Volume 5- Issue 3
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Frequently Asked Questions:
Q: My company still uses absorption accounting methods to measure the performance of the factory. Each month we must meet a shipping dollar goal. This goal makes everyone focus on dollars and not on customer requirements. What can I do to persuade management that this absorption accounting method does not focus on the customer? What can we use to better measure factory performance?
A: We have found that the best way to persuade people about the problems of traditional cost accounting and measurements is to give them examples. We use simple yet powerful example to demonstrate how traditional cost accounting methods lead you astray when your goal is to become a Lean enterprise. For example, we have a case study of a company that piloted Lean manufacturing for one product family and created excellent operational improvement; inventory fell by 80%, on-time delivery went from 80% to 99%, and the lead time fell from 6 weeks to 2 days. But the standard cost of the product increased. In reality, of course, the cost did not really go up – this illustrates that the standard cost method is wrong and leads us astray.
To show how performance measurement should be used we create a "Performance Measurements Linkage Chart". We start with the company's strategies and develop measurements for the plant that directly drive to fulfill the strategy. From these we develop value stream performance measurements by linking the goals of our value stream operation to the achievement of the plant measurements. This leads us to developing measurements for the production cells and support operations that are linked to the value stream objectives. This way it soon becomes clear that traditional measurements like earned hours, labor efficiency, machine utilization, or financial metrics such as overhead absorption, are not only unsuitable for the achievement of our Lean goals, but actively hostile to Lean.
When it comes to the issue of customer value rather than the inward focus on cost, profits, and stock price, we find it useful to look at how Lean companies work in comparison to traditional companies. Sadly the current situation in the auto industry has ample examples of massive corporations like GM that try to use Lean methods without changing their underlying business philosophy. The company's focus on Wall Street and stock price is markedly different from the way successful Lean organizations like Toyota and The Wiremold Company work. Another example is given in Jeff Liker's book "The Toyota Way" where he contrasts the mission statements of Ford and Toyota. He shows that the two companies have very different objectives leading to very different results.
On a more positive note, we have found that it is easier to demonstrate how the use of such methods as QFD, voice of the customer, and target costing can be very successful in enhancing the company's products, revenues, and profits. This gets you away from a theoretical discussion of customer value or stockholder value and onto practical methods for applying the customer value approach.
Q: We have developed our value stream maps for our product families. We have set up cells dedicated to each family. We would like to develop P&L statements for each cell, but we have a problem of allocation of indirect costs. How do we allocate the indirect costs, i.e. floor space, support salaries, etc., to the cells to get the data we need to complete the analysis?
A: In Lean Accounting we do not usually create P&L's for each cell. The P&L is created for the value stream. If you try to create a P&L for each cell then you have the problem of how to allocate all the costs that are outside of the cell including material handling, production engineering, maintenance, quality and so forth. It is possible to work out some complicated formulas to allocate all these costs but the complexity of the information makes it meaningless and unhelpful to the people using it.
One of the primary objectives of Lean Accounting is to provide financial information that is understandable, relevant, and meaningful. This is achieved by direct costing of the value streams, not the product, not the production job, and not the cell. When you have the value stream team defined then it becomes easy to create a value stream P&L because all the people in the team are now direct costs and do not have to be allocated. When we put together value stream P&L's we try to capture all the costs of the value stream directly with little or no allocation. Value stream P&L's can be readily understood and used by the value stream managers and others. They can be produced quickly and simply because they do not require arcane accounting methods, and they provide the information required for measurement, decision-making, and management of the value streams.
From a more theoretical point of view, it is a mistake to focus our accounting on the cells. One of the primary principles of Lean thinking is that we focus on the value streams so that we address the full flow of the process (see "Lean Thinking" by Womack & Jones). If we focus on an individual cell, then we are missing the bigger picture. In most cases, P&L's at the value stream level are the way to go; rather than P&L's for individual cells.
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Creating Lean Value - From Shop Floor to Executive Suite (Part 1 of a 2-part article on Optimizing the Value Chain)
In today’s business climate, increasing value for the customer is imperative. In fact, market demands dictate that you maximize value by improving the efficiency and productivity of every step in your organization’s value stream, not just in your manufacturing operation.
Increasing value and responding to customer demands constantly force manufacturers to do more with less, and Lean Manufacturing has emerged as the most powerful means of achieving this. With implications for an organization’s entire operation, Lean is moving well beyond the idea of simply improving the effectiveness of manufacturing processes. In theory, Lean Manufacturing is an overarching philosophy of “eliminating waste at every point in the value stream”, meaning the entire scope of activities that begin with product development, move through the procurement and processing of raw materials, involve pricing and accounting, and conclude when a finished product is in the hands of an end user.
Today’s Lean organizations know it is not enough to concentrate only on the production floor if they are to keep up with – or exceed – the competition. Indeed, companies have begun applying Lean methods to virtually every aspect of their value chain - both upstream and downstream, inside and outside the organization. And this enterprise-wide implementation of Lean is having a dramatic impact on non-manufacturing processes and overall profitability.
Matching Supply & Demand – Efficiently
While most companies focus Lean implementation efforts on the production functions, equally important is the effective planning and managing of all activities related to sourcing, procurement and logistics. This means controlling inventory as it flows through the company, as well as to suppliers, intermediaries, third-party service providers and customers. It comes down to systematic coordination among these parties in order to achieve high levels of efficiency not only in the production of goods and services, but also in the functions that help an organization match supply with market demands.
With regard to Logistics, for example, the flow of materials inbound to the plant can significantly affect the ability of manufacturers to efficiently meet the needs of customers. The quality, quantity and timing of material deliveries are critical to the plant’s objective of satisfying demand at the lowest cost. Likewise, the outbound flow to customers must ensure that the value created by the plant is sustained as goods reach the market. All the great production achievements of Lean manufacturing can be washed away if products are not delivered in a timely, efficient and safe manner. Indeed, the efforts of many otherwise Lean production operations are defeated when these conditions do not hold. Better coordination is needed between manufacturing and logistics to ensure that waste and disruption are minimized and that customers receive maximum value.
The implementation of Lean Logistics begins at the same place as Lean Manufacturing – with a value stream map. One should apply the same procedures used in manufacturing in order to identify waste and separate value-added from non-value-added activities. The forms of waste found in manufacturing are often the same as in transportation and warehousing. Implementing Lean principles across both manufacturing and logistics will help to ensure that handoffs between the two functions on both the inbound and outbound sides of the business result in flows free of constraints and bottlenecks.
Lean Supply Chain Management (SCM) is a bigger challenge – and one not necessarily met simply by working more closely with customers and suppliers. Rather, it comes from the need to get one’s house “in order,” i.e., getting the various functions of the company to think and act like a single system working toward a common objective. This is a gargantuan task. Most companies still focus on functional costs rather than company-wide profitability. At the end of the day, we are not very good at measuring contribution to some greater good, and prefer instead to measure and manage the business in small segments (i.e., functions). What needs to happen is a radical change in the ways we measure performance and allocate resources so that we provide the right motives and incite the right behavior. To the extent that improved coordination can occur and thrive among the physical flow functions of procurement, logistics and manufacturing, the company will be better able to integrate other functions such as accounting, finance, sales and marketing, R&D, HR, health/benefits/safety and so forth.
The Lean supply chain is the epitome of SCM. Unfortunately, Lean SCM does not happen overnight. It involves devising new and different measurement and rewards systems that foster a culture of shared business priorities. We have to realize that this “soft stuff” is the hard stuff to do. But the rewards for success are many. There are huge gains to be made. So while not easy to achieve, it is an imperative goal. For many companies, competitive advantage and their very survival depend on it.
Lean & Six Sigma in Product Development
Another area where the application of Lean can bring huge rewards is in Product Development. In terms of the entire value stream, the act of manufacturing generally takes place at the tail end of the overall process. Consequently, the benefit to be derived from Lean manufacturing can be further enhanced if we improve the process of product development. A consideration of product cost makes this clear. The majority of a product’s actual cost is locked in very early in the product development process, not in manufacturing. As illustrated in the graph below, during the concept phase approximately 50% of the actual product cost is committed at the point where a company has invested less than 5% of the total development cost. As the product moves into the design phase, nearly 70% of the product cost is locked in. Clearly, the product development process has significant influence on the product’s total cost.
While the largest percentage of product cost is established in the early stages of the product development process, this is also the time when the product design has the greatest degree of flexibility. Consequently, the product-development phase represents the best opportunity to make significant changes that influence downstream-related issues such as manufacturing and product serviceability.
In manufacturing, Lean employs the concepts of value streams, waste elimination, work concentration and flow to meet the goal of reduced cycle time. Conversely, Six Sigma uses variation reduction, rework and scrap elimination, and process control to improve product quality. However, in terms of product development, the activities are centered more on acquiring, transforming and integrating information. This information is the foundation for creating a product definition, represented as a drawing package, which is the key output of the product development process. Using Lean in product development entails creating processes to facilitate information flow and eliminating unnecessary tasks associated with creating information. Using Six Sigma in product development requires the use of data to control the variation of features that are dictated by the product definition and that result in high-quality products.
The powerful combination of Lean and Six Sigma has enabled companies to achieve dramatic results in product development:
- 70% reduction in development cycle time
- 40% reduction in product cost
- 5X reduction in quality defects
These numbers, which are typical, clearly demonstrate the breakthrough effect of combining Lean and Six Sigma. Developing an integrated strategy, based on a foundation of Lean and Six Sigma principles, can enable companies to achieve superior performance from product development, strengthen their market position, and potentially reach new levels of profitability.
Taking Lean into Account(ing)
Lean thinking also offers organizations an entirely new view of accounting procedures, with methods that make essential financial information available throughout a company. Traditional accounting is rooted in the assumptions of mass production; that's what it was designed for. This may be fine for a company wishing to be a mid-20th century mass producer, but it is a disaster for a company seeking to transition to Lean in order to better compete in a tougher, more global economy. Lean accounting is a very effective management system for supporting and greatly enhancing Lean operations. It applies Lean thinking to all aspects of a company's planning, accounting, control and measurement systems. As you shift to Lean manufacturing and Lean thinking, it will become clear that traditional accounting and other administrative methods are no longer appropriate.
- There are a number of dramatic administrative improvements that organizations can achieve by using appropriate accounting and performance measurement techniques in a Lean manufacturing program.
- Lean Accounting provides valid, meaningful and simple information leading to appropriate decision-making. It helps businesses increase sales and reduce costs by providing better information for decision-making. It helps you avoid making decisions like turning down good business, taking on bad business, out-sourcing products you should be in-sourcing, and poor capital project decisions, etc.
- Lean Accounting provides financial information that people can understand. We call this "Plain English" statements. Many company officials do not understand the financial reports they are looking at - yet they make important decisions based upon them. Plain English financial statements are easily understood by anyone in the company and can be readily used for cost control, accountability, routine decisions and longer-term strategic changes.
- Traditional accounting systems not only fail to give appropriate financial information, they usually show that bad things are happening when good Lean change is being accomplished. Lean accounting provides focused methods for assessing the financial impact of Lean improvement, and perhaps more importantly, enables you to set strategies to maximize the financial benefits of your Lean work.
- Traditional accounting systems are complex and wasteful. They require the tracking of thousands of transactions throughout the business processes, from shop floor production jobs to purchase orders. These systems are expensive, wasteful, and divert attention from the real tasks of serving customers, creating more value, eliminating waste and growing your business. Lean accounting provides financial information and performance measurements quickly and simply, with very little work and effort.
- In Lean Accounting you'll collect all your information by the value stream, not by individual product or production job, an approach that generates wasteful data and wrong thinking. The information is Lean-focused because it shows the financial impact on the value stream as a whole. This enables value stream managers (and others) to see the "bigger picture" and to manage the flow through the whole process.
- Lean Accounting provides timely information. This makes it possible for value stream managers to have tight control over value stream costs and profitability. A business should not have to wait until the end of the month to receive the financial information for controlling costs and understanding profitability of the value stream.
- Lean Accounting drives continuous improvement. The financial reporting and the value stream performance measurements are all designed to motivate continuous improvement. Unlike the traditional and confusing variance reporting, Lean accounting information and measurements provide the information required to initiate improvement and monitor the success of Lean improvement initiatives. Lean Accounting information helps to drive Lean forward.
- Lean Accounting does not rely on the traditional performance measurements like efficiency, earned hours, machine utilization and overhead absorption. These measurements actively work against Lean thinking because they lead to high inventories, large batches and late deliveries. Lean Accounting measurements are operational, visual, easy to understand and use. And they are timely. Some are measured by the hour, others by the shift or day, and others by the week. Such measurements provide excellent operational and financial control and are tied into the company's visual management system.
The value chain in every business is only as strong as its weakest link. The application of Lean methods to areas like logistics, product development and accounting can significantly reduce waste throughout an organization by interacting efficiently with ongoing Lean manufacturing methodologies. It is important to recognize that Lean implementation is not a series of isolated undertakings, but rather a strategic enterprise-wide initiative. Lean interconnects all aspects of a business to create a synergistic momentum that drives the organization to its highest levels of achievement. It is the fundamental key to long-term sustainable competitive advantage.
(In our next issue,we talk with Value Chain associates about the significant Lean benefits of Kanban programs and how to deal with Shared Resources when attempting to establish one-piece flow .)
Productivity Inc. wishes to thank contributors to this article…
Mr. Brian H. Maskell, President, BMA, Inc, and author of numerous books on Lean Accounting including Practical Lean Accounting
Mr. Clifford Fiore, Six Sigma Black Belt and Lean Expert, Honeywell International and author of Accelerated Product Development
Mr. Thomas Goldsby, Ph.D., Associate Professor of Supply Chain Management Gatton College of Business and Economics, University of Kentucky
For more information on the topics covered in this article, please call us at 800.966.5423, or e-mail lean@productivityinc.com
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Consulting
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Innovation:
(Using Lean principles to facilitate and nurture the inspiration necessary for producing the next BIG thing.)
In manufacturing it is impossible to overstate the importance of producing your product efficiently with as little waste as possible. It is the competitive advantage that powers the success of industry leaders. It is, however, not the entire story. If you are manufacturing a product that no one needs or wants, it doesn’t matter how efficiently and inexpensively you produce it. It doesn’t even matter that your product is of the highest quality; you will not succeed.
Manufacturing is not just about manufacturing, it is also about creating; facilitating a focused inspiration and developing that inspiration into a product or product improvement that serves a need or a desire of an end user (regardless whether or not that need or desire has been recognized by the end user). This creative process can be every bit as important to the success and survival of a company as the actual production process itself, yet how many manufacturers build the environment necessary to encourage, support and facilitate inspiration and innovation? Innovation can be more than just a competitive advantage it can manifest as market domination and even create markets where none existed. The power of innovation is as undeniable as it is intangible.
Most manufacturers are aware of how Lean strategies may be applied to the manufacturing and processing of tangible products but are unable to wrap their minds around how these same principals might be applied to the facilitating and harnessing of inspiration which manifests as new innovations.
Actually, in essence, the two are not so different. In both instances, the creation of the right environment is the key to success. In the manufacturing process Lean focuses on the elimination of waste throughout the enterprise; ANYTHING on the shop floor or in the front office that adds unnecessary expense and inefficiency to the process… thus removing drag and resistance to the optimal performance of the organization. In the creative process Lean focuses on maximizing available resources to facilitate inspiration and support the unfolding of this inspiration into innovative products and product improvements… removing drag and resistance which can waste the company’s intellectual and creative capital.
Lean has always utilized the power of employee efforts and ideas to refine the production process but now companies are turning this resource loose in new and creative ways to develop innovative products and product improvements and are benefiting exponentially. Moreover, companies have also found that they can tap not only their employees but also their customers, potential customers, enthusiasts, power users and everyone in between; stirring their passions and mining their creativity. The explosion of blogs is a demonstration of just how intensely people want to participate in the world around them; to have a voice and to make a difference. Previously unrecognized and under utilized, some companies have begun to use this resource in ways never before conceived of and are making it their competitive advantage.
So, where is your next product coming from? In our next issue we will continue this look at innovation and what some companies are doing to find inspired and innovative products in the most unlikely places.
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Featured Event |
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A Workshop Series on Leadership, Planning and Culture
Juy 18-21, 2006
St.Louis, Missouri
Organizations cannot survive on Lean production techniques alone…
As Toyota sits poised to take over the top spot as the worlds largest auto maker, manufacturers should be asking themselves…Why is there only one Toyota? Many U.S. Manufacturers have been working steadily to implement the principles of the Toyota Production System since the mid-eighties, yet few seem to enjoy the same long-term, sustainable results. What accounts for the difference between Toyota and every other manufacturer? The truth is that while we have spent years studying and attempting to copy the Toyota Production System (aka J-I-T, Lean production system) few really understand what has made Toyota so successful. It isn’t their production system, but their management system that has kept them so far ahead of the field. In other words, if implementing the Lean tools was all it took to achieve a world class Lean Enterprise, then all companies would be Lean. But organizations cannot survive on Lean production techniques alone, in order to succeed, an organization must have a Lean management system -- strong leadership, a well thought out plan of execution, a deployment process and the culture to sustain the gains. Absent any one of these, attempts to create a Lean Enterprise will fall short or fail completely. Join us in St. Louis, July 18-21 to gain the insights and tools you need to ensure you are developing the leadership and culture of continuous improvement that will ensure your implementation goals are met and your organization is positioned for long-term success. Click here to learn more about these workshops.
Workshops include:
Enter our Raffle
Enter to win a seat in our upcoming Leadership, Planning and Culture Workshop series being held in St. Louis, Missouri in July
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Upcoming Events |
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Lean
Tool Awareness Certification Program
June 12-16, 2006
Columbus, Ohio
Modules Include:
Co-developed by Productivity Inc. and
the Fisher College of Business at The Ohio State University,
The Lean Tool Awareness Certificate program is a one week,
fully accredited program that focuses on providing the knowledge
base needed to understand and take part in the Lean transformation
efforts in your organization. Earn 4 CEUs. Click here for additional details on the program.
A Maintenance Miracle
An Autonomous Maintenance Kaizen Event
August 22-25, 2006
Springdale, Arkansas
Host Plant: Rockline Industries
Properly implemented, AM eliminates the causes of 40%-60% of unplanned downtime, freeing up skilled trades for more specialized activities. During this 4 day kaizen event learn the steps necessary to involve operators in maintaining their own equipment through daily inspections, lubrications, parts replacement, simple repairs, detecting abnormalities and precision checks. The result is a restoration of equipment to its ideal state, establishment of basic conditions for maintaining it, and preventing equipment deterioration. Participants will learn how AM is developed to support Lean manufacturing and how it maximizes equipment effectiveness. At the host facility, in teams, participants get to apply the methods learned to the work environment. Click here for additional details on this program including a typical agenda.
Lean
Manager Certification Program
co-sponsored by the Fisher College
of Business at The Ohio State University
Columbus, Ohio
This highly interactive and fully accredited program teaches a carefully sequenced arrangement of Lean concepts and tools. Over four non-consecutive weeks, each participant will experience a series of learning modules focusing on the four key phases of Lean implementation: Plan, Pilot, Deploy and Integrate. In between the weeks of training, students need to apply the methods that they have learned in operations at their own companies and present their results to the class. Participants who successfully complete the four-week training and mentoring program, pass the certification exam and demonstrate successful implementation in their own facility are then certified by Productivity Inc. and the Fisher College of Business as Lean Managers. Earn 16 CEUs.
Fall Session Dates:
Week 1: Sept. 18-22
Week 2: Oct. 16-20
Week 3: Nov. 13-17
Week 4: Dec. 11-14
11th Annual Lean Management Conference
Driving the Enterprise in a Borderless Economy: Lean Six Sigma, TPM
October 30-November 3, 2006
Arlington, Virginia
Plan now to attend and save up to $300
We are currently working on the program for our upcoming 11th annual Lean Management Conference. This year’s event will offer a carefully sequenced array of case studies, workshops and keynote presentations providing participants with the greatest exposure to the fundamental techniques of Lean, Six Sigma, and TPM (Total Productive Maintenance) in a short amount of time. The event structure allows you to customize the conference around your special interests. (For more information on the specifics of the event, check our website at www.productivityinc.com details will be posted in the coming weeks. And, if you register and pay before July 1, 2006 you can take advantage of our Early-bird special and save up to $300!
Interested in Speaking? We would love to hear from you.
If you are a seasoned Lean, Six Sigma or TPM practitioner and are interested in sharing your implementation story with other manufacturing professionals at our 11th Annual Conference on Lean Management, please send your presentation ideas along with synopsis to speakers@productivityinc.com. For more information on topics and presentation structure, visit our website: www.productivityinc.com/conferences/speakers.shtml.
Submissions must be received by May 15th. Team presentations are welcome.
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About
Productivity |
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Productivity Inc. delivers today's leading
performance improvement tools and methodologies to enhance
rapid, ongoing, measurable results. Whether you need one day
of on-site consultation or facilitation of a total improvement
strategy, Productivity can accelerate your pursuit of Lean
Manufacturing and TPM in the US, Canada, Europe, Asia, Mexico...anywhere
in the world.
Call us today and allow us the opportunity to work with you
in your multi-cultural Lean environment.
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