1. © BMA Inc. 2009. All rights reserved. Value stream costing Lean reporting & control

2. © BMA Inc. 2009. All rights reserved. Value stream costing  Traditional cost accounting is harmful to lean enterprises. Motivates non-lean behavior and is complex & wasteful.  Value stream costing supports lean enterprises. Motivates lean thinking, is understandable, and simple.

3. © BMA Inc. 2009. All rights reserved. Plant-wide income statement We need to change the -3.8% to -4.0% MotorsSystemsSpare Parts New Product Design Support Costs TOTAL DIVISION Sales£326,240£748,894£453,215£1,528,349 Additional Revenue£0 £12,422 Material Costs£111,431£232,774£149,561£87,909£12,764£594,439 Conversion Costs£57,628£70,406£81,579£203,769£37,645£451,027 Outside Process Costs£32,433£22,991£22,661£7,531£85,616 Other Costs£16,040£57,816£29,459£72,721£176,036 Tooling Costs£4,843£12,544£6,588£23,975 Value Stream Profit£103,865£352,363£175,789(£364,399)(£57,940)£209,678 ROS31.8%47.1%38.8%-23.7%-4.0%13.7% £925,314 £918,807 (£6,507) £51,147 £152,024 9.9% Division ROS Corporate Overhead Division Profit VALUE STREAMS Opening Inventory Closing Inventory Inventory Change

4. © BMA Inc. 2009. All rights reserved. VALUE STREAM Value Stream Labor Value Stream Materials Value Stream Machines Outside ProcessingFacilities & Maintenance All Other VS Costs Actual cost of labor, machine, materials, support services, and facilities charged directly to the value stream. Little or no allocation. Value stream costing

5. © BMA Inc. 2009. All rights reserved. Calculated, as far as possible, on a “cash” basis: Revenue of Value Stream – actual value of production delivered to customers in period. Material cost – actual cost of material purchased in period. Direct production costs in period. Other costs. Only assign costs that can be managed in Value Stream – e.g. energy, space, depreciation. Can we assign support personnel to Value Stream ? Indirect costs. We do not apportion indirect overheads to the Value Stream ! Value Stream Costing

6. © BMA Inc. 2009. All rights reserved. Sources of actual value stream costs Cost CategoryBasis for ChargingSource of Data Materials Voucher on receipt of Materials Purchase journal Direct LaborWhen paidPayroll system Support LaborWhen paidPayroll system Outside ProcessingSupplier PO/invoicePurchases journal MachinesDepreciation expenseGeneral Journal FacilitiesSquare feet occupiedStandard Journal Entry Other CostsVoucher on receiptCredit card payment

7. © BMA Inc. 2009. All rights reserved. Monument costs Support Function Monuments –Make the costs direct with very little allocation –Assign full people – names & faces – not “equivalent heads”. –If in the short term you must allocate people, include them in the value stream cost only if you plan to include a real name & face in the future. Process Monuments –If the value stream shares a monument with another value stream – allocate it. –Use simple allocation. Do a study; don’t track it on-going.

8. © BMA Inc. 2009. All rights reserved. Step 1 – Identify & map value streams

9. © BMA Inc. 2009. All rights reserved. Step 2 – Collect actual costs based on value stream map resources

10. © BMA Inc. 2009. All rights reserved. Step 3: Calculate average costs for the value stream Cost of the Value StreamTotals Material Costs111,431£ Outside Process Costs32,433£ Employee Costs49,515£ Machine Costs8,113£ Facilities Costs12,750£ Tooling Costs4,843£ Other Costs3,290£ Total Cost222,375£ Conversion Cost110,944£ Quantity Shipped to Customers1,876 Average Material Cost59.40£ Average Conversion Cost59.14£ Average Cost per Unit118.54£ Profit Per Hour346.22£ Contribution Per Hour716.03£ Conversion Cost Per Hour369.81£ Cost Per Hour741.25£

11. © BMA Inc. 2009. All rights reserved. Step 4- Value stream P&L Profit & Loss Report 5-May-05Per Unit Percentage of Sales £326,240£173.901,876Units Additional Revenue £0 Material Costs £111,431£59.4034.16% Employee Costs £49,515£26.3915.18% Machine Costs £8,113£4.32 Outside Process Costs £32,433£17.299.94% Other Costs £16,040£8.554.92% Tooling £4,843£2.581.48% Value Stream Profit £103,865£5531.84% ROS 31.84% Hurdle Rate 42.00% Cash Flow Inventory £221,1638.9days Accounts Receivable £2,348,92836.0days Accounts Payable (£624,014)-28.0days

12. © BMA Inc. 2009. All rights reserved. Real example of a “plain English” P&L format. Gross Sales £32,332,000 Less Adjustments(£162,000) Net Sales£32,170,000 External Sales Force (7.5% of ns)£2,428,0007.5% Material Purchases£7,853,00024% Margin After Comm & Matrls£21,889,00068% Wages-Mfg£5,778,000 Fringes-Mfg (41.4% of wages)£2,393,000 Supplies & Tooling£991,000 Depreciation-Mfg£380,000 Utilities-Mfg£247,000 Outside Services£1,072,000 Scrap & Warranty£468,000 Other Coversion Costs£426,000 Total Mfg Conversion Costs£11,755,00037% Total Matrls & Conversion Costs£19,608,00061% Margin Before Support Costs£10,134,00032% Wages£2,142,000 Fringes (28.9% of wages)£618,000 Supplies£131,000 Travel & Entertainment£158,000 Professional Services£69,000 Outside Services£82,000 Depreciation£85,000 Rentals£118,000 Advertising & Exhibits£27,000 Employee Recruiting£28,000 Other Support Costs£402,000 Total Support Costs£3,860,00012% £6,274,00020% SUPPORT COSTS OPERATING PROFITS REVENUES VARIABLE COSTS MANUFACTURING CONVERSION COSTS

13. © BMA Inc. 2009. All rights reserved. Step 5 - Plant-wide income statement

14. © BMA Inc. 2009. All rights reserved. Step 6 - Calculating the hurdle rate THE VALUE STREAMS MUST MAKE A MINIMUM OF 46%

15. © BMA Inc. 2009. All rights reserved. Example: Italian Client

16. © BMA Inc. 2009. All rights reserved. Example: Italian Manufacturer - All Value Streams

17. © BMA Inc. 2009. All rights reserved. Lean Thinking: Make it simple by eliminating the causes of complexity What must be in place for value stream costing to be effective? Reporting should be by value stream - not by department Ideally everybody assigned to a single value stream with little or no overlap Few (or no) shared services departments. Try to eliminate monuments Production processes reasonably under control and low variability. Thorough tracking of “out-of-control” situations and of exceptions like scrap, rework, etc. Inventory must be under control, relatively low, and consistent

18. © BMA Inc. 2009. All rights reserved. Value stream P&L maturity path Traditional Manufacturing Traditional Accounting Traditional Financial Reporting Starting Lean Manufacturing Traditional Accounting Traditional Financial Reporting Lean Supplemental Statement Lean Manufacturing Lean Accounting Lean Financial Reporting Traditional Financial Reporting Lean Manufacturing Lean Accounting Lean Financial Reporting TRADITIONAL STARTING LEAN LEAN PROGRESS LEAN COMPANY

19. © BMA Inc. 2009. All rights reserved. Value stream costing  All costs are considered direct and are posted to the value stream profit center on the General Ledger.  Very few cost/profit centers  All value stream costs are included  Productive, Non-productive, available capacity  Direct, support, administrative  No overhead costs are allocated; direct costs only. If they are in the value stream they are direct; if not they are excluded.  Average Cost used as a primary value stream performance measurement.

20. © BMA Inc. 2009. All rights reserved. Value stream costing Almost all costs are assigned directly to the value streams. The value stream manager has P&L responsibility for his/her value stream. Costs not associated with the value streams are small and assigned to a business support cost center. They are budgeted and controlled. Plant or division P&L consolidates the value streams and the business support costs.

21. © BMA Inc. 2009. All rights reserved. What are the advantages of value stream costing? 1. Simple and very little work 2. Timely – weekly 3. Relevant & actionable financial information 4. Very few transactions 5. Focus attention on value stream issues, problems, & opportunities 6. Teamwork, ownership, accountability 7. Presents the “real” financial information 8. Everybody understands it 9. Does not require a CPA to do it !!

22. © BMA Inc. 2009. All rights reserved. Karol Warnock, Value Stream Manager, Marquip Ward United Corporation  Visual Inventory Management  Transaction Elimination  Value Stream Costing