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Lean Manufacturing priciples applied to finance
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Lean Manufacturing priciples applied to finance


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A presentation on how to apply lean principles to accounting and finance processes as opposed to only a manufacturing line.

A presentation on how to apply lean principles to accounting and finance processes as opposed to only a manufacturing line.

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  • 1. Lean Manufacturing:A finance perspectiveFabio Malagisi
  • 2. The Customer is King Customer Satisfaction is… Reduced Cycles – Get Data/Analysis Faster. Reduce Bottlenecks. Flow.Better Delivery – Simplification. Standard Formats/Processes. Targeted Metrics. More Capacity – Reduce Transactional and Increase Analysis. Better Quality – Reduce Errors. Predictable Forecasting. Productivity – Predictable, Accurate and Repeatable. Lean drives customer satisfaction Page: 2
  • 3. The Customer defines “Value” Customers… W things done correctly the first time. ant Don’t value what they won’t pay for. Pay for only what they perceive adds value to the product. The customer defines what is value add vs non value add. Value add = Customer Requirement that they will pay for. If you itemized it on a bill…would the customer be ok paying for that activity? Eliminate the non value add as it is wasting resources and not being demanded (or paid for) by the customer. Your customer could be Internal (ex: CEO, General Mgr) or External (Board of Directors, Shareholdsers, Consumers) Page: 3
  • 4. Eliminate Waste:Eliminate Waste in your Processes.Mura - waste due to unevenness…variationMuri - waste due to overburdening and unreasonableness.Muda – General term for a wasteful activity. Type I muda — Non-value added but necessary for the system as it is today to work properly. Type II muda — Non-value added and unnecessary.Eliminate Type II muda first and then move toward eliminating type I. Page: 4
  • 5. The 7 Types of waste (Muda)1) Defective Parts = Bad Feeds, Rework on calculations, Manual JEs2) Overproduction = Excess analysis…Excess Data…not demanded bycustomer3) Inventory = Excess data trackers, non value add reports stored onshared drives.4) Motion = Manual Journal Entries, Key punching into templates5) Processing Transactions = Multiple post close templates, manualjournal entries6) Transportation = Multiple systems feeding eachother. Manual reclasses7) Waiting = Wait time for Data from systems/people, Batch Runs Waste adds no value….waste only raises cost. Page: 5
  • 6. Defective Parts Examples in finance: An incorrect system feed A manual journal entry to correct a booking A PO mapped to the incorrect account A report filled out with incorrect data An incorrect version of a report taken off a shared drive An excel formula error A sub-ledger not tying out to a ledger Outdated lookup tables or databases Question every time a human needs to intervene! Page: 6
  • 7. Overproduction Examples in finance: Extracting excess data that isn’t demanded by the customer Producing reports “Just in case” someone asks Downloading excess data into spreadsheets or databases Measuring performance of factors that aren’t “demanded” Excess reports/templates to support internal department meetings Auditing/tracking without regard to materiality Focus on the ability to react and produce Just in time Page: 7
  • 8. Inventory Examples in finance: Multiple databases stored in excel/access Everyone having their own personal “stocking” of data reports Reports maintained that aren’t used...“Obsolete”/”Slow Moving” Data produced at the wrong time…too early or too late Unneeded offsite storage of records Multiple people producing the same data reporting Excess formats articulating the same data Incomplete analysis Data held in multiple locations requiring excess reconciliations Inventory is a tool to hide problems…don’t allow problems to be hidden Page: 8
  • 9. MotionExamples in finance:Unnecessary key punchingRunning wasteful reportsManual journal entriesManual categorization of data for analysisReconciliations that aren’t materialManual cross referencesUnnecessary filing / printingUnnecessary phone callsUnnecessary update meetings/emailsUnnecessary manual reconciliations of systemsEliminate unneeded physical activity that is wasteful and time consuming
  • 10. Processing Transactions Examples in finance: Systems that don’t talk to each other Errors due to lack of training/understanding Rework due to changing of scope (lack of standardization) System errors that need to be manually corrected Multiple systems processing the same data in separate processes Duplicate processing of data due to lack of coordination Data integrity checks due to unreliable systems Uncoordinated activities that need to be tracked Approvals at the end of a process vs during the process. Automation is critical to eliminating this waste. Page: 10
  • 11. Transportation Examples in finance: Data that passes through multiple sub-ledgers and ledgers. Transactions that get re-classed manually in a ledger Data categorized multiple ways through multiple, separate lookup tables Multiple templates pulling the same data Unconnected databases that get updated separately Reports that travel to multiple people for input Excess systems that have to “talk” to one another Unnecessary approval chains Emailing files back and forth Every step adds complexity and is an opportunity for a defect. Page: 11
  • 12. Waiting Examples in finance: Waiting for turn at shared resources (system log ins, spreadsheets etc) Unbalanced flow…waiting for data from someone/something. Waiting for a decisions Waiting for review/approvals Waiting for batch feeds to run Waiting for feedback on a process Idle time due to uncoordinated time zones and flow of data Idle time due to uncoordinated timelines and due dates/expectations Waiting takes away from our ability to add value through analysis. Page: 12
  • 13. Waste summaryWaste = Any activity which absorbs resources but does not create value(defined by customer…not you!)Understanding waste helps us train ourselves to “see” waste when itoccursRelentlessly drive pursuit of perfect process to eliminate wasteWaste adds cost but does not add value as the customer is not willingto pay for it Page: 13
  • 14. Common Muda Examples in Finance:Uneven stress levels/Closing Crunch.Too many manual journal entries. Equivalent to Rework.Batch feeds. Wait time in closing process.Uncoordinated functional inputs during forecasting efforts.Redundant templates for analysis. How far is the data traveling?Excess analysis due to lack of standard work.Complicated spreadsheets. Not apparent what the message is.Formula errors. Page: 14
  • 15. Lean is visualLean uses visual indicators to communicate simply and effectively.The goal is to know what’s going on at any time, simply by seeing.Visual Indicators can…. Prevent an error – Ex: Black out cells that shouldn’t be touched in a spreadsheet. Flag a defect or abnormality – Ex: cell turns red when a balance sheet doesn’t balance Communicates status – Ex: Output on track to plan and shows a green status. Share information – Ex: Trend chart on order rates.Examples Conditional formatting in spreadsheets Daily meeting boards Status dashboards Simplify spreadsheet and graphs Error proof…add checks in formulas Standard views and indicators Color coding Video vs written training/standard operating procedures Page: 15
  • 16. 5S – Starting a visual system5S is critical to creating a visual system.Sort – Easy access to data. Eliminate unneeded reports/data.Set in Order – Organize data. Set Metrics and Control Limits.Create the “Critical Few” and manage the outliers.Shine – Continuously eliminate waste….Attack Data feedissues, excess data, wait time etc.Standardize – Std work, Std analysis, Std format, Stdschedule. Repeatable and accurate processes.Sustain – Continuous flow of data analysis with processcontrols (Visual Mgmt). Std work and repeatable processes.Develop a “takt time” with daily routines. Page: 16
  • 17. Sort Define what is needed and get rid of what is unneeded. • Pay attention to “aged WIP”. Half done analysis that is driving clutter. • Old/excess equipment. • Outdated processes. • Unneeded documents and email. • Eliminate storage. Don’t allow things to build up again. • Purge shared drives. • Documents from former employees that are never looked at. • How can people tag things that aren’t needed? What is going to be your “red tag” method on data? • Pay attention to document retention policies for compliance. Page: 17
  • 18. Set in Order Organize what is needed. Put it in a logical place and make it stand out when its not in its place. • Location needs to be self explanatory • Re-Label • Color code common items • Rename and Reorder • Put files where they are functional…how will they be used and when? • Needs to be self evident…to all. A place for everything and everything in its place. Page: 18
  • 19. ShineSet controls and audit routines. Ensure you are sticking with the program.• Have a routine• Check color coding, labeling etc• Find abnormalities and clean them up• Make it visual• Make it mistake proof• Fix deviations on the spot Page: 19
  • 20. Standardize Make 5S part of your standard work. Embrace it as how you operate. • You can’t fix anything until its stable. • Communicate errors and defects so all can learn from it. • Everyone should know what is normal and abnormal and what the thresholds are. • Define the routines. In a routine, abnormality sticks out more. • Focus on scheduling and sequencing. • Drive documentation. Document procedures and standards. • Train everyone. Interchangeable processes not reliant on specific people • Anyone should be able to notice what the abnormality is. Page: 20
  • 21. Sustain Keep sustainable processes in place. Don’t let things regress. • Requires a discipline toward the process. • Checklists to monitor compliance • Rely on visual management to know what is going on. • Reward positive momentum. • Make it fun. Celebrate success • Need a 360 degree feedback loop. • Everyone must commit and reinforce. Mgmt at all levels. • Accountability • Continuous improvements…constantly challenge the status quo Page: 21
  • 22. TPS (Toyota Production System)Considered the best practice and guide for a set of lean tools. Page: 22
  • 23. HeijunkaEstablish stability despite erratic demandNeed to Level and Sequence our financial processes.• Daily/Weekly/Hourly Standard Analysis vs Month/Qtr end Crunch.• Continuous metrics vs ad hoc analysis.• Forecasting built into your process vs qtrly. Assumptions tied out.• Functional sequencing…Procurement, Commercial, Mktg, Mfg.• No all nighters…..Daily routines. W W k3 k4 Page: 23
  • 24. Strive for Standard Work Determine your quality standards and control limits Standardize your processes. Do things consistently. Document your work instructions and procedures. Allow for flexibility across people. Process drives effectiveness. Standardization allows abnormalities to be more noticeable. Page: 24
  • 25. Kaizen • Kai – Change / Zen - continuous improvement • Kaizen allows you to Implement and control processes….and continuously improve them. • Kaizen engages people in the lean effort • Kaizen is essential to drive lean • A kaizen event (1-5 days) is a focused dedicated event with the goal to drive lean process improvements in a specified area. 1.Plan 2.Create a plan 3.Do 4.Try it out 5.Check 6.Examine 7.Act 8.Implement changes Page: 25
  • 26. Just In Time (JIT)Provide customers what is needed, when its needed and the amount that isneeded.Develop a Takt time and strive for continuous flow in your data.• A Daily Rhythm of analysis• No wait time on data.• No Excess analysis…Simplification.• Automation…feed templates. Reduce Key Punching and manual.• Re-active analysis = Quality defect/rework.• “Instant indicators”/ Performance Metrics create “flow”.• Pull system – Customer triggers the activity vs pushing the activity onto the customer. Page: 26
  • 27. JidokaDetect abnormality and stopping when abnormality is detected.Process controls that allow for detection of abnormalities:•Built in checks•Control Limits on your data.•Manage the outliers, not every piece of data.•Process Controls drive compliance vs reactive audits.•Build all critical activities into process…eliminate post analysis.•Instant Indicators = Visual Management•Quality on the front line – Don’t rely on approvals. When it gets to a “quality inspector”…its too late. Page: 27
  • 28. Poka-YokeFrom the Japanese, yokeru – to prevent, and poka – inadvertent errorsSimple visual methods which prevent mistakes from being made.It’s visual…manage with your eyes.Poka-Yoke the process to mistake proof your process.Some Examples of Poka-Yoke Conditional formatting in spreadsheets Error proof…add checks in formulas Color coding to relay sequencing information. Audit checks that are visual. Blacking out cells that shouldn’t be input into. Protecting cells. Trend charts with control limits Page: 28
  • 29. Quality at the source A “mistake” is caught at the source….a “defect” is a mistake that moves on to the next step in the process Mistake proof your processes and don’t allow a mistake to become a defect. Strive for quality at the source vs relying on auditors, manager approvals, Audit as you go. SOX test as you go. Page: 29
  • 30. The 5 WhysAsk why 5 times in order to train your mind to get to the real root causeof an issue.Problem: Sales are decreasing year over year on prod line x.Why 1: All regions are showing growth except for region X.Why 2: In October, customer A, decreased their order rate by 10%,causing the short fall in the region.Why 3: Customer A, decided to dual source and is moving there ordersto a competitor.Why 4: Customer A thinks our prices are too high for what they need.Why 5: Customer A only needs the mid range version of product A fortheir application and we only offer the advanced range, forcing them topay more for features they don’t need. Page: 30
  • 31. Value Stream MappingProcess map – details out each step in the processA Value Stream Map….Maps out each step in the processAssigns a value add vs non value add distinction to each step.Assigns a time value to each step.Focuses on all inputs (vs just a few) to the activities •Man •Machine •Information •Materials •Method •EnvironmentIs often more far reaching/all encompassing than a process map.Value stream map is a powerful tool to identify where there is waste in aprocess. Page: 31
  • 32. Lean is continuousThe goal is a perfect processThere will always be more ways to improveConstantly challenge the status quoBe relentless against waste….it will always existEngage people. Lean is bottoms up, supported by the top Page: 32
  • 33. The future for accounting/finance Page: 33
  • 34. Managerial AccountingvsFinancial Accounting•We will see more separation between managerial accountingmethods (internally how we manage) from financialaccounting methods (how we report; legal and regulatorycompliance).•Currently many companies view them as the same in order todrive consistency.•Lean is embedded in the managerial side and must separatefrom financial accounting to work.•Conversion processes from internal rptg to external rptg willbe a key challenge to overcome. Page: 34
  • 35. Focus on value metricsFocus on metrics and accountabilityDetermine what activities are adding value to the bottom lineCreate metrics that are continuous, standard and visibleMeasurement frequency should be part of the process vs a report put outafter closing.Focus on activities vs departmentsUse the 5 whys to get to the root of the activity. Ex: Don’t measure sales….measure leads generated today, the conversion rate of the leads and thesales value of each leads. Page: 35
  • 36. •Lean & Accounting•Traditional Approach… •Lean Approach… • Standard Costs • Average Costs • (Total Value Stream Cost/#units shipped to customer) • Actual cost vs. Budget • (by functional • Actual cost vs Budget departments) • (by Value Stream) • Records Results • Understand Causes •Contribution method •Gross Margin (absorption) •Simplified operational metrics method that anyone can interpet •Complex metrics and calculations •P •Based upon romotes Principles of Mass Continuous Production Improvem ent Page: 36
  • 37. A change in perspectiveThe past…. Absorption Costing Overhead allocations Standard cost focus Functional/Department budgets Present results Audit for compliance Tactical focus. Deliver the numbers Focus on numbers, bottom line. P&L and balance sheet focus Know competitors Quality control/Assurance (Internal Audit, Approval Sign offs)The future… Contribution margin Don’t allocate overhead Actual cost focus..standards are just a point in time Value stream/Integrated focus vs department splits Present root causes and solutions Audit for compliance AND waste Strategic focus…deliver value, understand the customer Focus on metrics. Drive value of parts to deliver the whole Cash flow focus. Integrated focus. Drive value and income will come. Know customers Quality at the source through Poke-Yoke Page: 37
  • 38. Thank YouContact Me Anytime!Fabio MalagisiFabioMalagisi@Yahoo.comLinkedin Edit Page: 38