Lean and Accounting: The Role of The CEO and CFO: Orest J. Fiume Retired Vice President - Finance The Wiremold Company

LEAN AND ACCOUNTING:
The Role of the CEO and CFO
Orest J. Fiume
Retired Vice President - Finance
The Wiremold Company
Copyright 2006 by Orest J. Fiume - All rights
reserved.
LEAN
A Business Strategy
Not
A Manufacturing Tactic
Not
A Cost Reduction Program
reserved.
A Simple Example
Two Companies in Same Industry Using Same Equipment
Company A
Company B
Set Up Takes 1 Hour
Set Up Takes 1 Minute
Who Has Lowest Cost?

Who Can Provide Best Customer Service?
A Small Process Improvement Provides
Enormous Strategic Advantage
reserved.
Time-Based Strategies
Lead-Time Reduction
Critical for driving improvement to your

customers
reserved.
Time-Based Strategies
Lead-Time Reduction
The key is to reduce your processes to core value

reserved.
But What About

Non-Manufacturing Companies
All Companies have similar processes
Manufacturing
Develop new products
Take orders
Process orders
Purchase materials
Make products
Payroll
Ship product
Close the books
Accounts receivable
Accounts payable
Hire people
reserved.
Service
Develop new services
Take orders
Process applications
Purchase supplies
Provide services
Payroll
Ship product ?
Close the books
Accounts receivable
Accounts payable
Hire people
6
Why Doesnt Everyone Do Lean?

Easy to Agree With
Hard To Do
Why Is It So Hard?

reserved.
Most Companies View Lean as

Some Manufacturing Thing
Just an Element of Strategy
Delegate it Down in the Organization - But
Dont 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

reserved.
OBSTACLES TO CHANGE
But, those companies arent like ours, we
have different problems
Well change, but lets do so very slowly
Our auditors wont accept that

reserved.
What Does It Take To

Go to Lean Thinking?
Its a Culture Change

That Requires Leadership
Because In The End
Its All About People
reserved.
10
CEOs Role

reserved.
11
Learn Lean Thinking

Lean is a personal journey as well as an
institutional one
Jones, Aguirre and Calderone
If the CEO doesnt know Lean and how to

do it, youre not going to be successful at
implementing it in that company
Art Byrne

reserved.
12
Out Front-Hands On-Dont Delegate

Lean Thinkingis an entire business
model that must be run by the CEO
Jim Womack
If you cant get the CEO to lead this, then

dont start because you are wasting your
time.
Art Byrne

reserved.
13
Lots 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

reserved.
14
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
reserved.
15
When Should Metrics be

Addressed?
AT THE BEGINNING OF THE LEAN
TRANSFORMATION

reserved.
16
Who are the Principal

Users of Metrics
The Workers

reserved.
17
How should we use metrics?

Leaders may be judged by he numbers they deliver,
but thats 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 dont want to be a make-the-month company

reserved.
18
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

reserved.
19
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

reserved.
20
Eliminate Concrete Heads
But do it the right way

everyone is watching

reserved.
21
Have a no lay-off policy

No one will lose their
employment as a result of
productivity gains

reserved.
22
Organize Around Value Streams

Traditional organizational structure hides
problems
Value streams look at the organization
horizontally, not vertically
Flatten the organization

reserved.
23
Plan to answer the question:

Whats in it for me?
Profit Sharing

reserved.
24
CEOs Role - Summary
Learn Lean Thinking

Out Front - Hands On - Dont Delegate
Lots of Leaps of Faith
Change Metrics
Create an Environment Where its OK to Fail
Provide Air Cover for early adopters
Eliminate Concrete Heads
Have a no-layoff policy
Organize around Value Streams
Profit Sharing

reserved.
25
OBSTACLES TO LEAN ACOUNTING
Transaction focus
Complex systems
Absorption Accounting
Emphasis on Variance Analysis
No Timely Information
Focus on Compliance vs. Improvement

reserved.
26
CFOs 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
reserved.
27
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

reserved.
28
Understand the difference between

Efficiency and Productivity
PRODUCTIVITY = WEALTH
Arthur P. Byrne

reserved.
29
Productivity Is The Relationship

Between Quantity of Output vs.
Quantity of Resources Consumed
Sales $
Material $
Labor $
O/H $
=
=
=
=
Quantity x Price
Quantity x Price
Quantity x Price
Quantity x Price
Changing the Qs Requires Physical

Change -- Its Not a Financial Thing
reserved.
30
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
reserved.
31
EFFICIENCY
The Relationship Between Two Inputs:
Standard Labor Hours vs. Actual Labor Hours
It Presumes That The Standards Are Right

reserved.
32
The Standard Cost P&L

Net Sales
Cost of Sales:
Standard Costs
Purch Price Var
Matl Usage Var
Labor Eff Var
Labor Rate Var
OH Volume Var
OH Spend Var
OH Eff Var
Total Cost of Sales
Gross Profit
Gross Profit %
This Year
100,000
48,000
(3,000)
(2,000)
7,000
(2,000)
2,000
(2,000)
16,000
64,000
36,000
36.0%
USELESS MANAGEMENT INFORMATION

reserved.
Last Year
90,000
45,000
10,000
5,000
(8,000)
9,000
2,000
8,000
(17,000)
54,000
36,000
40.0%
33
How are Standard Costs Calculated?

Materials = Quantity x Unit Costs
Material Quantity based on engineering design, modified for yield
Material Unit Costs based on quotes, current average or ???
Labor = Hours x Hourly Rate

Labor Hours based on engineering studies, adjusted for PFD, etc
Labor Rates based on average rate
Overhead = Labor Hours x Overhead Rate

Overhead Rate based on Budgeted Overhead divided by Budgeted
Hours
Variance = Actual Standard (estimates in Red)

reserved.
34
The Plain Language P&L

Net Sales
Costs of Sales:
Purchases
Inventory (Inc) Dec: Matl Content
Total Materials
Processing Costs:
Factory Wages
Factory Salaries
Factory Benefits
Services & Sup
Equipment Depr
Scrap
Total Processing Costs
Occupancy Costs:
Building Depr
Building Services
Total Occupancy Costs:
Total Mfg Costs
Manufacturing Gross Profit
Inv Incr (Dec): Labor,O/H Content
Copyright
2006 Profit
by Orest J. Fiume - All rights
GAAP
Gross
reserved.
This Year
100,000
Last Year
90,000
+(-)%
11.1
28,100
3,600
31,700
34,900
(6,000)
28,900
9.7
11,400
2,100
7,000
2,400
2,000
2,600
27,500
11,500
2,000
5,000
2,500
1,900
4,000
26,900
(0.9)
5.0
40.0
(8.0)
5.3
(35.0)
2.2
200
2,200
2,400
61,600
38,400
(2,400)
36,000
200
2,000
2,200
58,000
32,000
4,000
36,000
0.0
10.0
9.1
6.2
20.0
35
0.0
Balance Sheet
Current Assets:
Cash
Acct Rec
Inventory
Other
Total
Fixed Assets
Total Assets
TY
xx
xx
LY
yy
yy
14.0 20.0
xx yy
xx yy
xx
xx

reserved.
yy
yy
Current Liabilities TY LY
Accts Payable
xx yy
Accruals
xx yy
Other
Total
xx yy
xx yy
Long Term Debt xx yy

Capital
xx yy
Total Liab + Cap. xx yy
36
Balance Sheet
Current Assets:
TY
LY
Cash
Acct Rec
Inv-Material
Inv-Def. L+O/H
xx
yy
xx
yy
8.4 12.0
5.6 8.0
Total Inv
Other
Total
Fixed Assets
Total Assets
Current
Liabilities
xx
xx
xx
xx
yy
yy
yy
yy
14.0 20.0
xx
yy
Long Term Debt
xx
yy
xx
yy
Capital
xx
yy
xx
xx
yy
yy
Total Liab + Cap. xx
yy

reserved.
Accts Payable
Accruals
Other
Total
TY LY
37
The Plain Language P&L

Net Sales
Costs of Sales:
Purchases
Inventory (Inc) Dec: Matl Content
Total Materials
Processing Costs:
Factory Wages
Factory Salaries
Factory Benefits
Services & Sup
Equipment Depr
Scrap
Total Processing Costs
Occupancy Costs:
Building Depr
Building Services
Total Occupancy Costs:
Total Mfg Costs
Manufacturing Gross Profit
Inv Incr (Dec): Labor,O/H Content
Copyright
2006 Profit
by Orest J. Fiume - All rights
GAAP
Gross
reserved.
This Year
100,000
Last Year
90,000
+(-)%
11.1
28,100
3,600
31,700
34,900
(6,000)
28,900
9.7
11,400
2,100
7,000
2,400
2,000
2,600
27,500
11,500
2,000
5,000
2,500
1,900
4,000
26,900
(0.9)
5.0
40.0
(8.0)
5.3
(35.0)
2.2
200
2,200
2,400
61,600
38,400
(2,400)
36,000
200
2,000
2,200
58,000
32,000
4,000
36,000
0.0
10.0
9.1
6.2
20.0
38
0.0
A Fundamental Truth
An Increase in Productivity
Does Not Automatically
Result in an Increase in Profit

reserved.
39
How to Actualize
Productivity Gains?
Sell more
Reduce Overtime
Hold on to attrition
In-sourcing
And Its Managements Responsibility
To Actualize Productivity Gains

reserved.
40
Cash Flow From Manufacturing

Gross Profit
Equipment
Depreciation
Building
Depreciation
Chg. In Inv.
Labor & O/H
Cash Flow
From Mfg.
reserved.
This Year
36,000
2,000
Last Year
36,000
1,900
200
200
2,400
(4,000)
40,600
+19%
34,100
41
Summary
According to Jim Womack: The Ages of Lean
1935 to 1977: Invention and Innovation
1977 to 1990: Discovery
1990 to Present: Diffusion out of auto
industry
1990 to 2006: The Lean tool age
2007
: The Lean Management Age
reserved.
42
THANK YOU
ojfiume@comcast.net

reserved.
43
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

reserved.
44

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LEAN AND ACCOUNTING:

The Role of the CEO and CFO

Set Up Takes 1 Hour

Set Up Takes 1 Minute

Who Has Lowest Cost?

Critical for driving improvement to your

The key is to reduce your processes to core value

But What About

Why Doesnt Everyone Do Lean?

Copyright 2006 by Orest J. Fiume - All rights

Most Companies View Lean as

Make the Month

Copyright 2006 by Orest J. Fiume - All rights

Copyright 2006 by Orest J. Fiume - All rights

What Does It Take To

Its a Culture Change

Copyright 2006 by Orest J. Fiume - All rights

Learn Lean Thinking

If the CEO doesnt know Lean and how to

Copyright 2006 by Orest J. Fiume - All rights

Out Front-Hands On-Dont Delegate

If you cant get the CEO to lead this, then

Copyright 2006 by Orest J. Fiume - All rights

Lots of Leaps of Faith

Every decision is a prediction of the future

Copyright 2006 by Orest J. Fiume - All rights

When Should Metrics be

Copyright 2006 by Orest J. Fiume - All rights

Who are the Principal

Copyright 2006 by Orest J. Fiume - All rights

How should we use metrics?

The winners will be those companies that focus on

We dont want to be a make-the-month company

Create an environment where it is OK to fail

Failure vs. Making Mistakes

Copyright 2006 by Orest J. Fiume - All rights

Provide Air Cover for Early Adopters

Waiting To See Who Wins

Eliminate Concrete Heads

But do it the right way

Copyright 2006 by Orest J. Fiume - All rights

Have a no lay-off policy

Copyright 2006 by Orest J. Fiume - All rights

Organize Around Value Streams

Flatten the organization

Plan to answer the question:

Copyright 2006 by Orest J. Fiume - All rights

CEOs Role - Summary

Learn Lean Thinking

Copyright 2006 by Orest J. Fiume - All rights

OBSTACLES TO LEAN ACOUNTING

Copyright 2006 by Orest J. Fiume - All rights

Learn Lean by Doing Lean

REMOVE THE OBSTACLES

Commit to break with traditional systems

Copyright 2006 by Orest J. Fiume - All rights

Understand the difference between

Copyright 2006 by Orest J. Fiume - All rights

Productivity Is The Relationship

Changing the Qs Requires Physical

Copyright 2006 by Orest J. Fiume - All rights

The Standard Cost P&L

USELESS MANAGEMENT INFORMATION