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Student Publications
Author: Phillip Lane
Title:
Business And Economics/ Business Statistics
Area:
Country :
Profile:
Program:
Available for Download:
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1. Introduction:
When you look at the economy we see many trends, the most
significant is the
customers wanting high quality products "cheaper, quicker, with
better service"
driving companies like Apple, UPS, plus the top three automotive
company to re-
look at how they do business today. Just take surf on the Internet
Google "Lean
versus Traditional Business Practice" and read hundreds of
testimonials, plus white
papers on their lean journey high points and low point. Toyota has
turn the
automotive business and manufacturing world towards a continuous
improvement
trend not only in the manufacturing environment, plus how they focus
on business
trends and forecasting business trends over time
In a recent articles found on one these goggled pages `LEAN
Executive Blog
� current thinking about lean leadership, June 2006, the article
name is `Change or
Die" this article explains Fords introspective look into themselves
and how they
miss the approaching train "Toyota".
It hard to believe Ford General Motors and Chrysler missed the
economic
trends and business leverage Toyota has put on this industry over
these past few
years. As quoted from this article " Ford, GM and all traditional
manufacturers mange
with n infrastructure that is fundamentally different from the
management and infrastructure at
Toyota, Honda and the truly lean companies."
"No matter how these traditional companies care, how hard they
work to solve there problems
they cannot continue to manage themselves by the old DuPont ROI
model with MRP/ERP
systems, Labor focus performance metrics, functional
organizational structures, standard cost and
3
investment decisions by the same old accounting practices and hope
to compete with Lean
organizations."
2. Background
One of the largest Business and Economic trends in the industry
today is
based on many companies lean transformation efforts and it's impact
on the
economics of these industries. With the removal of waste, small lot
sizes and
quicker process time, Traditional methods for accounting and
business
measurement need to change in order to sustain these efforts.
Accounting change from traditional accounting practices to "Lean
accounting"
has both negative and positive condemnation as with any change from
the norm.
Lean accounting;
� Provides information for better lean decision-making. This leads
to
better and improved revenue and profitability.
� Reduces time, cost and waste by eliminating wasteful transactions
and
systems.
� Identifies the potential financial benefits of Lean improvement
initiative and focus on stratifies required to realize those
benefits
� Motivates long-term lean improvements by providing lean focused
information and statistics.
� Address Customer value directly by linking performance
measurements to drivers of value creation and driving changes to
maximize this value.
Traditional accounting systems are not wrong, they are best suited
for mass
production and when used in lean environmental are mostly counter
productive in
4
meeting and measuring improvement. Some of the short coming when using
traditional methods are such;
� Motivate people to use non lean methods, such as running large
batches and building inventory
� Traditional systems are wasteful they require huge amounts of
unnecessary work, gathering and analyzing data, producing un helpful
report only a few look adding un-useful task to an already waste
burdened process.
� Standard cost can harm lean companies because the based on
premises
grounded in mass production methods. (Taylor's Scientific
Management) Lean violates all of the assumptions of mass production.
Where as mass production is based on achieving economies of scale
though long production runs, lean focuses on making product base on
customer requirements on short production run if possible in one day
It is no wonder that traditional methods lead people to make bad
decisions,
such as out sourcing items that should be in sourced. The method are
complex and
confusing to generate. They provide misleading information which
drives
management to make wrong decision on important factor within their
business
from all aspects, such as make buy, profitability of sales orders,
rationality on
products or customer.
A example of this found in Practical Lean Accounting Chapter One,
Why is
Lean Accounting Important, By Brian Maskell and Bruce Baggaley,
Productivity
Press, 2004 is the bases for majority of this paper.
Company A � traditional manufacturing process
5
Inventory 25 days
On time delivery 82%
Lead time 6 wks
Total cost per unit $21.50 (Standard Cost) = labor cost $5.00 +
over head cost $15 .00 + $1.50 Material
Drill on CNC
Machine
Inspect and pack
4 Minutes
1 Minute
Batch 2500
10 days
Grind
Machine
on Lathe
6 Minutes
4 Minutes
After making a lean work cell:
Machine
Drill on CNC
on Lathe
Machine
4 Minutes
4 Minute
Grind
Inspect and pack
4 Minutes
6 Minutes
Company A � lean work cell process
Inventory 5 days
On time delivery 98%
Lead time 2 Day
6
Total cost per unit $251.50 (Standard Cost) = labor cost $6.00 +
over head cost $18 .00 + $1.50 Material
Results; Company A reduce lead tine by 28 days, increased On time
delivery by
16%, plus reduce WIP inventory by 20 days.
Great work!! Or was it?
Unfortunately in this example due to traditional decision making and
traditional
accounting practices the company decide to can the lean cell effort
based on
increased in production cost. Even though they improved cash dollars
by reducing
inventory and improved customer satisfaction by improving on time
delivery and
lead time to market, which improves market shares.
3. General Analysis �Additional rational about the subject
After research from many article and many books to try and address
this
course in a objective manor. The above example is what see in real
life with most
of the companies I have had the pleasure to work with along in my
current career
path with Cooper Power Systems. What are the measurements that move
the
needle so we can measure improvement in our lean effort? Is it
dollars, customer
satisfaction, on time delivery? All of these are issues facing
companies moving
toward "Lean" plus competing in today's world. What drives our
business
decisions and our economic? We need to Learn from Ford and the
industries
position lost due to this traditional method of Toyota's Business
and Economies.
We need to be sure that once we pull the waste from our transaction
based process
we have the metric in place to measure were we are going.
4. Traditional versus Lean Accounting methods
7
Since lean accounting is a fairly new and not fully accepted concept
with the
industry as of yet. The book "Practical Lean Accounting" A proven
system for
measuring and managing the lean enterprise, by Brain Maskell and
Bruce Baggaley.
Define this subject the clearest in all of my research. As you
journey from
traditional accounting to Lean accounting you have to look at you
current state.
There are five major categories:
Financial Accounting
Operational Accounting
Management Accounting
Support for the Lean Transformation
Business Management
To best understand your current state value your first need to
survey or analyze
the status your value stream. Baggaley and Maskell develop and
analytical method
of survey of your current state. The survey below is an example out
of their book
that demonstrates how an organization could analyze the value
stream.
Understanding the value stream cost structure capacity, which format
a bias for
change in organization to reach its future state. Base on the
maturity step to a lean
enterprise. Please see Table below:
Example of survey
CATEGORY: Financial Accounting
Developing a
Managing by Value
Subcategory/ Goal
Piloting Lean Cells
Framework
Stream
Lean Enterprise
Accounts Payable &
All orders of materials and
We have made great strides in Most of our key suppliers deliver
Materials that are delivered
Procurement
suppl
re
ies are documented with a simplifying accounts payable. directly to
the production line directly to the line are paid for
quisition and a purchase
AP credit cards are widely in use based on kanban orders from
upon shipment to the customer,
order. All materials and supplies for all small purchases,
the line. Suppliers deliver daily
which is within a matter of days,
Shift from high volume
received are checked and
eliminating most of our P.O.s
and are paid on receipt, and we by backflushing the usage and
and procedurally complex docu mented. We perform a 3- and invoices.
We have issued have completely eliminated the wiring funds directly
into the
processes to minimum
way match to ensure the
blanket purchase orders for key three way match in accounts
supplier's bank account.
transactions with built in
accuracy of invoices prior to
materials and have started to
payable. AP has been relocated Consequently we have been able
Current
controls
payment authorization. High
identify and certify strategic
from accounting to the value
to eliminate most of the invoices
2
value purchases require senior suppliers. We have begun to
stream. Many of our suppliers
from our accounts payable
management authorization. AP voucher for payment on receipt are
being paid when we use
system.
Future
is controlled within the finance
of materials.
materials.
department.
7
Current
1
X
3
4
5
6
7
8
8
Future
1
2
3
4
5
6
o
8
Accounts Receivable
We mail order
We have greatly simplified our
We have made steps toward
We have eliminated all regular
acknowledgments to customers accounts receivable and order
eliminating the need for invoicing accounts receivable processes.
on receipt of a purchase order. fulfillment processes by
our key customers by
Customers wire payments into
W
il i
i
t th
i
bl k t
l
i
th
t
b k
t f
t i l
Appendix B: Questionnaire Results Summary
CURRENT FUTURE
Accounts Payable & Procurement
2
7
Financial
Accounts Receivable
2
7
Accounting
Authorizations and Sign offs
1
2
Month End
3
4
Material Costs
1
2
Operational
Labor and Overhead Costs
3
4
Accounting
Inventory Tracking
1
2
Product Costing
3
4
Alignment of Company Strategy and Lean Goals
1
2
Management Performance Measures
3
4
Accounting
Budgeting and Planning
1
2
Managing Product Profitability
3
4
Role of Finance People
1
2
Support for the Continuous Improvement
3
4
Lean
Empowerment and Learning
1
2
Transformation Financial Benefits of Lean Changes
3
4
Value Stream Organization
1
2
Business
Customer Value and Target Costing
4
7
Management Rewards and Recognition
5
7
Average
2.21 3.79
9
Appendix B: Lean Accounting Diagnostic
Current State
Future State
Accounts Payable & Procurement
8
Rewards and Recognition
Accounts Receivable
7
Customer Value and Target Costing
Authorizations and Sign offs
6
5
Value Stream Organization
Month End
4
3
nancial Benefits of Lean Changes
2
Material Costs
1
0
Empowerment and Learning
Labor and Overhead Costs
Continuous Improvement
Inventory Tracking
Role of Finance People
Product Costing
Alignment of Company Strategy and
Managing Product Profitability
Lean Goals
Budgeting and Planning
Performance Measures
The graphical summary above demonstrates a comparison of we are
today and
were we need to improve to follow and enhance long-term future state
vision for
the organization's journey into lean Six Sigma. From this quick
summary analysis
you can than start breaking the value stream down by process step,
capacity
utilization and all of the transactional process steps supporting
their value stream
while understanding their non-productive and productive value.
Step 1 Data
VALUE STREAM COST ANALYSIS BY PROCESS
-In
s
g
m
rn
e
u
ce
in
st
ave Post
rk
ice
o
B
v
y
W
d
ran
neer
S
an
Ser
ssu
g
ion
le
er
ing
in
ng
A
s
y
mb
m
rmat
tenance
T
nd Load/
t and Rew
ppi
chas
alit
ign Engi
in
a
sto
sse
u
fo
a
Total
SM
H
Tes
A
Shi
C
Pur
Qu
Account
Des
In
M
$ 51
2,160
$ 358,
512
$ 25,6
08
$ -
$ 1
28,040
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
Material Cost
Outside Cost $ 7,760
-
-
-
-
-
-
-
-
-
7,
760
-
-
Employee Cost $ 14
1,625
$ 17,
080
$ 23,4
85
$ 17,
080
$ 10,675
$ 2,
669
$ 12,109
$ 16,
145
8,073
$
$ 8,
073
$ 4,
036
$ 4,
036
8,073
$
Machine Cost $ 2
2,502
$ 16,
958
$ 2,0
16
$ 3,
528
-
-
-
-
-
-
-
-
-
Other Cost $ 2
0,000
20,
000
-
-
-
-
-
-
-
-
-
-
-
$ 70
4,047
$ 412,
550
$ 51,1
09
$ 20,
608
$ 1
38,715
$ 2,
669
$ 12,109
$ 16,
145
8,073
$
$ 8,
073
11,7
$
96
$ 4,
036
8,073
$
TOTAL COST
Average Cost $ 3
29.92
$ 193.
32
$ 23.
95
$ 9.
66
$ 65.00
$ 1.
25
$ 5.67
$ 7.
57
$ 3.78
$ 3.
78
$ 5.
53
$ 1.
89
$ 3.78
Conversion Cost $ 19
1,887
$ 54,
038
$ 25,5
01
$ 20,
608
$ 10,675
$ 2,
669
$ 12,109
$ 16,
145
8,073
$
$ 8,
073
11,7
$
96
$ 4,
036
8,073
$
Average Conversion Cost $ 89.92
$ 25.
32
$ 11.
95
$ 9.
66
$ 5.00
$ 1.
25
$ 5.67
$ 7.
57
$ 3.78
$ 3.
78
$ 5.
53
$ 1.
89
$ 3.78
Material Cost $ 51
2,160
$ 358,
512
$ 25,6
08
$ -
$ 1
28,040
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
Average Material Cost $ 2
40.00
$ 168.
00
$ 12.
00
$ -
$ 60.00
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
10
Capacity Summary in Hours
Value Stream:
Electronic Controllers
Current State
Long Term Future State
Non
Non
Freed-Up
Productive Productive
Available
Productive
Productive Available Capacity
Surface Mount Technology
Emp loyees
738.6
0
461.4
408.77
0
191.2
-270.169
Mac hine
214.8
79.9
25.3
50.97
106.09
2.94
0
Hand Load/Wa
ve Post
Emp loyees
840.2
853.6
-43.8
296.3
874.02
480
523.4833
Machine
4
93.4
62.6
4
119.6
36.4
-26.1764
Test and Rework
Employees
839.1
0
360.9
575.1
0
624.9
264
Machine
127.5
0
32.5
158.2
0
1.8
-30.6583
Assemble and
Burn In
501.8
213.4
34.8
226.2
496
27.8
-6.98333
Shipping
0
133.3
54.2
0
118
42
-12.2
Customer Service
537.4
0
62.6
59.03
0
541
478
Purchasing
187.2
360
202.8
7.4
144
202.8
0
Quality Assurance
296
0
4
296
0
4
0
Accounting
211.7
0
88.3
153.4
0
88.3
0
Design Enginer ing
120
0
30
120
0
30
0
Information Systems
135.8
0
14.2
135.8
0
14.2
0
Manufacturing Engineering
191.3
0
108.7
191.3
0
108.7
0
Technical S
upport Engineering
375
0
75
375
0
75
0
Total
5320.4
1733.6
1573.5
3057.377222 1857.681944 2470.841 919.6964
62%
20%
18%
41%
25%
33%
11
CURRENT STATE
VALUE STREAM COST ANALYSIS BY CAPACITY CATEGORY
-
g
rn
n
k
u
e
ce
rt
ave
B
ic
n
W
wor
d
rv
ra
neeri
ng
e
n
e
n
a
ssu
g
g
Suppo
le
r S
ing
in
tio
n
b
e
ng
A
a
s
m
actuti
cal
ls
m
lity
rm
m
neeri
ta
t
t and R
ppi
sto
chas
a
sign Engi
o
sse
e
fo
ste
EMPLOYEES
y
T
SMT
Hand Load/
Pos
Tes
A
In
Shi
Cu
Pur
Qu
Account
D
In
S
Manuf
Engi
Techni
Cost
139
$
,624
16,70
$
4
$ 22
,968
16,70
$
4
10,44
$
0
$ 2,08
8
11,92
$
8
14,902
$
$ 7,97
8
$ 7,
978
3,
$ 989
3,989
$
7,989
$
$ 11
,967
Productive
0%
52%
0%
28%
71%
0%
0%
0%
0%
0%
0%
0%
0%
Non-Productive
62%
51%
70%
67%
0%
90%
25%
99%
71%
80%
91%
64%
83%
Other
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Available Capacity
38%
-3%
30%
5%
29%
10%
27%
1%
29%
20%
10%
36%
17%
MACHINES
Cost $ 22
,502
$ 16,95
8
$
2,
016
$ 3,52
8
$ -
$ -
$ -
$ -
$ -
$
-
$ -
$ -
$ -
$
-
Productive
25%
58%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Non-Productive
67%
3%
80%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Other
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Available Capacity
0%
8%
39%
20%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Long Term Future State VALUE STREAM COST ANALYSIS BY CAPACITY
CATEGORY
k
ave
ice v
W
wor
d
ng
e
n
n
a
Ser
g
g
g
le
n
n
er
ing
ce
in
tio
n
ng
a
s
m
n
n
actuti
cal
ls
mb
m
to
lity
ra
neeri
rm
neeri
ta
t
t and R
ppi
chas
a
sig
o
sse
fo
ste
EMPLOYEES
ssu
y
T
SMT
Hand Load/
Pos
Tes
A
Burn-I
Shi
Cus
Pur
Qu
A
Account
De
Engi
In
S
Manuf
Engi
Techni
Support
Cost
139
$
,624
16,70
$
4
$ 22
,968
16,70
$
4
10,44
$
0
$ 2,08
8
11,92
$
8
14,902
$
$ 7,97
8
$ 7,
978
3,
$ 989
3,989
$
7,989
$
$ 11
,967
Productive
0%
53%
0%
66%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Non-Productive
34%
18%
48%
30%
71%
90%
1%
99%
71%
80%
91%
64%
83%
Other
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Available Capacity
66%
29%
52%
4%
29%
10%
80%
1%
29%
20%
10%
36%
17%
MACHINES
Cost $ 22
,500
$ 16,95
6
$
2,
016
$ 3,52
8
$ -
$ -
$ -
$ -
$ -
$
-
$ -
$ -
$ -
$
-
Productive
66%
75%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Non-Productive
32%
3%
99%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Other
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Available Capacity
0%
2%
23%
1%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
With these tools we get a quick view of our current state compared
to the vision
we have to drive future state this again give us sound decision
process to drive
improvement and understand cost plus capacity
5. SQDC � Safety, Quality, Delivery, Cost
Visual factories drive improvement with in the lean cell level. The
5-second review
is part of this visual management system being able to see in 5
second your S
safety, Q quality, D delivery, C cost
performance of the Lean cell or transactional
process steps. Below is an example of this visual management
systems, which will
tell lean practitioners quickly, and effectively which metric they
quickly need to
12
response to on a daily bases instead of waiting for month end report
or weekly
reports which are to late to react to effectively.
13
6. SOFP - Sales, Operational and Financial Planning
For year traditional forecast planning has had this enigma of being
only 605
accurate at best driving companies to drive inventory and overtime
for month end
shipments, excess labor, not to mention decline in customer
satisfaction.
The SOFP process is a cross functional approach in 12 month windows
to plan
the value stream activities short term to manage bottle necks and
constraints base
on the value stream Takt times and long term driving capacity, level
loaded
schedules for the next month, manning levels for each value stream.
This method
of looking at the facility allows for sound statistical decision
making for manpower,
make buy decisions capital expenditures. The below graph
demonstrates this
process.
Corporate Business Strategies
Inputs
Sales &
Product
Operation
Finance
marketing
Engineering
& Logistic
Sales, Operations, &
Financial Planning
SOFP Overview
Sales Plan
New Product
Operation
Financial
introduction
Capacity
Plan
Integrated Game Plan
Outputs
14
Day 1-5
Day 6-10
Day 12
Day 13-15
Day 15
Value Stream
Value Stream
SOFP
Value Stream
Executive
Demand Planning
Operational
Planning Meeting
Financial planning
SOFP
Meeting
Meeting
Input
Input
Input
Input
Input
1) Month End data
1) Demand Forecast
1) SOFP spread sheet
1) SOFP spreadsheet 1) SOFP spreadsheet
2) Customer forecast
2) Value Stream
2) Exec SOFP
3) New product plans
Cost analysis
Output
Output
Meeting agenda
3) Lean improvement
1) Decision to balance
1) Updated rolling
3) Update budgets
Out put
Plan
Demand & capacity
Budget for next
4) Major budget Issue
1) VS Product Family
4) Value stream changes
2) VS improvement plan
18 months
5) Major
Forecast in units
3) New product
2) Major budget
New expenditure
2) New SOFP Spread
Out put
Introduction plan
Issues list
sheet.
1) VS Capacity Forecast
4) Month end Financials
3) Major new
Output
2) Updated SOFP sheet
5) Agenda for executive
Expenditure
1) Operational Decision
Who
SOFP meeting
2) Authorized business
1) Sales and marketing Who
Who
"Game plan"
2) New product
1) Operations team
Who
1) VS Finance
3) Financial Decisions
development
1) Value stream mangers
2) Plant or
2) Sales and marketing
Division controllers
Who
3) New
1) President
Product development
2) SR Managers
4) VS Finance
3) Value Stream managers
5) Other key
4) Sales and Marketing
Operational people
5) New Products
6) Other Key People
The SOFP process is cross-functional process, which brings
statistical creditability
to the term "Planning or Forecast Planning" a process, which drives
the variability
out of customer demand, instead of focus on the marketing variable
demand. The
Economies of the organization is now based on sound statistical
planning and
performance.
7. Conclusion
Traditional business methods have been in place since Henry Ford and
Taylor's
Scientific Management principles. Companies like Ford and the other
use to be top
three automotive Manufacturers, plus any company these days trying
to use the
lean principle to be more competitive in their selective industry.
Companies will
need to address the waste in the transactional process to improve
their
15
organization to drive sound decision on growth. Visual Measurement
metric for
SQDC will drive metric with in the organization on a daily bases so
operations
mangers and supervisors can drive sound decision daily.
With two main process the SOFP and visual management metrics, plus
lean
accounting methods will support the lean journey of any organization
that support
sound lean thinking.
8. Definitions � Business and Economics
Business - " the Merriam � Webster `s collegiate dictionary
defines � 1) Purpose
full activities; 3a) Commercial or mercantile activity engaged in as
a livelihood; 3b)
A commercial or sometimes industrial enterprises; 3c) Dealings or
transactions
Economics � " the Merriam � Webster `s collegiate dictionary
defines Economics
as; 3a) of or relating to economics 3b) or based on distribution,
and consumption
of goods and services; 3c) of or relating to an economy; 4) having
practical or
industrial significance or uses affecting material resources.
Lean � "All we are doing is looking at a time line from the
moment the customer
gives us an order to the point when we collect the cash. And we are
reducing the
that time line by removing the non value added waste or Muda" -
Chapter 3, page
33, The Toyota Way Field Book Jeffery K liker and David Meier,
McGraw - Hill
2006
Six Sigma �"is a rigorous, focused and highly effective
implementation of proven
Quality principles and techniques. Incorporating elements form the
work of many
quality pioneers, six sigma aims for virtually error free business
performances.
Sigma is a Greek letter used by statisticians to measure variability
in any process".
16
9. Reference Material
THE TOYOTA WAY, 14 MANAGEMENT
PRINCIPLES FROM THE WORLDS
GREATEST MANUFACTURER,
BY JEFFERY K LINKER; MCGRAW �HILL
2004
THE TOYOTA WAY, FIELD BOOK
PRACTICAL GUIDE FOR
IMPLEMENTING TOYOTA'S 4PS
BY JEFFERY K LINKER AND DAVID MEIER;
MCGRAW-HILL 2006
PRACTICAL LEAN ACCOUNTING
A PROVEN SYSTEM FOR MEASURING AND MANAGING THE LEAN
ENTERPRISE
BY BRIAN MASKELL AND BRUCE BAGGALEY
PRODUCTIVITY PRESS - 2004
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