY LY
Cash xx yy Accts Payable xx yy
Acct Rec xx yy Accruals xx yy
Inv-Material 8.4 12.0 Other xx yy
Inv-Def. L+O/H 5.6 8.0 Total xx yy
Total Inv 14.0 20.0
Other xx yy Long Term Debt xx yy
Total xx yy Capital xx yy
Fixed Assets xx yy Total Liab + Cap.
xx yy
Total Assets xx yy
Copyright 2006 by Orest J. Fiume - All rights reserved.
38
The “Plain Language” P<he “Plain Language” P&L This Year Last Year +(-)%Net Sales 100,000 90,000 11.1Costs of Sales: Purchases 28,100 34,900 Inventory (Inc) Dec: Mat’l Content 3,600 (6,000)Total Materials 31,700 28,900 9.7 Processing Costs: Factory Wages 11,400 11,500 (0.9) Factory Salaries 2,100 2,000 5.0 Factory Benefits 7,000 5,000 40.0 Services & Sup 2,400 2,500 (8.0) Equipment Depr 2,000 1,900 5.3 Scrap 2,600 4,000 (35.0)Total Processing Costs 27,500 26,900 2.2Occupancy Costs: Building Depr 200 200 0.0 Building Services 2,200 2,000 10.0Total Occupancy Costs: 2,400 2,200 9.1Total Mfg Costs 61,600 58,000 6.2 Manufacturing Gross Profit 38,400 32,000 20.0Inv Incr (Dec): Labor,O/H Content (2,400) 4,000 GAAP Gross Profit 36,000 36,000 0.0
36.0% 40.0%
Copyright 2006 by Orest J. Fiume - All rights reserved.
39
An Increase in ProductivityDoes Not Automatically
Result in an Increase in Profit
A Fundamental Truth
Copyright 2006 by Orest J. Fiume - All rights reserved.
40
How to Actualize Productivity Gains?
• Sell more
• Reduce Overtime
• Hold on to attrition
• In-sourcing
And It’s Management’s Responsibility To Actualize Productivity Gains
Copyright 2006 by Orest J. Fiume - All rights reserved.
41
Cash Flow From ManufacturingThis Year Last Year
Gross Profit 36,000 36,000
Equipment Depreciation
2,000 1,900
Building
Depreciation
200 200
Chg. In Inv.
Labor & O/H
2,400 (4,000)
Cash Flow
From Mfg.
40,600
+19%
34,100
Copyright 2006 by Orest J. Fiume - All rights reserved.
42
Summary
According to Jim Womack: The Ages of Lean1935 to 1977: Invention and Innovation1977 to 1990: Discovery1990 to Present: Diffusion out of auto
industry1990 to 2006: The Lean “tool” age2007 : The Lean Management Age
Copyright 2006 by Orest J. Fiume - All rights reserved.
44
Real Numbers:Management Accounting in a Lean Organization
• www.tbmcg.com (go to TBM store)
• www.lean.org (go to Store, then Lean Applications)
• www.amazon.com