Designing Throughput Accountability

1. DesigningThroughput Accountability A Case Study By Jim Warren President – Sunset Manufacturing Company Chair – NWHPEC Lean Accounting SIG

2. Sunset Manufacturing Co. History • 1944 Sunset founded in Beaverton, OR • 1944 – 1978 Mfg Stainless Steel Pipe Fittings • 1979 – 2001 Re-Organized to High Precision CNC Machining Facility (Sunset Manufacturing’s Lean Journey begins August 2001…) • 2002 – Today Implemented Cellular Machining for Low Volume High Mix

3. Our Lean Journey begins Aug 2001 • Sunset Business Organization – 2001 • Traditional Accounting Job Costing/Tracking • Management by Results • Low Profitability • Competitive Barriers • Increasing Raw Material Costs • Increasing Health Benefit Costs • Increasing Tooling Costs • . • Increasing Labor costs

4. Typical Lean Successes • Setup Reductions of 86% • Lots of 5S events • Shop Floor • Shipping and Receiving • Tool Room • Office • Value Stream Mapping

5. Kaizen Event Identified Major Change Needed In Accounting/Accountability • Sales Order Flow Kaizen • Estimating • Order Entry • Purchasing • Work Order Flow • Data Collection (Job Costing) • Shipping/Invoicing

6. Event Discovery • Clearer understanding of the value stream flows • Job Costing Data Collection • Analysis clearly showed too costly, time consuming and inaccurate tool to support critical management business decision-making. • Work Order - Flow • Too complex, unnecessary processes • Management by Results (MBR) doesn't work in a lean organization As a matter of fact, it does not work in any organization !

7. Event Outcome • Unplug the data collection system • Implement a KanBan work order system

8. New Thinking • Implement Management By Means (MBM) • Management At The Point Of Action • Develop Value Streams by Part Families • Parts that travel the same machining process • Develop Value Stream Measures (Metrics) • Easy to understand, visual, real-time • Implement Lean Accounting Methodology

9. Implement Management By Means (MBM) • Management By Results (MBR) tries to steer from the back end of the process – traditional accounting methodology • Management By Means (MBM) or Management At The Point Of Action – forward flow, self-improvement and problem resolution - lean accounting methodology

10. Develop Value Streams by Part Families • Heavy equipment can’t move easily to accommodate flow • Categorize all work processes to develop families of parts with similar flow characteristics • Group machines for processing the particular family of parts in a hybrid flow process, eliminating wasted movements and lag time waiting for availability of the next process • Create as close to single-piece-flow as possible.

11. Sunset’s Hybrid Value Streams • Color codes provide quick identification of activities, resources, metrics and performance measures unique to a particular value stream. • Example; color-coded KanBan Cards, work force assignments, purchasing, sales, service and shipping.

12. Simple Logic of Lean Accounting • Inflow and Outflow the two data points needed to produce income statements ???Value Stream Flow Process ??? The Question - “How do we manage/measure what happens in the value stream flow process?”

13. The Logical Answer

14. Implement Value Stream Costing • Based on Alexander Church’s theory of reducing overhead expenses to direct costs or “Production Factors” • Utilize Square Footage as the basis for applying Resource Production Factoring • Identify and present Factors easily understood by supervisors and shop personnel

15. Value Stream Profit & Loss Statement We are currently in the process of automating the estimating, sales order, purchasing and shipping transactions to reflect the appropriate value stream. This alone will reduce data entry and wasted motion another 78% and we will automatically get a real time Value Stream P & L statement.

16. Enterprise Value Stream P & L LeanWerks currently in development

17. Visual Enterprise Level Metrics • Present lean accounting metrics Daily, colorful, understandable - combining all value streams for an Enterprise snap shot • We developed a “Box Score Card” that quickly portrayed cost and performance metrics against target values for daily, weekly, monthly, quarterly and yearly reporting periods

18. Sunset’s Key Enterprise Level Metrics • Material/Subcontract/Components (COGS) • Value-Added Sales (VAS) • Shop Supplies • Number Team Members (All shop floor personnel) • Input Hours (Direct from time clock) • Output Hours (Calculated average shop rate) • Quantity Parts to be Shipped • Quantity Parts Shipped • Quantity Parts Scrap • Percent Scrap • On-Time Delivery (OTD) • LPI – Lean Performance (LPI)

19. New Metric “LPI”Lean Performance Indicator • Lean Performance Indicator is a consistent method to measure lean implementation effectiveness. • A Key Core Value Metric for Motivating Performance and Rewarding Team Performance Through the PIP Plus Incentive Program. • Indicator:Real Time Performance, Continuous Improvement Implementation, Lean Sustainment, Waste Elimination and Profitability. • Goal:An LPI Monthly Goal of 100 - Equates to 116.3% Value-Added Output Performance at Level C Lean Performance. • Formula:Value Added Sales (Total Sales Minus Raw Materials, Sub-Contracting and Components) divided by Shop Rate Per Hour () Divided by Number of Hourly Shop Floor Personnel Divided by 2.

20. Lean Performance Indicator Chart • Color coded brackets for visual performance level recognition.

21. Lean Performance Indicator (LPI) • The LPI by design represents a monthly figure or a target number of 100, signified on the visual color coded “Lean Performance Indicator” chart as Lean level C. • The LPI number calculated when you first begin your lean journey represents your set-pointmarker for tracking historical improvement data: day to day and year to year.

22. LPI – Shop Floor Tool • A higher LPI number simply means your company’s continuous improvements are driving a higher level of throughput (VAS) per team member. • The LPI measurement is extremely useful as a management tracking tool in place of the traditional accountant’s bottom line figure.

23. LPI – Management Tool • As lean progresses in your company resulting in a higher LPI yield keep a close eye on your bottom line. • If it isn’t moving with the higher LPI yield, management problems may be identified in other areas of the P&L. • Your shop rates may need adjusting if efficiency is high and profitability is too low.

24. Sunset’s Key Metrics Enterprise Level Box Score Card • Metric • Target Daily • Performance • Target Weekly • PerformanceWeek to Date • Current State • Lean Performance Indicator Chart • LPI % of TargetThis Week • LPI – WTD • Current Lean Performance “Throughput”

25. Daily ThroughputChart

26. Target Month Box Score Chart

27. Yearly Box Score Chart

28. Financial Box Score Chart

29. Lean (MBM) vs. Traditional (MBR)

30. Throughput Compared • Company A Company B • Value-Added Sales Dollars 285,500.00 285,500.00 • Team Members 20 28 • Input Hours 3460 4844 • Output Hours at shop rate 3965 3005 • Shop Rate Dollars p/hr Quoted 72.00 95.00 • Shop Rate Dollars p/hr Produced 82.52 58.94 • Input Hours per Member 173 173 • Output Hours per Member 198.25 107.32 • Value-Added Sales per Member 14,275.00 10,196.42 • Throughput Efficiency Percent 114.6 62.04 • Lean Performance Indicator (LPI) 99.13 53.67 • Lean Performance Lean Level C Poor LeanTrack confirms the absolute value of implementing lean practices throughout the organization including lean accounting methodology tools. These examples indicate lean creates throughput increases with fewer personnel at a lower per hour rate. The truth of the matter: Lean Accounting increases your ability to compete globally.

31. Benefit of Throughput Metric • Easy to track overall performance daily • Easy to identify accuracy of shop rate charged – High throughput performance with low or no profit would signal a need to raise shop rate charged for services • Easy to see measurable results of continuous improvements • Easy to give understandable feed back

32. Special Thanks To Jim Huntzinger for graciously loaning his thesis “Lean Cost Management” to my NWHPEC Lean Accounting Special Interest Group as a study project.

33. Thank You for Attending • This Case Study can be downloaded at www.ShopWerksSoftware.com • LeanTrack and other lean tools are available at www.ShopWerksSoftware.com • Sunset Manufacturing website www.SunsetCorp.com • Contact Phone 503.692.1900