The Lean CFO

2. Lean Management Accounting System Users Measure & Manage Decision Making • Management • Based on business fundamentals • Operating Performance & Control • Path to improved profits • General framework • Improve Profitability © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com

3. Building the Lean Management System Design • The Economics of Lean • $how me the Flow Build • Measure Performance not Profits • Manage Spending Not Costs • Value of Measuring Capacity Move • Decisions, Decisions, Decisions Tear Down • Standard Costing: Simplify Today, Eliminate Tomorrow • Tame the ERP Beast © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com

5. Design Economics of Lean Supply of Resources Demand Deliver Exact Customer Value Productivity: 1. Maintain rate regardless of demand 2. Annual improvements Increasing Rate of Growth of Revenue Slower Rate of Growth of Spending © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com

7. Design What is Flow? Redesign Processes • Using Lean Practices Deliver Value • Eliminate waste Improve Productivity © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com • Manage variability

12. The Lean CFO: Integrity of the Measurement System Performance measurements Problem Solving & Improvement Lean Performance System Daily & Weekly Meetings © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com Visual Controls Build

16. Build Lean: Identify & Solve Problems Reduce Costs & Increase Profits Develop New Standard Work Change Operating Behavior ACT CHECK Generate Solutions © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com Assess Current Situation Using Actual Spending PLAN DO Identify Root Causes of Spending

20. Build 1. Actual costs for revenue generating Value Streams Value Stream Profit and Loss Statement: Unlock Financial Potential V AL U E S T R E AM S N ew P ro d u c t 3. Non revenue generating NPD Value Stream S a le s S u p p o rt T O T AL D e s ig n C o s ts D IV IS IO N M o to rs S ys te m s S p a re P a rts $ 3 2 6 ,2 4 0 $0 $ 7 4 8 ,8 9 4 $0 $ 4 5 3 ,2 1 5 $ 1 2 ,4 2 2 C o s ts C o s ts C o s ts C o s ts C o s ts $ 1 1 1 ,4 3 1 $ 5 7 ,6 2 8 $ 3 2 ,4 3 3 $ 1 6 ,0 4 0 $ 4 ,8 4 3 $ 2 3 2 ,7 7 4 $ 7 0 ,4 0 6 $ 2 2 ,9 9 1 $ 5 7 ,8 1 6 $ 1 2 ,5 4 4 $ 1 4 9 ,5 6 1 $ 8 1 ,5 7 9 $ 2 2 ,6 6 1 $ 2 9 ,4 5 9 $ 6 ,5 8 8 $ 8 7 ,9 0 9 $ 2 0 3 ,7 6 9 V a lu e S tre a m P ro fit ROS $ 1 0 3 ,8 6 5 3 1 .8 % $ 3 5 2 ,3 6 3 4 7 .1 % $ 1 7 5 ,7 8 9 3 8 .8 % ($ 3 6 4 ,3 9 9 ) -2 3 .7 % Ad d itio n a l R e v e n u e M a te ria l C o n v e rs io n O u ts id e P ro c e s s O th e r T o o lin g 2. Operating profit of the value streams 5. Financial adjustments for financial reporting $ 1 ,5 2 8 ,3 4 9 $ 1 2 ,4 2 2 $ 7 2 ,7 2 1 $ 1 2 ,7 6 4 $ 5 9 4 ,4 3 9 4. All costs $ 3 7 ,6 4 5 $451 not controlled ,0 2 7 by $ 7Value Stream 5 ,6 1 6 ,5 3 1 $ 8 teams $ 1 7 6 ,0 3 6 $ 2 3 ,9 7 5 ($ 5 7 ,9 4 0 ) -3 .8 % O p e n in g In v e n to ry C lo s in g In v e n to ry In v e n to ry C h a n g e C o rp o ra te O v e rh e a d $ 2 0 9 ,6 7 8 1 3 .7 % $ 9 2 5 ,3 1 4 $ 9 1 8 ,8 0 7 ($ 6 ,5 0 7 ) $ 5 1 ,1 4 7 D ivis io n P ro fit D ivis io n R O S © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com $ 1 5 2 ,0 2 4 9 .9 %

22. Build Capacity measures Time Based on the Process Design Productive Activities •Activities that create value © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com Nonproductive Activities •All other activities

24. Lean CFO: Integrity of Capacity Numbers CURRENT STATE FINANCIAL Employee Machines CAPACITY OPERATIONAL Sales per Person On-Time Shipment First Time Through Dock-to-Dock Days Average Cost Accounts Receivable Days FUTURE STATE $7,472 92% 71% 33.0 $419.46 54.0 $7,472 94% 78% 18.5 $413.97 50.0 Productive Capacity 51% 30% 19% Available Capacity 19% 37% Productive Capacity 53% 53% Non-Productive Capacity 32% 17% Available Capacity 15% 29% Measures reflect improvements as waste is eliminated 43% Non-Productive Capacity Build Revenue Material Costs Conversion Costs Total Costs Value Stream Profit Return on Sales Inventory Value Cash Flow $332,569 $111,431 $116,753 $228,184 $104,385 31% $209,336 $123,117 © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com $332,569 $108,446 $116,753 $225,199 $107,370 32% $113,026 $288,926 Elimination of waste changes non-productive capacity into available capacity The cost of capacity remains the same

26. Move The Issue Standard Costing rooted in Decision Making Processes of Companies Standard Costing Data Conflicts with Economics of Lean • Reducing labor vs. deliver value • Absorption of overhead vs. improve productivity • Utilization vs. Flow © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com

27. Move Lean CFO: Financial Benefits of Lean using Box Score Sell more Created or Available Capacity Re-deploy resources Eliminate resources © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com Financial Impact of Lean

28. Box Score: Standard Work for Decision Making Move CURRENT STATE SALES $ 7 ,4 7 2 $ 7 ,4 7 2 $ 9 ,9 0 4 O n -T im e S h ip m e n t 92% 94% 94% F irs t T im e T h ro u g h 71% 78% 78% D o c k -to -D o c k D a ys 3 3 .0 1 8 .5 8 .5 $ 4 1 9 .4 6 $ 4 1 3 .9 7 $ 3 6 4 .4 3 A c c o u n ts R e c e iv a b le D a ys 5 4 .0 5 0 .0 5 4 .0 P ro d u c tiv e C a p a c ity 51% 43% 60% N o n -P ro d u c tiv e C a p a c ity 30% 19% 24% A v a ila b le C a p a c ity 19% 37% 16% P ro d u c tiv e C a p a c ity 53% 53% 69% N o n -P ro d u c tiv e C a p a c ity 32% 17% 20% A v a ila b le C a p a c ity 15% 29% 12% R evenue $ 3 3 2 ,5 6 9 $ 3 3 2 ,5 6 9 $ 4 2 7 ,9 3 8 M a te ria l C o s ts $ 1 1 1 ,4 3 1 $ 1 0 8 ,4 4 6 $ 1 3 9 ,5 4 5 C o n v e rs io n C o s ts $ 1 1 6 ,7 5 3 $ 1 1 6 ,7 5 3 $ 1 1 5 ,5 5 7 T o ta l C o s ts $ 2 2 8 ,1 8 4 $ 2 2 5 ,1 9 9 $ 2 5 5 ,1 0 2 V a lu e S tre a m P ro fit $ 1 0 4 ,3 8 5 $ 1 0 7 ,3 7 0 $ 1 7 2 ,8 3 6 R e tu rn o n S a le s 31% 32% 40% In v e n to ry V a lu e $ 2 0 9 ,3 3 6 $ 1 1 3 ,0 2 6 $ 6 2 ,0 8 6 C a s h F lo w $ 1 2 3 ,1 1 7 $ 2 8 8 ,9 2 6 $ 1 5 6 ,9 2 1 S a le s p e r P e rs o n O P E R A T IO N A L E m p lo y e e A v e ra g e C o s t M a c h in e s F IN A N C IA L IN C R E A S E STATE C A P A C IT Y FUTURE © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com

29. Move Decision Making with a Box Score MEASURE IMPACT OF FUTURE STATE VALUE STREAM PROFITABILITY OF DECISIONS IMPACT OF IMPROVEMENT PROJECTS CAPITAL EQUIPMENT AND HIRING PEOPLE INSOURCE vs. OUTSOURCE BOX SCORE FOR SALES, OPERATIONS AND FINANCIAL PLANNING © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com

31. Tear Down Traditional Uses of Standard Costing (Replaced by Box Score) Inventory Valuation (Replaced by Box Score) Profitability Analysis Operating Performance © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com

32. Tear Down Lean CFO: Simplify Today Material Cost Labor Overhead • Simplify bills of material • Last price paid • One rate • Fewer router steps • One rate • Minimal cost allocations © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com

33. Tear Down Lean CFO: Eliminate Tomorrow Less Inventory Material • Materiality number: 30 days • Actual cost • Probably keep in ERP • Turn off rates in ERP Capitalizing labor & overhead • Do Manual journal entry © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com

35. Tear Down Transaction Intensive Processes 4.Cost Accounting 1.Production Work Orders 3.Inventory Tracking 2.Purchase Orders & Accounts Payable © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com

38. Tear Down Lean CFO: Simplify ERP Create transaction elimination plan with operations Include all stakeholders Transaction elimination maturity path Eliminate transactions & adjust ERP © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com Measure maturity of lean controls

40. Current State: Traditional Management Accounting Reported Profits •Highly influenced by Inventory Accounting •Standard Costing Needed Inventory Accounting Traditional Manufacturing © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com •Highly Subjective – many factors •Achieve Plan •Utilization, Efficiency, Absorption

41. Future State: Lean Management System Reported Profits • Highly influenced by Flow • Inventory Accounting immaterial Inventory Accounting Lean Operations © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com • Deliver Value • Flow • Improve Productivity

42. Implementing the Lean Management System Early Lean Lean Established Mature Lean • Pilot Box Score • Eliminate traditional measurements • Begin simplifying Standard Costing & ERP • Box Score Decision Making throughout company • Continue Simplifying Systems • Link Box Scores to External Reporting • Eliminate Standard Costing • Office Box Scores © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com

43. The Lean CFO: Architect of the Lean Management System Design • The Economics of Lean • $how me the Flow Build • Measure Performance not Profits • Manage Spending Not Costs • Value of Measuring Capacity Move • Decisions, Decisions, Decisions Tear Down • Standard Costing: Simplify Today, Eliminate Tomorrow • Tame the ERP Beast © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com

44. Get The New Book! • Pick up a copy at BMA’s Sponsor Table here at Summit • • From BMA’s web site: https://www.maskell.com/secure/shop.htm • From Amazon: www.amazon.com ISBN: 9781466599406 • From the Publisher: CRC / Productivity Press © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com

45. Learn More Visit BMA website www.maskell.com BMA Webinars • • Recorded webinars available for purchase on web site Live webinars can be scheduled Contact BMA or Nick information@maskell.com or nkatko@maskell.com To receive free Lean Accounting resources by download Visit www.maskell.com and click the “Download Free Resources” button To read articles, case studies & Visit www.maskell.com and choose the blogs about Lean Accounting Lean Accounting Tab Join the Lean Accounting SuperGroup (free) Visit www.leanaccounting.ning.com Blogs, forums, videos, and more Join the BMA Lean Accounting Group on LinkedIn (free) Visit www.linkedin.com and either join or sign in. Go to the Groups tab, search on “BMA Lean Accounting” and join in. Blogs, networking, and more © BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com

The Lean CFO

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