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Orest J. Fiume
Retired Vice President - Finance
The Wiremold Company
Copyright 2006 by Orest J. Fiume - All rights
reserved.
LEAN
A Business Strategy
Not
A Manufacturing Tactic
Not
A Cost Reduction Program
Copyright 2006 by Orest J. Fiume - All rights
reserved.
A Simple Example
Two Companies in Same Industry Using Same Equipment
Company A
Company B
Time-Based Strategies
Lead-Time Reduction
Time-Based Strategies
Lead-Time Reduction
Manufacturing
Develop new products
Take orders
Process orders
Purchase materials
Make products
Payroll
Ship product
Close the books
Accounts receivable
Accounts payable
Hire people
Copyright 2006 by Orest J. Fiume - All rights
reserved.
Service
Develop new services
Take orders
Process applications
Purchase supplies
Provide services
Payroll
Ship product ?
Close the books
Accounts receivable
Accounts payable
Hire people
6
Why Is It So Hard?
OBSTACLES TO CHANGE
But, those companies arent like ours, we
have different problems
Well change, but lets do so very slowly
Our auditors wont accept that
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CEOs Role
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Change Metrics
Why are Metrics Important?
Metrics send a message to employees as to
what management thinks is important
Employees want to appear to be doing what
management wants them to do
METRICS SHAPE BEHAVIOR
Copyright 2006 by Orest J. Fiume - All rights
reserved.
15
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The Workers
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Profit Sharing
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Transaction focus
Complex systems
Absorption Accounting
Emphasis on Variance Analysis
No Timely Information
Focus on Compliance vs. Improvement
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CFOs Role
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PRODUCTIVITY = WEALTH
Arthur P. Byrne
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=
=
=
=
Quantity x Price
Quantity x Price
Quantity x Price
Quantity x Price
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IMPROVEMENT REQUIRES
PHYSICAL CHANGE
Physically group production by product families
Physically change process layout to facilitate one
piece flow
Physically eliminate central parts storage - store
at the point of use
Physically reduce set up time 95%+
Co-locate people:
Marketing & Product Dev.
Purchasing, Production Control and Operations
Credit and Customer Service
Copyright 2006 by Orest J. Fiume - All rights
reserved.
31
EFFICIENCY
The Relationship Between Two Inputs:
Standard Labor Hours vs. Actual Labor Hours
It Presumes That The Standards Are Right
32
This Year
100,000
48,000
(3,000)
(2,000)
7,000
(2,000)
2,000
(2,000)
16,000
64,000
36,000
36.0%
Last Year
90,000
45,000
10,000
5,000
(8,000)
9,000
2,000
8,000
(17,000)
54,000
36,000
40.0%
33
34
This Year
100,000
Last Year
90,000
+(-)%
11.1
28,100
3,600
31,700
34,900
(6,000)
28,900
9.7
11,400
2,100
7,000
2,400
2,000
2,600
27,500
11,500
2,000
5,000
2,500
1,900
4,000
26,900
(0.9)
5.0
40.0
(8.0)
5.3
(35.0)
2.2
200
2,200
2,400
61,600
38,400
(2,400)
36,000
200
2,000
2,200
58,000
32,000
4,000
36,000
0.0
10.0
9.1
6.2
20.0
35
0.0
Balance Sheet
Current Assets:
Cash
Acct Rec
Inventory
Other
Total
Fixed Assets
Total Assets
TY
xx
xx
LY
yy
yy
14.0 20.0
xx yy
xx yy
xx
xx
yy
yy
Current Liabilities TY LY
Accts Payable
xx yy
Accruals
xx yy
Other
Total
xx yy
xx yy
Balance Sheet
Current Assets:
TY
LY
Cash
Acct Rec
Inv-Material
Inv-Def. L+O/H
xx
yy
xx
yy
8.4 12.0
5.6 8.0
Total Inv
Other
Total
Fixed Assets
Total Assets
Current
Liabilities
xx
xx
xx
xx
yy
yy
yy
yy
14.0 20.0
xx
yy
Long Term Debt
xx
yy
xx
yy
Capital
xx
yy
xx
xx
yy
yy
yy
Accts Payable
Accruals
Other
Total
TY LY
37
This Year
100,000
Last Year
90,000
+(-)%
11.1
28,100
3,600
31,700
34,900
(6,000)
28,900
9.7
11,400
2,100
7,000
2,400
2,000
2,600
27,500
11,500
2,000
5,000
2,500
1,900
4,000
26,900
(0.9)
5.0
40.0
(8.0)
5.3
(35.0)
2.2
200
2,200
2,400
61,600
38,400
(2,400)
36,000
200
2,000
2,200
58,000
32,000
4,000
36,000
0.0
10.0
9.1
6.2
20.0
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0.0
A Fundamental Truth
An Increase in Productivity
Does Not Automatically
Result in an Increase in Profit
39
How to Actualize
Productivity Gains?
Sell more
Reduce Overtime
Hold on to attrition
In-sourcing
And Its Managements Responsibility
To Actualize Productivity Gains
40
This Year
36,000
2,000
Last Year
36,000
1,900
200
200
2,400
(4,000)
40,600
+19%
34,100
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Summary
According to Jim Womack: The Ages of Lean
1935 to 1977: Invention and Innovation
1977 to 1990: Discovery
1990 to Present: Diffusion out of auto
industry
1990 to 2006: The Lean tool age
2007
: The Lean Management Age
Copyright 2006 by Orest J. Fiume - All rights
reserved.
42
THANK YOU
ojfiume@comcast.net
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Real Numbers:
Management Accounting in a Lean Organization
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