Presented by Nick Katko
Lean is a long-term business strategy, primarily focusing on employees and learning. Through various continuous improvement practices, employees learn to master their work, solve the right problems and help an organization learn how to do things tomorrow it cannot do today.
The operational impact of continuous improvement is well known. Eliminating waste creates capacity, which can be used to serve customers better, improve productivity and improve employee satisfaction. But what about the financial impact? Oftentimes conventional financial analytical practices do not capture the true financial benefits of continuous improvement. This becomes a “problem to be solved.”
This webinar will explain how to make the true cause-effect relationships between continuous improvement and financial improvement visible throughout the organization. Integrating these relationships will improve the quality of business decision-making and leverage continuous improvement for financial success for the entire organization.
In this webinar, you will learn:
* the numbers to establish the true cause-effect relationships between continuous improvement and financial improvement.
* how to use the economics of lean to calculate the financial benefit of continuous improvement
* how continuous improvement achieves cost reduction over time
* why certain conventional financial analyses can show that continuous improvement is “not working” financially
About Nick Katko:
Nick is the President and owner of BMA. Since 2002, Nick has leveraged his Lean Accounting experience and philosophy in assisting BMA clients in developing, leading, and coaching them in their Lean Accounting transformations. Clients Nick has served a range of organizations worldwide, from family-owned businesses to multi-national companies in industries such as manufacturing, healthcare, software, engineering, and service.
Nick is an early pioneer of Lean Accounting. In the 1990s, as CFO of Bullard, Nick implemented a complete lean management accounting system in conjunction with Bullard’s Lean transformation, which included eliminating standard costing.
Nick is a regular speaker at the annual Lean Accounting Summit and has also presented at conferences in the United States, Europe, Asia, and Australia.
Nick has written extensively on lean accounting. He is the author of “The Lean CFO – 2nd edition” (2023), which is an updated version of the 2013 publication “The Lean CFO.” The Lean CFO has been translated and published in Turkish and Italian. Nick co-authored “Practicing Lean Accounting” (2021), which has also been published in Italian.
Memorandum Of Association Constitution of Company.ppt
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
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
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
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
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