Leaf 7 Orry Fiume

LEAN AND ACCOUNTING:
The Role of the CEO and CFO
Orest J. Fiume
Retired Vice President - Finance
The Wiremold Company
1
Copyright 2006 by Orest J. Fiume - All rights
reserved.
LEAN
A Business Strategy
Not
A Manufacturing Tactic
Not
A Cost Reduction Program

2
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
3
reserved.
Time-Based Strategies
Lead-Time Reduction
Critical for driving improvement to your

customers 4
reserved.
Time-Based Strategies
Lead-Time Reduction
The key is to reduce your processes to core value
5
reserved.
But What About
Non-Manufacturing Companies
All Companies have similar processes
Manufacturing Service
Develop new products Develop new services
Take orders Take orders
Process orders Process applications
Purchase materials Purchase supplies
Make products Provide services
Payroll Payroll
Ship product Ship product ?
Close the books Close the books
Accounts receivable Accounts receivable
Accounts payable Accounts payable
Hire people Hire people
6
reserved.
Why Doesnt Everyone Do Lean?
Easy to Agree With
Hard To Do
Why Is It So Hard?
7
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

8
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
9
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
10
reserved.
CEOs Role
11
reserved.
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
12
reserved.
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
13
reserved.
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
14
reserved.
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
15
reserved.
When Should Metrics be
Addressed?
AT THE BEGINNING OF THE LEAN
TRANSFORMATION
16
reserved.
Who are the Principal
Users of Metrics
The Workers
17
reserved.
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
18
reserved.
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
19
reserved.
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

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

everyone is watching
21
reserved.
Have a no lay-off policy
No one will lose their

employment as a result of
productivity gains
22
reserved.
Organize Around Value Streams
Traditional organizational structure hides
problems
Value streams look at the organization
horizontally, not vertically
Flatten the organization
23
reserved.
Plan to answer the question:
Whats in it for me?
Profit Sharing
24
reserved.
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
25
reserved.
OBSTACLES TO LEAN ACOUNTING
Transaction focus
Complex systems
Absorption Accounting
Emphasis on Variance Analysis
No Timely Information
Focus on Compliance vs. Improvement
26
reserved.
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
27
reserved.
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
28
reserved.
Understand the difference between
Efficiency and Productivity
PRODUCTIVITY = WEALTH
Arthur P. Byrne
29
reserved.
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 Qs Requires Physical

Change -- Its Not a Financial Thing
30
reserved.
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 31
reserved.
EFFICIENCY
The Relationship Between Two Inputs:

Standard Labor Hours vs. Actual Labor Hours
It Presumes That The Standards Are Right
32
reserved.
The Standard Cost P&L
This Year Last Year
Net Sales 100,000 90,000
Cost of Sales:
Standard Costs 48,000 45,000
Purch Price Var (3,000) 10,000
Matl Usage Var (2,000) 5,000
Labor Eff Var 7,000 (8,000)
Labor Rate Var (2,000) 9,000
OH Volume Var 2,000 2,000
OH Spend Var (2,000) 8,000
OH Eff Var 16,000 (17,000)
Total Cost of Sales 64,000 54,000
Gross Profit 36,000 36,000

Gross Profit % 36.0% 40.0%
USELESS MANAGEMENT INFORMATION 33
reserved.
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)

34
reserved.
The Plain Language P&L
This Year Last Year +(-)%
Net Sales 100,000 90,000 11.1
Costs of Sales:
Purchases 28,100 34,900
Inventory (Inc) Dec: Matl 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 2.2
Occupancy Costs:
Building Depr 200 200 0.0
Building Services 2,200 2,000 10.0
Total Occupancy Costs: 2,400 2,200 9.1
Total Mfg Costs 61,600 58,000 6.2
Manufacturing Gross Profit 38,400 32,000 20.0
Inv Incr (Dec): Labor,O/H Content (2,400) 4,000 35
GAAP Gross
Copyright 2006 Profit
by Orest J. Fiume - All rights 36,000 36,000 0.0
reserved.
Balance Sheet
Current 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
36
reserved.
Balance Sheet
Current Assets: TY LY Current TY LY
Liabilities
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
37
reserved.
The Plain Language P&L
This Year Last Year +(-)%
Net Sales 100,000 90,000 11.1
Costs of Sales:
Purchases 28,100 34,900
Inventory (Inc) Dec: Matl 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 2.2
Occupancy Costs:
Building Depr 200 200 0.0
Building Services 2,200 2,000 10.0
Total Occupancy Costs: 2,400 2,200 9.1
Total Mfg Costs 61,600 58,000 6.2
Manufacturing Gross Profit 38,400 32,000 20.0
Inv Incr (Dec): Labor,O/H Content (2,400) 4,000 38
GAAP Gross
Copyright 2006 Profit
by Orest J. Fiume - All rights 36,000 36,000 0.0
reserved.
A Fundamental Truth
An Increase in Productivity
Does Not Automatically
Result in an Increase in Profit
39
reserved.
How to Actualize
Productivity Gains?
Sell more
Reduce Overtime
Hold on to attrition
In-sourcing
And Its Managements Responsibility

To Actualize Productivity Gains
40
reserved.
Cash Flow From Manufacturing
This Year Last Year
Gross Profit 36,000 36,000
Equipment 2,000 1,900
Depreciation
Building 200 200
Depreciation
Chg. In Inv. 2,400 (4,000)
Labor & O/H
Cash Flow 40,600 34,100
From Mfg. +19%
41
reserved.
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
42
reserved.
THANK YOU
ojfiume@comcast.net
43
reserved.
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
44
reserved.

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LEAN AND ACCOUNTING:

The Role of the CEO and CFO

A Cost Reduction Program

Set Up Takes 1 Hour Set Up Takes 1 Minute

Who Has Lowest Cost?

A Small Process Improvement Provides

Critical for driving improvement to your

The key is to reduce your processes to core value

Easy to Agree With

Must Be Company Strategy To Be Successful

But, those companies arent like ours, we

Lean Thinkingis an entire business

Why are Metrics Important?

Metrics send a message to employees as to

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

Failure vs. Making Mistakes

Every failure teaches a man something, if he will learn

A small number will quickly understand it

Waiting To See Who Wins

But do it the right way

No one will lose their

Flatten the organization

Changing the Qs Requires Physical

The Relationship Between Two Inputs:

It Presumes That The Standards Are Right

Gross Profit 36,000 36,000

Labor = Hours x Hourly Rate

Overhead = Labor Hours x Overhead Rate

Variance = Actual Standard (estimates in Red)

And Its Managements Responsibility

www.tbmcg.com (go to TBM store)

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