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Connecting Continuous
Improvement to the
Bottom Line
Hosted by
Host: Mark Graban
Senior Advisor, KaiNexus
Mark@KaiNexus.com
Presenter: Nick Katko
President, BMA
nkatko@maskell.com
About Nick Katko
• President and owner of BMA
• Early pioneer of Lean Accounting
• Former CFO, Bullard
• Author of books including:
• The Lean CFO – 2nd edition (Feb 2023)
• Practicing Lean Accounting
How lean works financially
The Box Score
Lean cost management
Using Box Scores to measure continuous improvement
Conventional financial analyses and continuous improvement
Wrap up & questions
Learning Objectives & Agenda
Numbers Drive Thinking Habits and Decisions
Numbers
drive
thinking
Thinking
drives
behavior
Behavior
drives
decisions
Decisions
drive the
numbers
The Economics of Lean
Economics of Lean
Continuous
Improvement
Creates
Capacity
Use capacity
to deliver
value
Use capacity
to achieve
cost
reduction
Sustainable
financial
success
Cause – Effect: Improved Financial Performance
Improved
operating
performance
Improved
capacity
usage
Improved
financial
performance
Increases sales without increasing fixed costs
Reduces fixed costs as a % of sales
Reduces variable costs, improves contribution margin
Increases capacity without increasing costs
Improves performance and increases capacity
Improves cash flow
How Lean Thinking Can Drive
Financial Performance
Box Score: A tool to drive new thinking habits
Performance measures to see
improvement
Improvement in value stream
profitability using VSP&L
Capacity to measure waste elimination
Lean Performance Measurements
• Improve on-time delivery
Delivery
• Improve quality
Quality
• Reduce lead or processing time
Lead time
• Increase output with same resources
Productivity
• Reduce costs over time
Cost
• Prevention of incidents
Safety
• Respect for people
Morale
www.maskell.com
Measuring Capacity
Total available
time
• Total time of
resources
Productive
Capacity
• Value add
activity time
Nonproductive
Capacity
• Time spent on
non-value
added activities
(necessary and
waste)
Available
Capacity
• Time created
through
improvements
Value Stream Income Statement
Motors Systems Spare Parts
New
Product
Design
Support
Costs
TOTAL
DIVISION
Sales $326,240 $748,894 $453,215 $1,528,349
Additional Revenue $0 $0 $12,422 $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
ROS 31.8% 47.1% 38.8% -23.7% -3.8% 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
1. Identify value streams
and revenue
4. Actual operating profit by
value stream
5. Segregate allocations
3. Separate all functional
costs from value streams
2. Identify actual direct
and shared costs
Box Scores Drive New Thinking Habits
Operating
Performance
Capacity
Usage
Financial
Performance
Lean Cost Management
Defining Costs
• Varies directly with short-term
volume changes
Variable Cost
• Does not vary with short-term volume
changes
• Influenced by management decisions
Fixed Costs
• More costs are considered fixed in
lean organizations
Lean Thinking
• actions taken to lower current spending or
investment levels
• tangibly reflected on financial statements in
the short-term
Actual cost
savings
• actions taken to avoid having to incur costs
in the future
• cost measurements improve over time
Cost
avoidance
How Lean Achieves Cost Reduction
Measuring Cost Reduction
• contribution margin improvement
• sales less direct variable costs
Variable cost
reduction
• actual costs as a % of sales
• gross margin
• expense type (e.g. labor cost)
Fixed cost
reduction
• Any cost allocation method (product cost, cost
per patient, etc.)
• numbers that have been “GAAP adjusted” for
financial reporting
Avoid using
Labor Cost Drivers
• OT, temps, contract labor
• Temporary capacity needs is the
driver
Variable
• Full-time employees
• Permanent capacity needs is the
driver
Fixed
• Labor cost = cost of capacity
• Capacity requirements =
demand + process waste
Lean Financial
Thinking
Labor Cost Reduction
Actual Savings
• reduce overtime, temps,
contract labor
• not replace
• promote internally &
backfill
• fill internally
• insource outsourced
operations
Cost Avoidance
• direct redeployment
• cross training
• assign to improvement
activities
• other temporary
assignments
Box Scores & Continuous
Improvement
Measuring the Impact of Continuous Improvement
Productive Capacity 51% 43%
Non-Productive Capacity 30% 19%
Available Capacity 19% 37%
Productive Capacity 53% 53%
Non-Productive Capacity 32% 17%
Available Capacity 15% 29%
CAPACITY
Employee
Machines
Sales per Person $7,472 $7,472
On-Time Shipment 92% 94%
First Time Through 71% 78%
Dock-to-Dock Days 33.0 18.5
Average Cost $419.46 $413.97
Accounts Receivable Days 54.0 50.0
OPERATIONAL
CURRENT
STATE
FUTURE
STATE
Revenue $332,569 $332,569
Material Costs $111,431 $108,446
Conversion Costs $116,753 $116,753
Total Costs $228,184 $225,199
Value Stream Profit $104,385 $107,370
Return on Sales 31% 32%
Inventory Value $209,336 $113,026
Cash Flow $123,117 $288,926
FINANCIAL
Improvements in
delivery, quality and
flow
Improvements created
capacity
Actual cost impact:
decrease in material
due to
improvements
Financial Benefit: Increase Sales
Without Increasing Costs
Sales per Person $7,472 $7,472
On-Time Shipment 92% 94%
First Time Through 71% 78%
Dock-to-Dock Days 33.0 18.5
Average Cost $419.46 $413.97
Accounts Receivable Days 54.0 50.0
Productive Capacity 51% 43%
Non-Productive Capacity 30% 19%
Available Capacity 19% 37%
Productive Capacity 53% 53%
Non-Productive Capacity 32% 17%
Available Capacity 15% 29%
Revenue $332,569 $332,569
Material Costs $111,431 $108,446
Conversion Costs $116,753 $116,753
Total Costs $228,184 $225,199
Value Stream Profit $104,385 $107,370
Return on Sales 31% 32%
Inventory Value $209,336 $113,026
Cash Flow $123,117 $288,926
OPERATIONAL
CURRENT
STATE
FUTURE
STATE
FINANCIAL
CAPACITY
Employee
Machines
$9,904
94%
78%
8.5
$364.43
54.0
60%
24%
16%
69%
20%
12%
$427,938
$139,545
$115,557
$255,102
$172,836
40%
$62,086
$156,921
INCREASE
SALES
Improvement
• Surgical instrument
flow from operating
rooms to instrument
process and back is
reduced from 10.6
hours to 3.6 hours
Improvement Event Financial Benefit
Performance Measurements
Productivity +
On-timedelivery
Quality
Cost
Days inventory
Lead/Flow/Process time +
Safety
Morale
Capacity
Productive +
Nonproductive -
Available + -
Value Stream Income Statement
Revenue +
VariableCosts +
Contribution Margin +
Valuestream direct costs
Labor
Machine
Other -
Total direct costs
ValueStream Profit +
Improvement
• Reducing changeover
time from 4 hours to 15
minutes
Improvement Event Financial Benefit
Performance Measurements
Productivity +
On-timedelivery +
Quality
Cost
Days inventory +
Lead/Flow/Process time +
Safety
Morale
Capacity
Productive +
Nonproductive -
Available + -
Value Stream Income Statement
Revenue +
VariableCosts +
Contribution Margin +
Valuestream direct costs
Labor
Machine
Other
Total direct costs
ValueStream Profit +
Improvement
• Installing error proofing
machine that reduces
defect rate from 2.7%
to zero
Improvement Event Financial Benefit
Performance Measurements
Productivity +
On-timedelivery +
Quality +
Cost +
Days inventory +
Lead/Flow/Process time +
Safety
Morale
Capacity
Productive
Nonproductive -
Available +
Value Stream Income Statement
Revenue
VariableCosts -
Contribution Margin +
Valuestream direct costs
Labor
Machine
Other
Total direct costs
ValueStream Profit +
Improvement
• Getting wireless
headsets for customer
service phone agents –
better ergonomics and
staff satisfaction.
Shorter hold times for
customers
Improvement Event Financial Benefit
Performance Measurements
Productivity +
On-timedelivery
Quality
Cost
Days inventory
Lead/Flow/Process time
Safety +
Morale +
Capacity
Productive
Nonproductive
Available
Value Stream Income Statement
Revenue
VariableCosts
Contribution Margin
Valuestream direct costs
Labor
Machine
Other
Total direct costs
ValueStream Profit
Wrap Up
Conventional Financial Analyses &
Continuous Improvement
• All assume a cash outflow
• Most C.I. creates time/capacity
ROI, NPV, IRR, Payback
• All subjectively allocate fixed costs
• Avoid using!
Cost allocations
“Cost per___”
• this is short-term financial thinking
• use economics of lean
Lower costs on P&L
• will not be realized on P&L
• seeing “$” drives poor thinking
Monetize time savings
Practical Advice
• Need to experience C.I.
• C.I. will lead to financial improvement
Accounting &
Executives
• Integrate into all analysis & decision-making
to drive thinking
Economics of
Lean/Box Scores
• Short-term impact must be ACTUAL
• Long-term financial benefit of C.I.
Short vs Long Term
Numbers:
“The Box
Score”
Thinking:
Lean
relationships
Behavior:
PDCA
Decisions:
Improve
economic
value
Box Scores Drive Thinking & Improvement
Lean Accounting Books
Available on amazon.com Available February 6, 2023
Learn more
• Nick Katko
• nkatko@maskell.com
• Free 30-minute chat about this webinar
• BMA website: www.maskell.com
• join our mailing list
• monthly webinars
• blogs
• online courses & certification
• BMA YouTube channel: https://www.youtube.com/c/BMATheLeanAccountingLeaders
• over 30 webinar recordings
• testimonials
Register or get notified of future webinars: www.KaiNexus.com/webinars
NEXT WEBINAR:
Habits & Continuous Improvement
February 23, 2023 — 1 pm ET
Greg Jacobson, MD & Morgan Wright
blog.kainexus.com
The KaiNexus Podcast
• www.KaiNexus.com/podcasts
• Subscribe via:
– Apple Podcasts
– Google Podcasts
– Overcast
– Stitcher
– Other apps & services
Q&A
• Web:
– www.kainexus.com
– blog.kainexus.com
– www.maskell.com
• Webinars on Demand:
– www.kainexus.com/webinars
• Social Media:
– www.linkedin.com/company/kainexus
– www.facebook.com/kainexus Host: Mark Graban
Senior Advisor, KaiNexus
Mark@KaiNexus.com
Presenter: Nick Katko
President, BMA
nkatko@maskell.com

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Connecting Continuous Improvement to the Bottom Line

  • 1. Connecting Continuous Improvement to the Bottom Line Hosted by Host: Mark Graban Senior Advisor, KaiNexus Mark@KaiNexus.com Presenter: Nick Katko President, BMA nkatko@maskell.com
  • 2. About Nick Katko • President and owner of BMA • Early pioneer of Lean Accounting • Former CFO, Bullard • Author of books including: • The Lean CFO – 2nd edition (Feb 2023) • Practicing Lean Accounting
  • 3. How lean works financially The Box Score Lean cost management Using Box Scores to measure continuous improvement Conventional financial analyses and continuous improvement Wrap up & questions Learning Objectives & Agenda
  • 4. Numbers Drive Thinking Habits and Decisions Numbers drive thinking Thinking drives behavior Behavior drives decisions Decisions drive the numbers
  • 6. Economics of Lean Continuous Improvement Creates Capacity Use capacity to deliver value Use capacity to achieve cost reduction Sustainable financial success
  • 7. Cause – Effect: Improved Financial Performance Improved operating performance Improved capacity usage Improved financial performance
  • 8. Increases sales without increasing fixed costs Reduces fixed costs as a % of sales Reduces variable costs, improves contribution margin Increases capacity without increasing costs Improves performance and increases capacity Improves cash flow How Lean Thinking Can Drive Financial Performance
  • 9. Box Score: A tool to drive new thinking habits Performance measures to see improvement Improvement in value stream profitability using VSP&L Capacity to measure waste elimination
  • 10. Lean Performance Measurements • Improve on-time delivery Delivery • Improve quality Quality • Reduce lead or processing time Lead time • Increase output with same resources Productivity • Reduce costs over time Cost • Prevention of incidents Safety • Respect for people Morale www.maskell.com
  • 11. Measuring Capacity Total available time • Total time of resources Productive Capacity • Value add activity time Nonproductive Capacity • Time spent on non-value added activities (necessary and waste) Available Capacity • Time created through improvements
  • 12. Value Stream Income Statement Motors Systems Spare Parts New Product Design Support Costs TOTAL DIVISION Sales $326,240 $748,894 $453,215 $1,528,349 Additional Revenue $0 $0 $12,422 $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 ROS 31.8% 47.1% 38.8% -23.7% -3.8% 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 1. Identify value streams and revenue 4. Actual operating profit by value stream 5. Segregate allocations 3. Separate all functional costs from value streams 2. Identify actual direct and shared costs
  • 13. Box Scores Drive New Thinking Habits Operating Performance Capacity Usage Financial Performance
  • 15. Defining Costs • Varies directly with short-term volume changes Variable Cost • Does not vary with short-term volume changes • Influenced by management decisions Fixed Costs • More costs are considered fixed in lean organizations Lean Thinking
  • 16. • actions taken to lower current spending or investment levels • tangibly reflected on financial statements in the short-term Actual cost savings • actions taken to avoid having to incur costs in the future • cost measurements improve over time Cost avoidance How Lean Achieves Cost Reduction
  • 17. Measuring Cost Reduction • contribution margin improvement • sales less direct variable costs Variable cost reduction • actual costs as a % of sales • gross margin • expense type (e.g. labor cost) Fixed cost reduction • Any cost allocation method (product cost, cost per patient, etc.) • numbers that have been “GAAP adjusted” for financial reporting Avoid using
  • 18. Labor Cost Drivers • OT, temps, contract labor • Temporary capacity needs is the driver Variable • Full-time employees • Permanent capacity needs is the driver Fixed • Labor cost = cost of capacity • Capacity requirements = demand + process waste Lean Financial Thinking
  • 19. Labor Cost Reduction Actual Savings • reduce overtime, temps, contract labor • not replace • promote internally & backfill • fill internally • insource outsourced operations Cost Avoidance • direct redeployment • cross training • assign to improvement activities • other temporary assignments
  • 20. Box Scores & Continuous Improvement
  • 21. Measuring the Impact of Continuous Improvement Productive Capacity 51% 43% Non-Productive Capacity 30% 19% Available Capacity 19% 37% Productive Capacity 53% 53% Non-Productive Capacity 32% 17% Available Capacity 15% 29% CAPACITY Employee Machines Sales per Person $7,472 $7,472 On-Time Shipment 92% 94% First Time Through 71% 78% Dock-to-Dock Days 33.0 18.5 Average Cost $419.46 $413.97 Accounts Receivable Days 54.0 50.0 OPERATIONAL CURRENT STATE FUTURE STATE Revenue $332,569 $332,569 Material Costs $111,431 $108,446 Conversion Costs $116,753 $116,753 Total Costs $228,184 $225,199 Value Stream Profit $104,385 $107,370 Return on Sales 31% 32% Inventory Value $209,336 $113,026 Cash Flow $123,117 $288,926 FINANCIAL Improvements in delivery, quality and flow Improvements created capacity Actual cost impact: decrease in material due to improvements
  • 22. Financial Benefit: Increase Sales Without Increasing Costs Sales per Person $7,472 $7,472 On-Time Shipment 92% 94% First Time Through 71% 78% Dock-to-Dock Days 33.0 18.5 Average Cost $419.46 $413.97 Accounts Receivable Days 54.0 50.0 Productive Capacity 51% 43% Non-Productive Capacity 30% 19% Available Capacity 19% 37% Productive Capacity 53% 53% Non-Productive Capacity 32% 17% Available Capacity 15% 29% Revenue $332,569 $332,569 Material Costs $111,431 $108,446 Conversion Costs $116,753 $116,753 Total Costs $228,184 $225,199 Value Stream Profit $104,385 $107,370 Return on Sales 31% 32% Inventory Value $209,336 $113,026 Cash Flow $123,117 $288,926 OPERATIONAL CURRENT STATE FUTURE STATE FINANCIAL CAPACITY Employee Machines $9,904 94% 78% 8.5 $364.43 54.0 60% 24% 16% 69% 20% 12% $427,938 $139,545 $115,557 $255,102 $172,836 40% $62,086 $156,921 INCREASE SALES
  • 23. Improvement • Surgical instrument flow from operating rooms to instrument process and back is reduced from 10.6 hours to 3.6 hours Improvement Event Financial Benefit Performance Measurements Productivity + On-timedelivery Quality Cost Days inventory Lead/Flow/Process time + Safety Morale Capacity Productive + Nonproductive - Available + - Value Stream Income Statement Revenue + VariableCosts + Contribution Margin + Valuestream direct costs Labor Machine Other - Total direct costs ValueStream Profit +
  • 24. Improvement • Reducing changeover time from 4 hours to 15 minutes Improvement Event Financial Benefit Performance Measurements Productivity + On-timedelivery + Quality Cost Days inventory + Lead/Flow/Process time + Safety Morale Capacity Productive + Nonproductive - Available + - Value Stream Income Statement Revenue + VariableCosts + Contribution Margin + Valuestream direct costs Labor Machine Other Total direct costs ValueStream Profit +
  • 25. Improvement • Installing error proofing machine that reduces defect rate from 2.7% to zero Improvement Event Financial Benefit Performance Measurements Productivity + On-timedelivery + Quality + Cost + Days inventory + Lead/Flow/Process time + Safety Morale Capacity Productive Nonproductive - Available + Value Stream Income Statement Revenue VariableCosts - Contribution Margin + Valuestream direct costs Labor Machine Other Total direct costs ValueStream Profit +
  • 26. Improvement • Getting wireless headsets for customer service phone agents – better ergonomics and staff satisfaction. Shorter hold times for customers Improvement Event Financial Benefit Performance Measurements Productivity + On-timedelivery Quality Cost Days inventory Lead/Flow/Process time Safety + Morale + Capacity Productive Nonproductive Available Value Stream Income Statement Revenue VariableCosts Contribution Margin Valuestream direct costs Labor Machine Other Total direct costs ValueStream Profit
  • 28. Conventional Financial Analyses & Continuous Improvement • All assume a cash outflow • Most C.I. creates time/capacity ROI, NPV, IRR, Payback • All subjectively allocate fixed costs • Avoid using! Cost allocations “Cost per___” • this is short-term financial thinking • use economics of lean Lower costs on P&L • will not be realized on P&L • seeing “$” drives poor thinking Monetize time savings
  • 29. Practical Advice • Need to experience C.I. • C.I. will lead to financial improvement Accounting & Executives • Integrate into all analysis & decision-making to drive thinking Economics of Lean/Box Scores • Short-term impact must be ACTUAL • Long-term financial benefit of C.I. Short vs Long Term
  • 31. Lean Accounting Books Available on amazon.com Available February 6, 2023
  • 32. Learn more • Nick Katko • nkatko@maskell.com • Free 30-minute chat about this webinar • BMA website: www.maskell.com • join our mailing list • monthly webinars • blogs • online courses & certification • BMA YouTube channel: https://www.youtube.com/c/BMATheLeanAccountingLeaders • over 30 webinar recordings • testimonials
  • 33. Register or get notified of future webinars: www.KaiNexus.com/webinars NEXT WEBINAR: Habits & Continuous Improvement February 23, 2023 — 1 pm ET Greg Jacobson, MD & Morgan Wright
  • 35. The KaiNexus Podcast • www.KaiNexus.com/podcasts • Subscribe via: – Apple Podcasts – Google Podcasts – Overcast – Stitcher – Other apps & services
  • 36. Q&A • Web: – www.kainexus.com – blog.kainexus.com – www.maskell.com • Webinars on Demand: – www.kainexus.com/webinars • Social Media: – www.linkedin.com/company/kainexus – www.facebook.com/kainexus Host: Mark Graban Senior Advisor, KaiNexus Mark@KaiNexus.com Presenter: Nick Katko President, BMA nkatko@maskell.com