Lean Beans: Jack s Cost System for the 21st Century

3. Getting Past Old Paradigms �What Business Are You In?� 80�s and 90�s Management Techniques: JIT, TQM, TPM, Six Sigma � All Inwardly focused on products. What Business Should You Be In? - creating VALUE for the Customer. - Outwardly focused on the Customer.

4. Getting Past Old Paradigms If we look at the history of Management Accounting, there has not been much �change� or innovation since Henry Ford spoke on Target Costing back in the 1920�s: �We have never considered any costs as fixed. Therefore we first reduce the price to a point where we believe more sales will result. Then we go ahead and try to make the price. We do not bother about the costs. The new price forces the cost down.� - By Henry Ford, My Life and Work, 1922

6. FERF: Financial Executive Research Foundation Defined the Traditional Accountant as: �Bean Counter� Messenger of �Doom & Gloom� Concerned only with Control Variance Analysis / Paralysis

7. �Old� Paradigm vs �New� in Accounting MBO What gets done & what gets measured counts Vertical organization Control Isolated �functions� Lone Rangers & one improvement per year MBV (VALUE) �How� we achieve success is what really counts Horizontal organization Empowerment Integrated Teams Kaizen Teams & many improvements, often

8. FERF says there will be Implications How will the Finance �function� operate in a process or team-oriented organization? Is a �functional� approach to organizing Finance still relevant?

9. FERF �Initiative on Organization and Strategy in Financial Management� Finance should be Commitment to Cultural Change Finance plays a major role in this Organizational Change (an example: Controller at Gorton Fish)

10. Gorton Fish Kaizen Team mapped the Value Stream, from the time material hit the receiving dock to the time the finished product was shipped to the customer. After mapping the current state, they went to work eliminating Waste (miles of conveyor belts, waiting time, queue time, mountains of inventory, handling waste, defects.) Reduced lead time from 114 days to 10 days, taking $3 million to the bottom line with only an $80k investment (that�s an IRR of 3,650%.) Who led this team? A new age Managerial Accountant!

11. Making the Numbers Count Excuse: Must obey GAAP! Yes! But only in Financial Reporting! Management Accounting is proactive. Simplify accounting systems so that they serve Production, Marketing, and Engineering�. the entire Organization!

14. Review of Principles of Lean Create Value for Customer (Product Families) Map the Value Stream Flow (machines/desks lined up in the order in which the operations occur) Pull from the Customer Perfect

15. Prerequisites for Lean Beans You should have the first two principles of Lean in place in your organization: Specify VALUE (set up Product Families) Identify the VALUE Stream

16. What do we mean by VALUE?Principle #1 To be successful in Business, we need to look �Outside-In� and not �Top-Down.�

17. Value-Added AnalysisAn Example� Start at the moment supplier drops off material:

19. Prerequisite to Creating Value Establish PRODUCT FAMILIES

20. Identifying PRODUCT Families

22. Mapping the Value Stream Identify all of the steps currently required to move product from material requisition to delivery of Finished Good to Customer. Challenge every step: Does it all add Value for the Customer? Many steps are only necessary because of the way businesses are organized (departments and functional silos.)

23. Mapping the Value Stream How orders come in (information mapping) How material comes in (material mapping) How product is shipped out to customer

27. New Management Accountant�s Role:Creating New Paradigms Soft Skills as well as Hard skills. You will always need knowledge of GAAP, yes, but you will also need people skills and some psychology to be successful. Fewer Controls. You will need to move away from Controls and move toward adding Value and empowering your people. You will need to be a COACH_ not a supervisor. More line integrated. You will find yourself reporting to multiple bosses: some in Finance, some in Operations. There may still be a solid line boss, but there will be multiple dotted-line bosses. Share information / data. No more data rich and knowledge poor. You will need to bring the data to the users of the information, and help them understand it. No more MBO (management by objectives) but rather MBV (management by Values.) Help to remove barriers within the company, tearing down functional silos, departments, processing villages, flattening the organization. You will need to build cross-functional teams to solve problems, cross departmental barriers, and communicate your data and knowledge to all types of employees in all sorts of functional areas. Robert Half, in a recent survey entitled �The Next Generation Accountant,� stated that today�s CFO expects non-traditional accounting functions to occupy 37% of a Sr. Accountant�s time five years from now. Help with Organizational learning. People throughout the organization need to know the business cold! People can better help move the organization if they understand it. Provide Cost training for Operations people_ �YOUR BUSINESS 101� for new hires. Do bottom line results count more than how we achieved those results? Did the Financial Accountant play games with the Balance Sheet, or did you, the Management Accountant, create Value for the business?

28. Trends in New Management Lean Bean Accounting Emphasis on eliminating Waste rather than just reducing costs. We will be looking at processes and the entire Value Stream rather than just the �point improvements� we got with Reengineering, JIT, Six Sigma, etc. in the 1990�s. Emphasis on cost reduction at the new product development stage. Design to Cost and Target Costing are emerging as standard practices in the new organization. Utilization of VE (Value Engineering) Teams to: Create Estimated Cost Accounting Systems. We don�t need to calculate the actual cost of each individual product separately for internal use, nor do we need to put a cost on every little nut and bolt in our Inventory. At Pratt & Whitney, we did not need to cost every single engine serial number, but rather we cost families of engines based on pounds of thrust. Knock down your organization�s exterior walls, and send VE Teams to work at reducing costs at your Suppliers. We are not going to cut the Supplier�s profit margin, but rather help him eliminate waste and improve processes. After all, your Supplier is an extension of your Value Stream. Implementation of a Product Cost Management System, to handle cost reduction and cost control, and standardize how we do this across the entire organization. Once we have calculated �estimated costs� for different product families, then we can apply cost reduction ideas across the family of parts. Effectiveness on your part will be more important and more valuable than efficiency. People need to be empowered to make changes. Cross-functional teams are getting things done more effectively than Lone Rangers stacked in layers of hierarchy.

29. Effectiveness vs Efficiency What is and what could be Outside-in view from customer perspective Identifies the expectation gaps between current activities and optimal performance Doing the right thing! Keep people busy doing anything, just to cover overhead Inside-out view Identifies how much work I did with the resources I had Having good people do the wrong things well

30. Cost Accounting = transactions = bean counting = Standards = Command & Control! Cost Management = Target costing = QFD = Cost Planning = Empowerment/Psychology

31. So What�s Wrong withStandard Cost? How does Standard Cost fit into Cost Management? IT DOESN�T!

32. Lean Business Structure Demands We Recreate the Financial System What Variable Cost Management System will cause Product Managers to do the right thing? Standard Cost & Absorption Accounting are not it! -- Does not �pull� from the Customer -- Allows �game-playing� -- Measures Inventory and �batches� -- Measures �efficiency�

33. Standard Cost Measures �Efficiency� Efficient use of machines and people creates �volume� variances. But in Lean we want to reduce volumes, and make only what the Customer orders. In Standard Cost these lower Lean volumes create negative variances and lower profits as these variances hit expense.

34. Bottom Line Improvements Three Reasons why we see NO Bottom Line improvements from Lean in the first year: You are still using Standard Cost with Volume Variances creating problems!! Any month you do substantial Inventory reduction, you show your manufacturing expenses increasing. In Lean you have eliminated Waste but not, in the short-term, costs. The Waste you removed has been converted into available capacity, and you will need to DO something with that extra capacity and floor space to �create wealth.�

35. Robert Kaplan, �Relevance Lost� �Corporate Management Accounting systems are inadequate for today�s environment.� Too complex! Evolution of Lean is toward simplicity & speed! ABC Costing has only added complexity and cost to the accounting system. In any company involved in Lean, Standard Cost becomes a barrier to change!

36. A New Focus on the Business�..The Value Stream Map! Without a Vision, the Result will be NO savings reaching the bottom line, because the Value Flow comes to a halt in a swamp of Inventory and detours up & down, and through Departments.

37. Productivity = Wealth Productivity = Revenue / #Employees How are you getting productivity improvements? Increasing the numerator, or decreasing the denominator? Truly increasing revenue, or raising prices? Truly increasing revenue, or laying off employees?

38. And Focus Needs to be on Our Value Streams! New CM �Reporting� needs to be by Value Stream (VS), and not by Departments. People need to be assigned to a VS Few shared-service departments and few monuments (avoid cost allocations) Need Tracking system of �out of control� situations, eg, scrap and rework. Inventory must be relatively low (>25 turns) Change the Metrics to motivate Get rid of most accounting �controls�, and replace with �visuals� (Kanbans, Scorecards) Validate the financial impact of Lean successes with �new� Lean P&L�s

39. Summary of Lean Beans� Replace Standard Cost system with some Variable, Value Stream cost system. (suggest a Target Cost system where one looks at Actuals and trends.) Create �simple Lean Bean� financial statements & P&L�s. Use Target Cost to drive the business from Customer Value, and not from Cost. Use Target Cost for strategic Budgeting. Use Cycle Time to allocate overhead.

40. Lean Accounting is a Philosophyof doing Business(Not a CD Rom!) Remember! Goal of Lean Beans is to: Clarify financial statements (simplify!) Give operations folks insight into the business. Keep it simple, and in a language that folks can understand!

41. Old Paradigm vs New Lean Paradigm Standard Cost Absorption Variance Analysis /Paralysis O/H allocation based on DLH Old Cost System = Standard & Absorption Target / Actual Cost Variable Variance of Actual to Target/ Trend Analysis O/H allocation based on Cycle Time New Cost System = anything that drives the right behavior

42. Old Paradigm vs New Lean Paradigm Valuing Inventory Controlling Transactions Financial Metrics and MBO S/T Goals (Operating Income) Make-the-Month Cost Accounting Eliminating Inventory Controlling Processes Non-financial Metrics and MBV L/T Goals (Inv Turns, Customer Satisfaction Cycle time = Takt Cost Management

43. Old Paradigm vs New Lean Paradigm Cut Costs Saving Cash ABC Allocation Traditional Standard Cost P&L Cut Wastes Create Cash No Allocations (all costs are direct) �Simple Lean Bean� P&L

45. Mass Production vs Lean Production Beg Inv 1,450,000 DM purch 950,000 Dir Labor 900,000 Indir Mfg Costs 350,000 SubTotal 3,650,000 - End Inv 1,450,000 Total Costs 2,200,000 Total Revenue 3,000,000 Profit (loss)-pretax 800,000 Cash Flow-pretax 800,000 Beg Inv 1,450,000 DM purch 500,000 Dir Labor 900,000 Indir Mfg Costs 350,000 SubTotal 3,200,000 - End Inv 150,000 Total Costs 3,050,000 Total Revenue 3,000,000 Profit (loss)-pretax (50,000) Cash Flow-pretax 1,250,000

46. II. INCREASES CAPACITY Most companies look for short-term cost reductions as a result of Lean. Financial impact of Lean comes from utilizing the increase in available capacity. As we gain speed and make more with less, we free up space and capacity. We need to �do something� with that capacity to increase revenue and profits.

47. III. INCREASES SALES Cash created by reducing Inventory can be used to buy a like business or supplier, and increase sales.

48. IV. Saves Time & Money in Accounting Systems Lean Beans eliminates loads of �transactions� Eliminates army of people on Standard Cost Work Orders are no longer needed Many procurement costs go away as we are using Kanban systems, LTA�s, fewer Suppliers. As you reduce Inventory, most of the perpetual inventory system can be eliminated. No more cycle counting! �Simple Lean Bean� financial statements are quick and easy to put together!

49. Traditional P&L This Year Last Year Net Sales Cost of Sales: Standard Cost Purchase Price Variance Material Usage Variance Labor Efficiency Variance Labor Rate Variance Overhead Volume Variance Overhead Spending Variance Overhead Efficiency Variance Total Cost of Sales Gross Profit Gross Profit %

50. Example of a �Lean Bean� Financial Statement Net Sales Cost of Sales: Purchases Inventory material (incr)/decr Total Material Costs Processing Costs: Factory Wages Factory Salaries Factory Benefits Services & Supplies Equipment Depreciation Scrap Total Processing Costs Occupancy Costs: Building Depreciation Building Services Total Occupancy Costs Total Manufacturing Costs Inventory � labor/overhead (incr)/decr Cost of sales Gross Profit Gross Profit %

51. LEAN P&L

52. Lean Beans Scorecard

54. Conclusion�

55. Lean Beans!

56. THANK YOU! Established in 1998 Experts in Lean theory & application (hands-on experience � lived it.) 100s of implementations across most industries Advisors/Experts in N.A. (Mexico), divisions in Spain, India and China Training and implementation - English, Spanish, French, Cantonese and Mandarin Effective training and implementation methods Various methods of Training / Implementation customized. a) On-Site b) Webinars c) On-Line