1. Designing Throughput Accountability
A Case Study By
Jim Warren
President – Sunset Manufacturing Company
Chair – NWHPEC Lean Accounting SIG

2. Sunset Manufacturing Co. History
1944 Sunset founded in Beaverton, OR
1944 – Mfg Stainless Steel Pipe Fittings
1979 – Re-Organized to High Precision CNC Machining Facility (Sunset Manufacturing’s Lean Journey begins August 2001…)
2002 – Today Implemented Cellular Machining
for Low Volume High Mix

3. Our Lean Journey begins Aug 2001
Sunset Business Organization – 2001
Traditional Accounting Job Costing/Tracking
Management by Results
Low Profitability
Competitive Barriers
Increasing Raw Material Costs
Increasing Health Benefit Costs
Increasing Tooling Costs .
Increasing Labor costs

4. Typical Lean Successes
Setup Reductions of 86%
Lots of 5S events
Shop Floor
Shipping and Receiving
Tool Room
Office
Value Stream Mapping

5. Sales Order Flow Kaizen
Kaizen Event Identified Major Change Needed In Accounting/Accountability
Sales Order Flow Kaizen
Estimating
Order Entry
Purchasing
Work Order Flow
Data Collection (Job Costing)
Shipping/Invoicing

6. Event Discovery Clearer understanding of the value stream flows
Job Costing Data Collection
Analysis clearly showed too costly, time consuming and inaccurate tool to support critical management business decision-making.
Work Order - Flow
Too complex, unnecessary processes
Management by Results (MBR) doesn't work in a lean organization
As a matter of fact, it does not work in any organization !

7. Event Outcome Unplug the data collection system
Implement a KanBan work order system

8. New Thinking Implement Management By Means (MBM)
Management At The Point Of Action
Develop Value Streams by Part Families
Parts that travel the same machining process
Develop Value Stream Measures (Metrics)
Easy to understand, visual, real-time
Implement Lean Accounting Methodology

9. Implement Management By Means (MBM)
Management By Results (MBR) tries to steer from the back end of the process – traditional accounting methodology
Management By Means (MBM) or Management At The Point Of Action – forward flow, self-improvement and problem resolution - lean accounting methodology

10. Develop Value Streams by Part Families
Heavy equipment can’t move easily to accommodate flow
Categorize all work processes to develop families of parts with similar flow characteristics
Group machines for processing the particular family of parts in a hybrid flow process, eliminating wasted movements and lag time waiting for availability of the next process
Create as close to single-piece-flow as possible.

11. Sunset’s Hybrid Value Streams
Color codes provide quick identification of activities, resources, metrics and performance measures unique to a particular value stream.
Example; color-coded KanBan Cards, work force assignments, purchasing, sales, service and shipping.

12. Simple Logic of Lean Accounting
??? Value Stream Flow Process ???
Inflow and Outflow the two data points needed to produce income statements
The Question - “How do we manage/measure what happens in the value stream flow process?”

13. The Logical Answer

14. Implement Value Stream Costing
Based on Alexander Church’s theory of reducing overhead expenses to direct costs or “Production Factors”
Utilize Square Footage as the basis for applying Resource Production Factoring
Identify and present Factors easily understood by supervisors and shop personnel

15. Value Stream Profit & Loss Statement
We are currently in the process of automating the estimating, sales order, purchasing and shipping transactions to reflect the appropriate value stream.
This alone will reduce data entry and wasted motion another 78% and we will automatically get a real time Value Stream P & L statement.

16. Enterprise Value Stream P & L
LeanWerks currently in development

17. Visual Enterprise Level Metrics
Present lean accounting metrics Daily, colorful, understandable - combining all value streams for an Enterprise snap shot
We developed a “Box Score Card” that quickly portrayed cost and performance metrics against target values for daily, weekly, monthly, quarterly and yearly reporting periods

18. Sunset’s Key Enterprise Level Metrics
Material/Subcontract/Components (COGS)
Value-Added Sales (VAS)
Shop Supplies
Number Team Members (All shop floor personnel)
Input Hours (Direct from time clock)
Output Hours (Calculated average shop rate)
Quantity Parts to be Shipped
Quantity Parts Shipped
Quantity Parts Scrap
Percent Scrap
On-Time Delivery (OTD)
LPI – Lean Performance (LPI)

19. New Metric “LPI” Lean Performance Indicator
Lean Performance Indicator is a consistent method to measure lean implementation effectiveness.
A Key Core Value Metric for Motivating Performance and Rewarding Team Performance Through the PIP Plus Incentive Program.
Indicator: Real Time Performance, Continuous Improvement Implementation, Lean Sustainment, Waste Elimination and Profitability.
Goal: An LPI Monthly Goal of Equates to 116.3% Value-Added Output Performance at Level C Lean Performance.
Formula: Value Added Sales (Total Sales Minus Raw Materials, Sub-Contracting and Components) divided by Shop Rate Per Hour () Divided by Number of Hourly Shop Floor Personnel Divided by 2.        

20. Lean Performance Indicator Chart
Color coded brackets for visual performance level recognition.

21. Lean Performance Indicator (LPI)
The LPI by design represents a monthly figure or a target number of 100, signified on the visual color coded “Lean Performance Indicator” chart as Lean level C.
The LPI number calculated when you first begin your lean journey represents your set-point marker for tracking historical improvement data: day to day and year to year.

22. LPI – Shop Floor Tool
A higher LPI number simply means your company’s continuous improvements are driving a higher level of throughput (VAS) per team member.
The LPI measurement is extremely useful as a management tracking tool in place of the traditional accountant’s bottom line figure.

23. LPI – Management Tool
As lean progresses in your company resulting in a higher LPI yield keep a close eye on your bottom line.
If it isn’t moving with the higher LPI yield, management problems may be identified in other areas of the P&L.
Your shop rates may need adjusting if efficiency is high and profitability is too low.

24. Sunset’s Key Metrics Enterprise Level Box Score Card
Target Daily
Performance
Target Weekly
Performance Week to Date
Current State
Lean Performance Indicator Chart
LPI % of Target This Week
LPI – WTD
Current Lean Performance “Throughput”
LPI Calculation – Sales minus raw materials, outside sub-contracting and components = Value-Added Sales (VAS) Divided by Average Hourly Shop Rate Divided by Number of Shop Team Members divided by Two = LPI
Output Hours Calculation – Value-Added Sales divided by Average Shop Rate (including profit) = Output Hours
Throughput Calculation = Output Hours Divided by Input Hours = Throughput

25. Daily Throughput Chart

26. Target Month Box Score Chart

27. Yearly Box Score Chart

28. Financial Box Score Chart

29. Lean (MBM) vs. Traditional (MBR)

30. Throughput Compared Company A Company B
Value-Added Sales Dollars 285, ,500.00
Team Members
Input Hours
Output Hours at shop rate
Shop Rate Dollars p/hr Quoted
Shop Rate Dollars p/hr Produced
Input Hours per Member
Output Hours per Member
Value-Added Sales per Member 14, ,196.42
Throughput Efficiency Percent
Lean Performance Indicator (LPI)
Lean Performance Lean Level C Poor
LeanTrack confirms the absolute value of implementing lean practices throughout the organization including lean accounting methodology tools. These examples indicate lean creates throughput increases with fewer personnel at a lower per hour rate. The truth of the matter: Lean Accounting increases your ability to compete globally.

31. Benefit of Throughput Metric
Easy to track overall performance daily
Easy to identify accuracy of shop rate charged – High throughput performance with low or no profit would signal a need to raise shop rate charged for services
Easy to see measurable results of continuous improvements
Easy to give understandable feed back

32. Special Thanks
To Jim Huntzinger for graciously loaning his thesis “Lean Cost Management” to my NWHPEC Lean Accounting Special Interest Group as a study project.

33. Thank You for Attending
This Case Study can be downloaded at
LeanTrack and other lean tools are available at
Sunset Manufacturing website
Contact Phone