February 14, 2013 Lean Accounting What is it?

Lean Accounting Contents Introduction Maturity Path Why Change February 14, 2013 Contents Introduction Maturity Path Why Change Sticking Points Eliminating waste Wrap-up & Review Test Lean Accounting What is it?

Lean Accounting Definition February 14, 2013 Lean Accounting Definition Wikipedia – “to support the lean enterprise as a business strategy; seeks to move from traditional accounting methods to a system that measures and motivates excellent business practices in the lean enterprise”

Lean Accounting Definition February 14, 2013 Lean Accounting Definition Brian Maskell – “lean accounting is the general term used for the changes required to a company’s accounting, control, measurement and management processes to support lean manufacturing and lean thinking”

February 14, 2013 Lean Accounting Accounting principles, practices and reporting designed to support and enhance the lean enterprise Lean accounting supports manufacturing by value streams, customer demand, pull

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What is Traditional Accounting? February 14, 2013 What is Traditional Accounting? Accounting principles, practices and reporting designed to support and enhance the traditional enterprise Traditional accounting supports mass production; producing for inventory, to sales forecasts, MRP

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History Techniques of accounting for lean have been around for a while February 14, 2013 History Techniques of accounting for lean have been around for a while Companies have developed their own methods to value and cost lean initiatives The first summit on lean accounting was held in 2005 The foremost authorities on lean accounting are Brian Maskell and Bruce Baggaley

The Vision for Lean Accounting February 14, 2013 The Vision for Lean Accounting Provide accurate, timely & understandable information to motivate lean transformation Use lean tools to eliminate waste from the accounting processes while maintaining thorough control Fully comply with GAAP, external reporting regulations and internal reporting requirements Support the lean culture by motivating investment in people, providing information that is relevant and actionable. BMA Inc. 2006

Lean Accounting Aid decision making in lean environment February 14, 2013 Aid decision making in lean environment Accurate & understandable information Relevant & actionable information Lean Accounting Lean the Accounting processes Comply with GAAP and reporting requirements Support lean culture

First Principle of Lean Thinking February 14, 2013 First Principle of Lean Thinking Is: Customer Value

Improve Customer Value February 14, 2013 Improve Customer Value Map processes and understand value streams Extensive training on lean principles Kaizens Implement various lean tools – kanban, flow, quick changes Track operational improvements, visual systems We put all the stuff needed to run a lean operation in the value stream – production folks, machines, re-organize layouts Then What?

February 14, 2013 Then What? We wait. Wait for the $ improvements to show up – profit, cash But in the short-term, the opposite happens

February 14, 2013 Then What? We make a huge investment in lean and improving value for our customer. Lean is a new way of thinking. Why account for it using traditional accounting?

Lean Accounting is a new way of thinking. February 14, 2013 Then What? Lean Accounting. Lean Accounting is a new way of thinking.

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February 14, 2013 How? Don’t rush out and change all accounting processes. Lean Accounting grows with lean initiatives Logical progression to follow

The Maturity Path Three Stages February 14, 2013 The Maturity Path Three Stages Lean Manufacturing Lean Accounting Pilot lean production cells Getting started with lean accounting Lean manufacturing is widespread Managing by value stream Lean accounting applied throughout organization and partners Lean Enterprise Suggested maturity path from Practical Lean Accounting Authors Brian Maskell Bruce Baggaley

Examples of Lean Accounting in the Maturity Path February 14, 2013 Examples of Lean Accounting in the Maturity Path

Maturity Path Stage 1 Lean Accounting Successful lean cells in place February 14, 2013 Maturity Path Stage 1 Lean Manufacturing Lean Accounting Successful lean cells in place Training and tools Standardized work Quality at source & self-inspection Lean performance measures in cells $ impact of lean calculated Begin to eliminate variance reporting Eliminate waste from accounting processes

Maturity Path Stage 2 Lean Accounting February 14, 2013 Maturity Path Stage 2 Lean Manufacturing Lean Accounting Lean is widespread Extensive visual systems CI teams in place Initial supplier certifications Mfg managed by VS Performance measures in VS and plant/corporate level Costing by VS VS info drives CI

Maturity Path Stage 3 Lean Accounting Target costing used February 14, 2013 Maturity Path Stage 3 Lean Manufacturing Lean Accounting Fully organized by VS Cooperation with customers, suppliers CI a way of life Lean thinking applied throughout organization Target costing used VSM extended outside to customers, suppliers Most purchasing & inventory control eliminated

February 14, 2013 Where are You? Regardless of where you are on the maturity path with Lean you may find a disconnect between what’s happening on the plant floor and what’s showing up in financial statements. Lean Accounting maybe the Answer

Traditional measurements: February 14, 2013 Why Change? Traditional measurements: Motivate non-lean behaviour – building large batches, increasing inventory Come too late, days or weeks after month-end close Primarily financial Take a lot of time gathering and analyzing data

Traditional accounting: February 14, 2013 Why Change? Traditional accounting: Transactional based Overhead applied based on labour Standard costing can spread inefficiencies to all products Freed up capacity is bad

February 14, 2013 None of these items support lean thinking No value is added Waste is abundant

February 14, 2013 Lean Accounting replaces measurements and financial results with those that support lean

Sticking Points Performance measures Capacity Internal control February 14, 2013 Sticking Points Performance measures Capacity Internal control Inventory management Financial reporting Organization chart

Sticking Point - Performance Measures February 14, 2013 Sticking Point - Performance Measures Traditional accounting measures are typically financial Standard costs Variances Absorption Inventory turns

Performance Measurements February 14, 2013 Performance Measurements Lean performance measure Include operational as well as financial Day by the hour First-time-through WIP to SWIP Units per person On-time shipment Dock-to-dock days Sales per person First four are cell performance measures day by the hour – hourly production compared to qty required – takt time first time thru - % produced right first time – standardized work WIP SWIP – amt of inventory compared to right amt of inventory – make to pull OEE – machine ability to make to quality, right the first time and avail when reqd – takt time for bottleneck or constraint machine

Sticking Point - Capacity February 14, 2013 Sticking Point - Capacity Available hours People Machines

Capacity - traditionally February 14, 2013 Capacity - traditionally Idle time is bad. Often used to build inventory. Sometimes inventory that the customer doesn’t want. Fully utilize resources so they’re not a waste. Concern is with current financial presentation.

February 14, 2013 Capacity Lean increases capacity by eliminating waste. The decision is what to do with it. The best time for deciding is when preparing the value stream map.

Lean looks at capacity differently. February 14, 2013 Capacity - lean Lean looks at capacity differently. Resources can be redeployed. Or to spend time on CI. Or bring back outsourced work. Move up timeline for new product launch Or….. Invest in the future

Business Decisions & Capacity February 14, 2013 Business Decisions & Capacity Is there capacity? No Buy it $x Create it $x Yes $x

Business Decisions & Capacity February 14, 2013 Business Decisions & Capacity Why Not Company makes ‘things’

Business Decisions & Capacity February 14, 2013 Business Decisions & Capacity Cheap Company wants 100 ‘things’ $45.00 each Regular selling price is $87.50 Current free capacity is 180 hours each man and machine

Business Decisions & Capacity February 14, 2013 Business Decisions & Capacity Is there capacity? Yes Should we make it? $? Time needed to make each thing: 1.5 hours each 100 things 150 hours needed Have 180 hours free

Business Decisions & Capacity February 14, 2013 Business Decisions & Capacity Should we make it?

Sticking Point - Internal Control February 14, 2013 Sticking Point - Internal Control Relies on inspection of transactions to ensure controls are in place. Traditionally, need huge control systems to document, review, approve just about everything that happens. But maybe… Costs of control should be relative to risks being controlled.

Prevention and detection become key in a lean environment. February 14, 2013 Internal Control Prevention and detection become key in a lean environment. Risk is lowered.

Practical Lean Accounting Authors Brian Maskell Bruce Baggaley February 14, 2013 Practical Lean Accounting Authors Brian Maskell Bruce Baggaley

Sticking Point - Inventory Control February 14, 2013 Sticking Point - Inventory Control Traditional accounting Keeps detail tracking of inventories through perpetual systems Work orders, purchase orders, BOM Required for purchasing & MRP Standard costing to value cost of sales Annual inventory count

Inventory Control Lean accounting February 14, 2013 Inventory Control Lean accounting With accurate BOM & scrap reporting – backflusing Visually controlled – kanban, pull Inventory levels lowered Product moves quickly through VS Materials expensed on purchase Cycle counting to regularly update inventory $ & check on processes Annual inventory not needed

Sticking Point - Financial Reporting February 14, 2013 Sticking Point - Financial Reporting Traditional accounting prepares financial statements monthly Spends hours/days analyzing variances from standard cost and from budget Tracks data by department, cost centre Prepares budgets by department, cost centre Consumes a lot of resources Often out of date when distributed

Financial Reporting Lean accounting February 14, 2013 Financial Reporting Lean accounting Combines operational, resource and financial information Tracks data by value stream Tracks data hourly, weekly, monthly and cumulative Provides information for immediate decision making (not delayed) Includes VS Future State data

February 14, 2013 Financial Reporting Lean accounting uses a Box Score for reporting results Used by everyone in the value stream Common language, simple measures Weekly reporting Value streams combine on one Box Score to report company results

Performance measurements February 14, 2013 Financial Reporting Performance measurements Income statement capacity Box Score

February 14, 2013 Financial Reporting Box Score

February 14, 2013 Financial Reporting Box Score

Sticking Point – Org Structure February 14, 2013 Sticking Point – Org Structure Lean companies: manage by value streams CI by value stream Cost by value stream (box score) Do we reorganize organizational structure by value stream?

February 14, 2013 Org Structure The question - do we reorganize by value stream or remain organized by function? The answer – whatever works best to fulfill your lean objectives Value Stream – Matrix - Functional

Role of Accountant in the lean organization February 14, 2013 Org Structure Role of Accountant in the lean organization Changed from traditional role Must be involved in the lean operations at the value stream level Evaluate key controls & determine if operating as planned Part of the CI team Prepare VS Box Score Analyze alternatives for capacity decisions

Lean Accounting Aid decision making in lean environment February 14, 2013 Aid decision making in lean environment Accurate & understandable information Relevant & actionable information Lean Accounting Lean the Accounting processes Comply with GAAP and reporting requirements Support lean culture

Lean the Accounting and Finance Processes February 14, 2013 Lean the Accounting and Finance Processes

Leaning Accounting Processes February 14, 2013 Leaning Accounting Processes All areas of the business can be leaned including Accounting and Financial departments Frees up time for Accountants to be partners in lean improvements Ensures control on plant floor from the design phase

February 14, 2013 Eliminating Waste As manufacturing processes move to lean, batch sizes get smaller. Maintaining the same transactional recording and reporting such as work orders, purchase orders, customer invoices may be overwhelming. (as lean progresses, transactions are maintained by VS and are fewer.)

Eliminating Waste Questions to ask: February 14, 2013 Eliminating Waste Questions to ask: Is that report or sign off necessary? Is there an easier way? What exactly are we trying to control? What are the risks of errors if we stop? Can we automate more?

Accounts Payable Accounts Receivable Month-end Close Reporting February 14, 2013 Eliminating Waste Accounts Payable Accounts Receivable Month-end Close Reporting

Detailed and time-consuming February 14, 2013 Eliminating Waste - AP Two major AP tasks: Ensuring invoicing is correct Paying vendors Detailed and time-consuming

Eliminating Waste - AP Blanket purchase orders February 14, 2013 Eliminating Waste - AP Blanket purchase orders Voucher from receiving documents Purchase/credit cards for small purchases Voucher on backflushing Pay from monthly statements Pay via EFT

Detailed and time-consuming February 14, 2013 Eliminating Waste - AR Two major AR tasks: Issuing invoices Recording payments Detailed and time-consuming

Eliminating Waste - AR Blanket purchase orders February 14, 2013 Eliminating Waste - AR Blanket purchase orders Invoice from shipping documents Send invoice with shipment Pay by shipment Pay via EFT/wire transfers/credit card Automatic posting of payments from payment data

Eliminating Waste – Month-end February 14, 2013 Eliminating Waste – Month-end Two major month-end tasks: Review accounts Prepare journal entries Detailed and time-consuming

Eliminating Waste – Month-end February 14, 2013 Eliminating Waste – Month-end Simply the chart of accounts Delete, de-activate unused accounts, cost centres, departments Automatic data loads – payroll, bank Change timing of charges to avoid accruals Move to quarterly close

Eliminating Waste – Reporting February 14, 2013 Eliminating Waste – Reporting Two major reporting tasks: Prepare financial statements Distribute financial reports Detailed and time-consuming

Eliminating Waste – Reporting February 14, 2013 Eliminating Waste – Reporting Avoid Excel Automatic report writing solutions Summary reports with drill-down options Avoid emailing Use cloud or intranet solutions to house reports

Eliminating Waste – Other February 14, 2013 Eliminating Waste – Other Automate approval process Automate exception reporting & notifications Automate consolidations

February 14, 2013 Wrap-up & Review

February 14, 2013 Test – Fun Activity