A lean approach to activity based Costing

1. A lean approach to activity based Costing Effective Cost Strategies for Manufacturers March 27, 2014

2. Agenda • What is Lean? • Activity Based Costing (ABC) • Implementing Lean (using ABC) – Case Study • Lean ABC Exercise

3. Leanis the elimination of waste by focusing on time

4. The origins of Lean • Lean can trace its roots to the Toyota Production System • Came to the United States in the 1980’s (Manufacturing) • Spreading to other Industries, such as construction

5. Six Types of Waste • Making too much • Moving • Waiting • Storing Excess Inventory • Over-processing • Fixing mistakes

6. 80%

8. Value Added vs. Non-Value Added VALUE ADDED NON-VALUE ADDED 5% • Inspection • Set-up • Break-down • Batch queues • Adjustments • …and more Sustaining Tasks Example: Regulatory Authority requirements 80%

9. Agenda • What is Lean? • Activity Based Costing (ABC) • Implementing Lean (using ABC) – Case Study • Lean ABC Exercise

10. Price $$$ Design criteria Invisible Costs Transportation Procurement Accounts Payable Material handling Disposal Specifications Manufacturing Inventory management Information Support Energy Costs Investment Costs Forecasting Distribution Testing Hidden costs which are often overlooked

11. What is the cost of each Activity? - Max Large no of Suppliers Mrp output Orders/ Purchase Schedules/ Changes/ Requisitions Purchasing Etc Expediting Re-scheduling Invoice Transport Check $5 Accounting Grn's Receiving Multiple transactions Large data bases Products Count Re-pack Admin Expediting Point of Use Inspection Line Stock Materials Expediting Handling Materials Stores Handling

12. Cost at point of use Point-of-use Invoice match and payment Storage and handling Inspection Receiving Expediting Raise purchase order Supplier negotiations Total Cost Requisition / mrp Price

13. Traditional cost management techniques … spread costs over products like peanut butter DEPT #1 300% Overhead Costs 200% OVERHEAD COSTS DEPT #2 100% Direct LaborActivity Costs Direct Labor/ Machine Hours for Product ‘A’ DIRECT LABOR COSTS $ $ $ $ $ DIRECT MATERIAL COSTS Direct Material Costs Direct Material Costs for Product ‘A’ $ $ $ $ PRODUCT ‘A’

14. £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ Activity based costing principles identify where costs are incurred Activities consume resources Activity Based Costing Standard Costing Practices $ $ $ $ COSTS COSTS X $ ACTIVITIES OBJECTS OBJECTS PRODUCTS & SERVICES CUSTOMERS / CHANNELS PRODUCTS & SERVICES Managing Gross Margin Managing Profit

15. Agenda • What is Lean? • Activity Based Costing (ABC) • Implementing Lean (using ABC) – Case Study • Lean ABC Exercise

16. Understanding the Activities that make up the Order Entry Process • Order entry process improvement project • Measuring the impact of the Waste in the order entry process BEFORE: Process Mapping 100orders Receiveorder Find to Customerdata Put inthe orderdata Defineshippingtype Definespecialprices <13%perfect order VA33% NVA57% SNVA10% 2% 40% 35% 50% 36% • Fax received at reception • Email sent to the wrong internal address • Customer doesn’t know his customer number • No customer number on the fax • Stock outs • Delivery address different from that in the system • Individual typing for all orders • Price structure isn’t in system

17. Where and Why are there Non Value Activities and Waste? VA33% NVA57% SNVA10% additional Information The need to use additional paperwork and “aide memoirs” demonstrates the inability to enter orders right first time, where known information is not held in the SAP system file notes sales information Stapler & punch printouts

18. The Actual Activity Costs and Savings • Order entry process improvement project • Dramatic reductions in Order Entry times from 60–90% 820 90% BEFORE: AFTER: 660 45% Warehouse(orders/dayuntil 14.00 in thewarehouse) Capacity(orders/day) Process Mapping

19. Co locating by Customer Stream AFTER: • More open environment … • Faster communication • Team motivated • Easy to control BEFORE: Elapsed Time (in minutes for one order)

20. Warehouse Activity Based Costs Spaghetti Diagram Office Small Parcel • Warehouse reorganization project • Reduction in distance traveled (Spaghetti Diagram) BEFORE: Office Large Customers Small Parcel AFTER: Large Customers Receiving Shipping Receiving/Shipping

21. The Warehouse Improvements Warehouse Reorganization resulted in the following improvements: Analysis of Shipping and Rental Costs and collection of quotes resulted in the following cost savings: WAREHOUSE REORGANIZATION 1660 820 90% 660 27 1120 20 45% 18 15 Cost(T DM) Elapsed Time(min/order) FTE Capacity(orders/day) Warehouse(orders/dayuntil 14.00 in thewarehouse)

22. Agenda • What is Lean? • Activity Based Costing (ABC) • Implementing Lean (using ABC) – Case Study • Lean ABC Exercise

23. Exercise: • By company do a current state process map of the order entry process • Or map out your Warehouse

24. Questions and Discussion