"Information needs for the lean organization" by Jean Cunningham

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The traditional cost statements and metrics will derail a lean transformation. Standard cost systems drive production to capacity rather than customer demand. Providing simple, easy, Jean Cunningham's presentation at the 1st European Lean IT Summit held in Paris in October 2011.

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"Information needs for the lean organization" by Jean Cunningham

  1. 1. Copyright © Institut Lean France 2011Information Needs for the Lean Organization Jean Cunningham
  2. 2. Copyright © Institut Lean France 2011 Building LEAN Beyond Manufacturing • Founder and President • Lean accounting pioneer • Former CFO, Lantech, Inc. • Former CFO, MarshfieldManaging Times Press, 2003 Productivity Press, 2007 Door Systems Shingo Prize, 2004 Shingo Prize, 2008 Information Needs for the Lean Organization – Jean Cunningham 2
  3. 3. Copyright © Institut Lean France 2011 Evaluate and/or Eliminate Standard Cost Accounting Sam and his sawInformation Needs for the Lean Organization – Jean Cunningham 3
  4. 4. Copyright © Institut Lean France 2011 Information Needs for the Lean Organization WHY LEAN ACCOUNTING FOR LEAN ORGANIZATIONS?Information Needs for the Lean Organization – Jean Cunningham 4
  5. 5. Copyright © Institut Lean France 2011 Traditional Standard Cost Accounting Why is it an issue with lean?Information Needs for the Lean Organization – Jean Cunningham 5
  6. 6. Copyright © Institut Lean France 2011 Traditional Financial Statement $ %Sales $1303 100%Standard cost $900 69%Labor variance $50 4%Burden variance ($12) (1%)PPV ($26) (2%)Total COGS $912 70%Gross margin $391 30%Information Needs for the Lean Organization – Jean Cunningham 6
  7. 7. Copyright © Institut Lean France 2011 Traditional Metrics Variance Non-Lean Outcomes/Behaviors ► Building of unnecessary inventory Absorption variance ► Reluctance to change over equipment ► Reluctance to change over equipment Machine utilization ► Reluctance to perform necessary PM procedures ► Promotes buying excess inventory due to quantity discounts Purchase price variance ► May compromise quality and delivery over price considerations ► Promotes increase in number of suppliers ► Use of lowest cost resource regardless of skill set Direct labor variance analysis ► Piece rate encouraged the building of unnecessary inventory and compromised quality ► Favorable variances interpreted as good regardless of Overhead variance analysis continuous improvement trend ► Encourages production regardless of demandInformation Needs for the Lean Organization – Jean Cunningham 7
  8. 8. Copyright © Institut Lean France 2011 LeanPlant 1 Plant 2 $ % $ %Sales $1303 100% $1303 100%Material $517 40% $517 40%Supplies $72 5% $72 5%Net freight $54 4% $54 4%Variable margin $660 51% $660 51%Labor and benefits $190 15% $190 15%Fixed cost (leases, dpr, utilities) $42 3% $42 3%Cost (to)/from inventory $37 3% ($100) (8%)Total cost of sales $912 70% $775 59%GM $391 30% $528 41%Natural margin $428 33% $428 33%Shipments/employee $225 $225Information Needs for the Lean Organization – Jean Cunningham 8
  9. 9. Copyright © Institut Lean France 2011 Evolution: Manufacturing Allocations Traditional Lean Product A Dedicated Shipping Product B Resources = & Customer Product C Focus Standard Cost Lean AccountingInformation Needs for the Lean Organization – Jean Cunningham 9
  10. 10. Copyright © Institut Lean France 2011 Information AlignmentInformation Needs for the Lean Organization – Jean Cunnngham 10
  11. 11. Copyright © Institut Lean France 2011 Sales has an opportunity to sell the product. Should we take it?Information Needs for the Lean Organization – Jean Cunningham 11
  12. 12. Copyright © Institut Lean France 2011 Traditional Product Line Quote price $30 /unit Standard cost $25 /unit Gross margin $ 5 /unit Gross margin % 16.67% Gross margin target 28% Current gross margin 23%Information Needs for the Lean Organization – Jean Cunningham 12
  13. 13. Copyright © Institut Lean France 2011 Lean Product Line Direct Shared Total Sales 100,000 100,000 Material 20,000 20,000 Direct costs 18,000 18,000 Shared 39,000 39,000 62,000 (39,000) 23,000 @ 10,000 @ 2,500• Material content from BOM = $6 Revenue 300,000 75,000• 1 additional direct labor needed Material 60,000 15,000 Variable Margin 240,000 60,000• 10,000 units — 50% probability Direct cost 40,000 40,000 2,500 units — 95% probability Profit 200,000 20,000 Information Needs for the Lean Organization – Jean Cunningham 13
  14. 14. Copyright © Institut Lean France 2011 Company Totals Product Line @ 10,000 @ 2,500 Direct Shared Total Sales 100,000 100,000 400,000 175,000 Material 20,000 20,000 80,000 35,000 Variable Margin 80,000 80,000 320,000 140,000 Direct costs 18,000 18,000 58,000 58,000 Shared 39,000 39,000 39,000 39,000 Gross Margin 62,000 (39,000) 23,000 223,000 43,000 GM %age 23% 57.5% 24.6%Information Needs for the Lean Organization – Jean Cunningham 14
  15. 15. Copyright © Institut Lean France 2011 I have to close a plant. Which one?Information Needs for the Lean Organization – Jean Cunningham 15
  16. 16. Copyright © Institut Lean France 2011 Traditional Plant 1 Plant 2 $ % $ %Sales $1303 $1303COGS $900 $900Variances $12 ($125)GM $391 30% $528 41%Productivity/employee $200 $250Information Needs for the Lean Organization – Jean Cunningham 16
  17. 17. Copyright © Institut Lean France 2011 Lean Plant 1 Plant 2 $ % $ %Sales $1303 100% $1303 100%Material $517 40% $517 40%Supplies $72 5% $72 5%Net freight $54 4% $54 4%Variable margin $660 51% $660 51%Labor and benefits $190 15% $190 15%Fixed cost (leases, dpr, utilities) $42 3% $42 3%Cost (to)/from inventory $37 3% ($100) (8%)Total cost of sales $912 70% $775 59%GM $391 30% $528 41%Natural margin $428 33% $428 33%Shipments/employee $225 $225Information Needs for the Lean Organization – Jean Cunningham 17
  18. 18. Copyright © Institut Lean France 2011 What will happen if we insource this product?Information Needs for the Lean Organization – Jean Cunningham 18
  19. 19. Copyright © Institut Lean France 2011 Traditional Insource A B C Standard hours 2 3 7 Standard rate $40 $23 $30 $80 $69 $210 Material cost $70 Total cost $429 Vendor price $200Information Needs for the Lean Organization – Jean Cunningham 19
  20. 20. Copyright © Institut Lean France 2011 Lean In Source Material cost $70 x units 1,000 $70,000 Direct cost 3 people $120,000 $120,000 Utilities $2,000 $2,000 $192,000 Vendor cost $200 x units 1000 $200,000 $122,000 Breakeven: $200 – $70 = $130, then = 938 units $130Information Needs for the Lean Organization – Jean Cunningham 20
  21. 21. Copyright © Institut Lean France 2011 Reality Measures LEAN MEASURESInformation Needs for the Lean Organization – Jean Cunningham 21
  22. 22. Copyright © Institut Lean France 2011 New Measures Working Points• Support the company strategy• Be few in number• Mostly non-financial• Motivate the right behavior• Simple to understand• Measure the process• Be timely• Be visual; show trendsInformation Needs for the Lean Organization – Jean Cunningham 22
  23. 23. Copyright © Institut Lean France 2011 Box Score LAST YR GOAL J F M A M J J A S ON D OperationalUnits Shipped 5000/month 6000/month 5400 5550 5700 5800 5925 5800Sales per person ($K) $201,000 $340,000 217 237 260 264 289 305Batch size 10 1 6 6 3 1 1 1Stop the Line 5 x per day 4 x per day 6 4 7 3 3 55S 77% 95% 90% 75% 80% 84% 87% 70%Floor Space 9000 sf 8000 sf 9000 9000 9000 9000 9000 8750Produce to TAKT 120% Under 100% 97% 80% 80% 90% 100% 100% CapacityPeople in Cell 17 12 17 16 15 15 14 13TAKT 120 seconds 105 seconds 120 120 120 110 110 105 FinancialInventory ($K) $500,000 $300,000 480 420 380 350 350 340Revenue ($K) $285,000/mth $342,000/mth 307 316 325 330 337 331Material scrap ($K) $10,000/mth $3,500/mth 8 2 2 3 2 0.5Profit contribution ($K) $86,000 $110,000 84 87 95 97 102 100Overtime Hours 5,000 hrs 2,000 hrs 40 30 10 20 40 0 Information Needs for the Lean Organization – Jean Cunningham 23
  24. 24. Copyright © Institut Lean France 2011 IT Box Score LAST YR GOAL J F M A M J J A S OND OperationalProjects with changed go live date ##Acceptance to resource commitment # daysDelivered projects IT satisfaction score XX%Senior leaders IT satisfaction score XX%All employees IT satisfaction score XX% CapacityAdmin hours versus total hours XX%Kaizen events held ##Improvements implemented ## FinancialPortfolio funds with no action $XXXXDelivered projects over budget ##Global sales / employee $XXXX Information Needs for the Lean Organization – Jean Cunningham 24
  25. 25. Copyright © Institut Lean France 2011 Cascading Box Scores Corporate or Business Unit Value Sales Mfg Admin Stream 1 SQDC Finance Board SQDC IT Each with unique performance measures.Information Needs for the Lean Organization – Jean Cunningham 25
  26. 26. Copyright © Institut Lean France 2011 Process and Outcome Metrics PROCESS: Number of manual entries OUTCOME: Days to close PROCESS: Number of WIP locations OUTCOME: Inventory days on hand PROCESS: Client Changes To Specification OUTCOME: Projects On Time PROCESS: Orders entered without carrier info OUTCOME: On time deliveryInformation Needs for the Lean Organization – Jean Cunningham 26
  27. 27. Copyright © Institut Lean France 2011 Next Steps YOUR LEAN ROADMAPInformation Needs for the Lean Organization – Jean Cunningham 27
  28. 28. Copyright © Institut Lean France 2011 Lean IT Transformation Consulting Consulting Analysis Analysis Transactions TransactionsInformation Needs for the Lean Organization – Jean Cunningham 28
  29. 29. Copyright © Institut Lean France 2011 Lean IT Support Goals Support Change Optimize Eliminate Information WasteInformation Needs for the Lean Organization – Jean Cunningham 29
  30. 30. Copyright © Institut Lean France 2011 Apply IT to Improvements Pilot Early Adapters Operational Value Add Manual Technical Integration Analysis & Support Poke Yoke• Fax • Track kanban • Scan kanban • Error• Paper cards for receive proofing • Create and order • Part usage• Email kanban cards • Entry to ERP • BOM quality • Handling • Supplier exceptions performance • PartManual entry Manual entry Integrated performance to ERP to ERP with ERPInformation Needs for the Lean Organization – Jean Cunningham 30
  31. 31. Copyright © Institut Lean France 2011 Questions & Answers “There is nothing so useless as doing efficiently that which should not be done at all.” – Peter DruckerInformation Needs for the Lean Organization – Jean Cunningham 31
  32. 32. Copyright © Institut Lean France 2011 Contact Jean Cunningham Email: jean.cunningham@leanjcc.com Phone: 224.688.3504 (U.S.A.)Information Needs for the Lean Organization – Jean Cunningham 32
  33. 33. Copyright © Institut Lean France 2011 JCC Products and Services• Lean Back Office Workshops• Business Process Kaizens• Lean Accounting• Lean Human Resources• Lean IT and IS Migration• Strategic Deployment Planning• Lean Metrics• Lean Financial StatementsInformation Needs for the Lean Organization – Jean Cunningham 33
  34. 34. Copyright © Institut Lean France 2011www.lean-it-summit.com

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