Tag: Accounting

Posted on

Smart People Making Good Decisions and Killing Growth

Probably without realizing it, Clayton Christensen takes us (the “lean community”) to task in this talk about investment and growth.

We have been “selling” continuous improvement – in all of its forms whether we call it “lean” or Six Sigma, or Theory of Constraints, or Total Quality Management as a cost reduction tool for so long that most managers out there believe that is all it is for.

In this talk, which I got from Mike Rother’s YouTube channel, Christensen makes the distinction between market creating innovations, which create demand where none existed; sustaining innovations, which improve the product, but don’t create new customers; and efficiency innovations which allow us to do more with less.

In Christensen’s view (which I happen to support), the only one of these which creates growth in the economy is a market creating innovation.

Growth stagnates because efficiency innovations show much better short-term return on key metrics.

Take a look at the video, then let’s discuss where we need to go with this.

In a market where there are two or three stable players, without breakthrough market creating innovations, they can only “grow” by taking market share from one another. This dictates a strategy of becoming very good at sustaining innovation (making your product better) and efficiency innovation (so you can sell it at a competitive price).  These are important, because they are required for survival which is, in turn, required to fund market-creating innovation.

Because the vast majority (not all, but most) of continuous improvement effort is focused inward, it tends to work in these areas – improving existing products, improving operations.

We do have the “Lean Startup” movement that is hacking out space for true market creating or disrupting innovation. The question (and I don’t know the answer) is how do established companies get past their completely rational financial decision making and pull that “seek new customers” thinking into their portfolios? The only companies I know who are doing this are privately held, and actually run by the owners (vs. private equity owners)… and I’ve seen a couple of privately held companies turn away game changing ideas as well for fear of cannibalizing their other products.

Apple has been the exception. It’s too early to tell if that exception was actually Apple or just Steve.

Maybe that’s the normal business cycle. What are your thoughts?

Posted on

What is the ROI for That Log?

I still see companies struggle to apply a financial return on every improvement proposed.

PC has made an excellent analogy in a post on the forum. Rather than repeat it here, I’ll give you the link, maybe we can get a conversation started.

http://forums.theleanthinker.com/viewtopic.php?f=9&p=903#p903

(Sidebar: I am pretty aggressive about deleting accounts that look like spammers. If I got yours by mistake, write to me at “Contact Mark” on the right sidebar, and I’ll fix it.)

Posted on

Biggest ERP Failures of 2010

pc pointed out a great little article in a post on the discussion forum.

The article touches lightly on why ERP implementations are so hazard prone, and then lists the “Biggest Failures” of 2010.

Of note is that the majority of the listed failures are governments. I can see why. Governments, by their nature, have a harder time concealing the budget over runs, process breakdowns and other failures that are endemic with these implementations.

A corporation can have the same, or even a worse, experience, but we are unlikely to know. They are going to make the best of it, work around it, and make benign sounding declarations such as “the ERP implementation is six months behind schedule” if for no other reason than to protect themselves from shareholders questioning their competence.

Does anybody have any of their own stories to share?

Posted on

Home Appliance Utilization

Bob Hanover has a great little article about applying visual controls to household laundry on his “Thoughtput Solutions” site. (cute way to use TPS as the name for the company, too.)

The concept he outlines is the same one that is (or should be) used to trigger batch run points for kanban managed machines.

But I want to talk about machine utilization, especially of home appliances.

A modern home washing machine can cost anywhere from a few hundred dollars to over a thousand, depending on the make, model and features.

In a household like Bob’s, with two adults and seven kids, it makes sense to ensure this expensive machine is running to full capacity.

To keep the machine running, as each load is complete, the next one should be started, otherwise the machine will sit idle, and that would be bad… right?

Let’s do some math.

Typically a home washing machine completes its automatic cycle in just around half an hour.

Typically a home dryer completes its automatic cycle in around 45-50 minutes.

So, if you want avoid having the washer stand idle, what are you doing to do?

I’ll tell you what nobody does. Nobody keeps putting loads into the washer and piling up wet clothes to wait for the dryer. It is obvious that the dryer is pacing the process, and running loads through the washer faster than the dryer can take them would defy common sense. Wouldn’t it?

Yet we do this all of the time in factories.

Why?

Posted on

Get Your Ducks In A Row For Lean Accounting

I have known Russ Field since working with him on a few projects in a large Seattle (now Chicago) based aerospace company. Recently he posted a very (typically Russ) thorough reply on NWLEAN to a question about value stream accounting. I asked him to take the same basic material, clean it up a little, and let me publish it here as a guest post.

Added Feb 21: There are some good comments to this post as well.

Enabling Material-Only Costing in Value Streams

—————– By Russell Field ——————

For some time now, the value stream concept has been a topic of energetic debate. If you choose to implement that approach, you’ll find there is more than one reasonable way to organize them, each with its own requirements for management, measurement and performance assessment.

This discussion centers on the value stream design described in three excellent books:

Aside from my own experiences and observations, these works are the primary references for this article. I recommend them highly for anyone wanting to better understand the concepts and related impacts on the Finance function as a business “leans out”.

NOTE: This article is not an endorsement of this particular value stream form. Rather, it is examination of its enabling and prerequisite conditions.

The really short message, as in so many things, is “Don’t get the cart before the horse!” In this case, if material-only cost accounting procedures (discussed later) are implemented before the factory processes have been realigned and proven, the best which can be expected is a different flavor of misrepresentation.

First, though, some baseline thoughts.

“TRADITIONAL STANDARD COSTING” vs. COSTING OF (LABOR) STANDARDS

Remember, words have meaning. I’ve seen many discussions derailed because of confusion between these two phrases. The philosophy and practice of “Traditional Standard Costing” is not the same as the “costing of (labor) standards”.

The question is not whether I should know the cost of one widget, or the labor content (time) of that widget, or even the labor contribution ($$) to the cost of that widget; rather, the questions are how I should determine the hourly rate ($$) to apply to the labor content (time), and how I should account for other costs of producing that widget.

BUT – even those questions become academic in a value stream where all products have the same labor content and where all costs are contained within the value stream (more on that later); that’s when we can start talking about the average cost per unit at the value stream level.

“LEAN ACCOUNTING” vs. “ACCOUNTING FOR LEAN”

As described in AWCO (pg. 36), these are two different concepts.

“Lean Accounting” refers to the use of Lean tools and techniques to make the accounting process more efficient.

“Accounting for Lean” “… represents an accounting process that captures the benefits of a Lean implementation as well as motivates Lean behavior.”

MATURITY PATH OF “ACCOUNTING FOR LEAN”

Both PLA (Chapt. 2; pg. 141 et al) and WC (pg. 165 et al) make the point that changes in accounting techniques should be made in conjunction with or immediately following the successful implementation of Lean procedures on the shop floor (we won’t get into Service vs. Production in this article). To change the cost accounting processes BEFORE leaning out Operations merely confuses the situation and causes unnecessary churn.

That said, let’s proceed.

In my opinion, the ability to successfully implement and sustain the accounting techniques described in the books noted earlier is dependent upon getting the process “ducks” into four rows:

  1. Organization by value stream
  2. Elimination of task-level labor tracking
  3. Stabilization of overall value stream-level labor costs
  4. Lowering of inventory levels

Underlying each of these “duck rows” is, of course, a set of enabling conditions.

DUCK ROW #1) Organization by value stream

There’s plenty of material out there on value stream mapping, so for this discussion let’s just say there are some key characteristics:

  1. Similar process flows (or “routings”);
  2. Similar production cycle times (AKA “work content”);
  3. Similar physical size of product;
  4. Ideally, personnel dedicated to the value stream; and
  5. Again ideally, no “monuments” or shared resources (there are, of course, ways of dealing with shared resources and personnel, but I did say “ideally”).

In other words, this approach emphasizes segregation of product families with high similarity in multiple categories. What does all this buy us?

a) If every product follows the same process flow or path, physical segregation and rearrangement is much simpler. Additionally, there is a high likelihood that each product will use each resource (or resource type), further reducing the need for cost allocation between product lines/families.

b) If each product takes about the same amount of time at each task/resource, then the overall work content of all products is about the same.

c) If product size is similar, that helps keep the number of people needed and the need for additional, product-specific moving/handling equipment to a minimum (and supports similar work content).

d) & e) If people and equipment aren’t shared outside the value stream, then all of their costs can be attributed to the value stream.

NET RESULTS:

  1. The major sources of cost are captive within the value stream, so the need for allocation is minimized if not eliminated.
  2. Every product in the value stream population takes about the same flow time and has about the same total work content (which also minimizes allocation requirements).
  3. Some key sources of variation in that flow time and labor content are sorted out of the value stream by design.

DUCK ROW #2) Elimination of task-level labor tracking

There are two sub-elements here: “Stabilize task cycle times” and “Establish a common wage structure”. In order to reach these goals, we must create certain conditions.

a) Stabilize task cycle times

In order to create an environment in which a given task takes the same amount of time and effort regardless of who executes it, we need:

  1. Stable, high-quality processes (“reasonably under control and low variability”, PLA pg. 140/141 et al); this cuts down on how many times a job needs to be done, and how much input is wasted.
  2. Standard work; standardizing process steps helps assure that the job is done the same way each time.
  3. A cross-trained, multi-skilled workforce; in full implementation, this means that any member of the workforce can step in and execute any task.

b) Common wage structure

Note that a cross-training and multi-skilling not only helps stabilize task times, but also aids breaking down the “craftsman/guild” barriers to a common wage. For that, we need:

  1. A cross-trained, multi-skilled workforce
  2. Simplified processes; among other things, this makes cross-training and multi-skilling considerably easier.

NET RESULTS:

1) I no longer need to track how much time was spent executing an individual task; with high quality, standard work and cross-training, I know how long it takes because I know the plan.

2) I no longer need to track who executed the task in order to determine an appropriate rate (accountability/traceability is another issue), because everyone gets paid pretty much the same (within a job category, at least).

In short, I no longer need to run all over the production floor, tracking activity durations or costs at the task level. In fact, to the degree that the process paths and work content are very similar, I don’t even need to track them at the Item level.

DUCK ROW #3) Stabilization of overall value stream-level labor costs

Once I have eliminated the need for task-level labor tracking, then I need only to stabilize my labor population in order to keep my overall value stream labor costs at a fairly constant level.

The high-quality processes I put in place to stabilize my task cycle times will help by assuring that labor is used only for production (and not rework or re-make), but I also need to level my demand, either artificially within my walls or by working with the customer base toward that end (I may also need to level-sequence my product mix if I still have significant difference in work content between products).

In that way, I always have about the same amount of work to be done, and don’t need to bring people in, pull them back out, put them back in, or shake them all about (do the “Production Hokey Pokey”!).

NET RESULT:

I have a consistent amount of work to be done in the value stream, so I’m able to maintain a fairly fixed workforce population.

DUCK ROW #4) Lowering inventory levels

Once the inventory turn rate gets down to, or drops below the overall value stream cycle time, product is going out the door very soon after completion. Assuming a FIFO approach, I don’t need to put a lot of effort into tracking my inventory costs because a) they’re per current rates and b) there aren’t many pieces anyway.

NET RESULT:

I don’t have to keep separate track of what I have invested in each lot, batch or item. Even radical changes in material costs flush through the value stream very quickly.

SO:

IF I don’t have to mess with spreading/allocating costs;

AND IF every time I make a given product, it takes the same amount of time;

AND IF all the products I make in my value stream take the same amount of time;

AND IF anyone who makes it gets paid the same wage;

AND IF I don’t have to constantly change the size of my labor population,

THEN I can apply a flat hourly $$ rate – based on total value stream cost – to the product’s work standards (planned work content). In fact, at full maturity I may even be able to simply average my total periodic value stream costs over the number of pieces shipped – AKA “average cost per unit” (PLA pg. 124 et al).

If my value stream is fully segregated and mature, this is the closest I need to get to “overhead allocation”. I don’t have to account for variation in order quantity, labor expense or the like because I’ve designed/driven out those variations. I know what the labor content is because of the stable processes and high reliability; there’s no rework to account for because of the high quality; a worker is a worker is a worker from both a skill and pay standpoint, and I’m controlling the number of workers on the payroll (NOTE: Worker interchangeability must not be confused with worker dispensability / replaceability; it can take quite a while to adequately cross-train good personnel).

And the ONLY thing I really need to track is material consumption (you can throw in some consideration for features and characteristics costing if appropriate). Hence the term, “material-only cost system” (WC, pg. 38).

To recap, in order to enable truly simple, material-only costing we need to:

  1. Organize by value stream, driving out key categories of variation;
  2. Work to eliminate the need for task-level tracking of labor input and rates;
  3. Stabilize the overall value stream labor costs; and
  4. Lower inventory levels to less than one value stream cycle (or 5 days as some suggest).

To do all that, the fundamental enablers include:

  1. A value stream organized around product families with high similarity in routings, process time/work content, physical size and the ability to segregate personnel and resources
  2. Stable, reliable processes
  3. Standard work
  4. Cross-trained, multi-skilled workforce
  5. Simplified processes
  6. Stable, level demand

Of course, these enablers presuppose the existence of lower-level enablers (e.g. accurate BOMs and routings, and having appropriate metrics in place).

So what? My whole point is that there’s more to successfully implementing Lean Accounting techniques described in PLA, WC and AWCO than simply ceasing or starting to gather certain data or collect certain costs. If you already have these enablers in place, then you are better positioned to embrace the related accounting practices.

NOW – the BIG question is, “How do we manage our business until we can get these enablers firmly in place?”

I refer you again to the books noted above. All offer some good thoughts on this subject, but I will reiterate the sentiments expressed under the heading of “MATURITY PATH OF ‘ACCOUNTING FOR LEAN'”. Bottom line: “Don’t get the cart before the horse!”

Your current accounting processes are likely adequate for traditional manufacturing environments, especially those which are still largely mass-production oriented (PLA, pg. 4 et al). Both PLA and WC specifically discuss synchronizing the evolution of Lean Production Operations and “accounting for Lean” (and yeah, I capitalized it).

Posted on

Vendor Managed Inventory vs. Less Inventory

Almost every shop I have visited has, or is thinking about, initiating a “vendor managed inventory” program of some kind.

The pressure to do this is especially strong when there is a big push to improve working capital positions and increase inventory turns. And, to be honest, the way traditional accounting counts inventory turns, getting the inventory “off the books” is certainly one way to do it.

It follows, then, that vendor managed inventory can improve inventory turns, at least on paper.

In reality, though, unless the inventory itself is actually removed from the value stream, all that has happened is the valuation has been slid from one ledger to another. All of the costs are still in the system, they are just in different columns now.

It is the physical presence of inventory, not who owns it, that is evidence of some kind of problem. So “reducing” inventory by transferring ownership really doesn’t change the system at all.

The “documented cost savings” are often only an “on paper” artifact of traditional cost accounting, when the actual cash outlay of the organization doesn’t really change very much.

Then there is the added cost (often hidden) of managing distribution from a consignment stock, a tendency for supplier’s representatives to “sell” by stuffing bins as full as possible, and a host of other little things that can add up.

Don’t get me wrong, vendor managed inventory can, in theory, be done superbly and truly help. The problem is that it usually isn’t, and doesn’t.

Don’t push your problems onto your suppliers.
Solve them instead.

Posted on

Lean Accounting’s Fat Problem – Forbes.com

Lean Accounting’s Fat Problem – Forbes.com

I am really encouraged when I see a mainstream business publication like Forbes.com begin to discuss how better flow can cause problems for traditional cost accounting. I would refer this little piece to any executive, at least as a starting point for a discussion.

Key points:

Unless the accountants understand the way that lean works, in the worst case it seems to them that lean produces losses, not efficiencies. In a typical case, they cannot see the cost advantages.

This is especially a problem if there is a lot of excess inventory in the system. Holding everything else constant, reducing inventory causes two problems. First, it cuts the “assets” side of the balance sheet, and can look like a write-down, when in reality, inventory is simply being converted to cash. (and in today’s economy, cash is a good thing to have). Another effect is that it looks like costs go up because there is less inventory to “absorb the costs.” That is more a problem with the absorption model itself which can report a “profit” even though nothing was sold.

I really liked this analogy:

One presenter at the summit used weight loss as an analogy. When dieting, standard cost accounting would advise you to weigh yourself once a week to see if you’re losing weight. Lean accounting would measure your calorie intake and your exercise and then attempt to adjust them until you achieve the desired outcome.

That is the heart of the whole thing. The Toyota Production System is real time. It is designed to detect and respond to problems immediately. Managing it requires clear undistorted information, not abstract models that include things that aren’t affected by the “right now” decisions. Absorbed overhead costs are not part of the manufacturing function, and often overwhelm the true costs of manufacturing.

The countermeasure?

Value stream accounting was suggested by Bruce Baggaley of BMA as a way out. The company’s revenues and costs are reported weekly for each of the value streams. The costs reported do not include allocations or standard costs, just the costs that actually occurred within the value stream last week.

How to fit this in to your kaizen plan:

Now you are looking only at the actual costs incurred by the shop floor operation. You should be able to look at your kaizen activity, predict the results you will achieve, and then use this weekly report as a CHECK in your PDCA cycle.

“What numbers should we see (as a result of this improvement)?”

“What numbers did we actually see?”

“Is there a difference?”

“Why? What didn’t we understand about our process, our improvement, or our costs?”

Posted on

Outsourcing Profit

This post on Kevin Meyer’s Evolving Excellence blog brings up some good challenges to the traditional “avoid fixed costs” rationale for outsourcing. The post (and the comments) point out Wall Street’s obsession with achieving a total variable cost model.

There is certainly a lot of appeal. Traditional cost accounting works hard to “assign” fixed costs  to individual units of production so that they can then pretend to calculate unit costs and unit margins. But rather than going into a long rant on accounting, I will just refer you to the experts.

Instead, I want to go beyond the cost accounting rationale that is usually put together, and look at some of the other issues with outsourcing.

Here’s a question for you: Where is the value added in your value stream?

That means what stage of the value stream has the steepest difference in value between what is purchased and what is transferred to the next stage? Put another way, if all you do is final assembly, what is the difference between what you pay for the parts and what your customers pay for the finished product? Keep in mind that this number is the most money you could make. All of your expenses come off this delta. Given any particular level of costs, it makes sense to add as much value as possible.

What is the difference between the cost of components and what you pay for your outsourced sub-assemblies? That is the value your supplier adds.

If, for the sake of argument, your kaizen activities made space and labor available – space and labor that you are already paying for today – how much more profit would you make if you used those resources to bring some of those outsourced sub-assemblies under your own roof?

Remember, in this little exercise, your labor costs stay the same. Your production area stays the same. Your overhead stays the same. The only thing that changes is this: Instead of buying completed sub-assemblies from a supplier, you are buying the components that the supplier buys and assembling them yourself.

If you would pay less for the components than you do for that sub assembly, your total cost of goods sold goes down, and all of that difference goes straight to the bottom line. (I am sticking with assembly here because the capital requirements, in most cases, are modest here.)

This is a different answer than you would get in a traditional make-vs.-buy analysis which assumed that all of the burdened direct labor costs would be shed with the work. It isn’t that clean in reality.

Posted on

Financial Transparency 2

A couple of interesting comments to the last post (as well as the original question) got me thinking some more. I’d like to go back to basics.

There are no specific practices and behaviors that are “lean principles.”
I believe the principles operate at a higher level. The principles have to do with creating a culture in which people naturally surface and solve problems, supported by the organizational and workplace structures.

In this case, “financial transparency” may, or may not, be found as an attribute of companies that are otherwise doing very well establishing this culture.

Financial transparency is a countermeasure, not a principle.

A countermeasure would be applied against a problem which, if not solved, prevents the organization from taking a step toward the ideal.

Some organizations’ paths may take them to or through a problem where financial transparency is the solution.

Some organizations may take other routes and never need to address that. For example, if they otherwise operate with 100% integrity, and there is solid trust.. is there a need to disclose everything?

So it is entirely possible that two, otherwise similar, organizations may have reached the same point on their journey by doing different things.

Now, there are some countermeasures which are nearly universal because they address issues nearly everyone has. (note that I say “nearly”.. never say “all” in this business.)

Without a culture of trust, for example, people in the organization really cannot contribute. They have to come to work, do exactly what they are told, and go home.. knowing full well that the things they did today are probably stupid. Doesn’t exactly help them feel like winners, does it?

But while financial transparency certainly reflects a degree of trust, it is neither necessary nor sufficient to generate it, and I guess that is the key point here.

Posted on

Financial Transparency – Is it important?

Steve Fonseca asks an interesting question on The Whiteboard.

Are lean companies really transparent with their customers and suppliers as to cost/profits. Is this a lean principle or not, or to what extent?

I am going to offer an opinion, then perhaps other readers can chip in.

First, there is no real definition of what is, or is not a “lean principle.”
Second, there are infinite shades of the term “financial transparency.”
Thus, there is no definitive answer to the question.

So, in my view, I don’t really see a correlation. Nor do I see a significantly greater degree of openness as a prerequisite to success with infusing a culture of continuous improvement.

Toyota is publicly traded, and as such, is really restricted by insider trading laws on how much financial information they can share with customers / suppliers short of sharing it with everyone.

Anyone else? What have you seen out there? Does a degree of financial transparency, above and beyond what is normal in business relationships, offer a significant competitive advantage, or drive continuous improvement faster?