The Lean CFO

The Lean CFO
Architect of the
Lean Management System
Presented by Nick Katko,
Senior Consultant, BMA Inc.

© BMA Inc. 2013 All Rights Reserved. Contact: nkatko@maskell.com

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


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


1. The Economics of Lean
Design


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


2. $how Me the Flow
Design


Design

What is Flow?
Redesign
Processes

• Using Lean
Practices

Deliver
Value

• Eliminate waste

Improve
Productivity


• Manage
variability

Design

Rate of Flow = Rate of Profits
Order
Fulfillment
Value Streams

From Suppliers
Flow

To Customers


In the Office

3. Measure Performance Not
Profits
Build


Build

CFO’s Role

Operating Performance


Financial Results

Lean Operating Behavior:
Drives the Economics of Lean

Quality
Productivity
Flow

Delivery
Lead Time
Cost per Unit

Build

The Lean CFO:
Integrity of the Measurement System
Performance
measurements

Problem
Solving &
Improvement

Lean
Performance
System

Daily &
Weekly
Meetings


Visual
Controls

Build

4. Manage Spending not Costs
Build


CFO’s Role:
Explain Financial Results


Build

Build

Economics of Lean


Build

Lean:
Identify & Solve Problems
Reduce Costs & Increase Profits
Develop New Standard
Work

Change Operating
Behavior

ACT

CHECK

Generate Solutions


Assess Current Situation Using
Actual Spending

PLAN

DO

Identify Root Causes of
Spending

Build

Materials: Actual Cost of Purchases


Labor: Actual Cost of People


Build

Actual Machine Costs: Function of
Productivity


Build

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

$ 1 5 2 ,0 2 4
9 .9 %

5. Value of Measuring Capacity
Build


Build

Capacity measures Time Based on
the Process Design

Productive
Activities
•Activities that
create value


Nonproductive
Activities
•All other
activities

Continuous Improvement:
Process Redesign


Build

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


$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

6.
Decisions, Decisions, Decisio
nsMove


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


Move

Lean CFO:
Financial Benefits of Lean using Box Score
Sell
more

Created or
Available
Capacity

Re-deploy
resources

Eliminate
resources


Financial Impact
of Lean

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


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


7. Standard Costing – Simplify
Today; Eliminate Tomorrow
Tear Down


Tear Down

Traditional Uses of Standard Costing

(Replaced by Box Score)

Inventory
Valuation

(Replaced by Box Score)

Profitability
Analysis

Operating
Performance


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


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

8. Tame the ERP Beast
Tear Down


Tear Down

Transaction Intensive Processes

4.Cost
Accounting

1.Production
Work Orders

3.Inventory
Tracking

2.Purchase
Orders &
Accounts
Payable


Tear Down

Financial Control Map – Current State


Tear Down

Financial Control Map – Future State


Tear Down

Lean CFO: Simplify ERP
Create
transaction
elimination
plan with
operations

Include all
stakeholders

Transaction
elimination
maturity
path

Eliminate
transactions
& adjust ERP


Measure
maturity of
lean controls

Wrap Up:
Create the Lean Management
System


Current State:
Traditional Management Accounting
Reported
Profits

•Highly influenced by Inventory
Accounting
•Standard Costing Needed

Inventory
Accounting

Traditional
Manufacturing


•Highly Subjective – many factors

•Achieve Plan
•Utilization, Efficiency, Absorption

Future State:
Lean Management System
Reported
Profits

• Highly influenced by
Flow
• Inventory
Accounting
immaterial

Inventory
Accounting

Lean
Operations


• Deliver Value
• Flow
• Improve
Productivity

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


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


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•
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ISBN: 9781466599406

• From the Publisher: CRC / Productivity
Press


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The Lean CFO

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