Presented by: Mike Discenza, CMA

How many of you:

o Have less than 8 hours of work per day?
o Have new things at work you would like to
do and have adequate time to get them
done?
o Are pleased because you or your associates
talents are being utilized to their fullest
because all of their workload is valuable
and meaningful?
o Have plenty of time to get more
experience for yourself or your associates?

What is Lean?

What is Six Sigma?

What are some Lean tools?

How does Lean apply in finance?

A look at Lean Accounting.

A philosophy, with corresponding practices, that focuses on:

o

Eliminating waste

To make processes run more efficiently

To deliver more customer value

A business philosophy characterized by eliminating non-value added

activities (NVAs) which are any activity that:
o

Adds cost without adding value to the product, service, or customer.

An organization that is Lean systematically eliminates waste (NVAs) in

their operations to get the job done timely, by minimizing:
o

Labor (Effort)

Materials

Cash

Machines

Space

US organizations traditionally focus

productivity and cost improvement
efforts on enhancing value added
activities (VAs)
o

e.g. Buying new software or automation

While it is true that technological

advances do help performance, it is by
eliminating NVAs, that companies
realize the most cost improvement.
In fact, most processes contain as
much as 75%-90% NVAs!

Value Added
o To be a value added action, the action
must meet all three of the following
criteria:
The customer is
willing to pay for
this activity.

It must be done
right the first time.

The action must

somehow change
the product or
service in some
manner.

1. Identify the
Value

2. Map the
Value Stream

5. Seek
Perfection

3. Create Flow

4. Establish
Pull

Six Sigma is a business initiative started at Motorola by an

engineer named Bill Smith in the 1980s.
At the time, growth within Motorola was stagnant and the
company was spending up to 20 percent of revenues correcting
poor quality.

With up to $900 million each year going towards finding and

correcting defects, executives at Motorola came to believe that
higher quality products should actually cost less.
Six Sigma was initiated as an attempt to reduce the costs of
poor quality that resulted from rejected material, rework,
inspection processes, lost revenue, and other hidden costs
associated with not doing it right the first time.

Simply defined, Six Sigma is a systematic approach to reducing

variation within processes.
Following a methodology known as DMAIC, project teams work
to:
Define the problem as perceived by the customer
Measure the performance of the process
Analyze data to determine root causes of problems
Improve the process
Control the improvements

Sigma ( ) is a letter in the Greek alphabet used in statistics to

describe variability.
A sigma quality level is used as an indicator of how often defects
are likely to occur.
The higher the sigma quality level, the less likely a process is to
create defects.
A Six Sigma quality level, which is considered world class, is
approximately 3.4 defects per million opportunities (examples
of almost Six Sigma quality level follow).
In order to achieve higher sigma quality levels, and thus lower
defect rates, we need to continuously drive out variation from our
processes.

99% Good
20,000 lost articles of mail per hour
Unsafe drinking water almost 15 minutes per day
5,000 incorrect surgical operations per week
2 short or long landings at most airports each day
200,000 wrong drug prescriptions each year

No electricity for almost 7 hours per month

o
o
o

All processes have waste

All process inputs vary
Outputs are the sum of the variation in the
inputs plus the value added and non-value
added (waste) activities in the process
Traditional improvement methods have
focused on fixing the outputs (fire-fighting)
without addressing the inputs and sources of
waste.

Three types of variation

1.

Common Cause Variation

Natural background variation or process
noise. Always present and inherent to the
system. This is small scale variation.

2.

Special Cause Variation

Large scale variation that may permanently
change the process. The cause is
assignable and external.

3.

Systematic Variation
Large scale variation that systematically
changes the process mean and is inherent
to the process.

If a process exhibits only common cause

variation we say it is stable.
If a process exhibits special or systematic
variation we say it is unstable.
Use a control chart to measure the
process over time enabling us to see
variation.

The control chart allows you to watch your process over

time and measure your improvements.
Notice the change around period 40. We introduced a
special cause to improve the process.

Cycle Time

Error Proofing (Poka-Yoke)

Standard Work & Standard Training

SIPOC

Value Stream Mapping & Process Mapping

Voice of the Customer (VOC)

Suppliers

List of
suppliers

Inputs

List of inputs
to the process

Process

Process
steps
(see below)
Step #1
Step #2
Step #3
Step #4

Outputs

List of
outputs from
the process

Customers

List of
customers

Any activity that takes time, resources,

or space, but does not add value to a
product or service
Transporting
Items

Inventory
Motion
Talent

Waiting

Over
Production

Over
Processing

Defects

Transporting
Items

Manufacturing

Finance

Relocating inventory to get

to required material

Printing reports and getting

them from printers

Inventory

Manufacturing

Finance

Parts in line to be
inspected

Capital requests waiting to

be reviewed or approved

Motion

Manufacturing

Finance

Transferring material
to the next processing
unit

E-mailing files for others to

complete

Manufacturing

Talent

Using an experienced
maintenance associate to
sweep floors

Finance

Using a degreed accountant

to enter data manually for
a journal entry or report

Waiting

Manufacturing

Finance

Work in-process material

Waiting for a journal entry

to be completed so closing
reports can be run

Over
Production

Manufacturing

Finance

Producing more than

customer ordered as a way
to optimize run size

Producing reports that are

no longer needed

Over
Processing

Manufacturing

Finance

Multiple inspections

Producing extremely
detailed reports when a
higher-level report would
work

Defects

Manufacturing

Finance

Defective parts

Bad data from databases

Waste
o
o

o
o
o
o
o
o

Transporting Items
Inventory
Motion
Talent
Waiting
Over Production
Over Processing
Defects

Tools
o
o
o
o
o

Cycle Time
Error Proofing
Standard Work
SIPOC
Value Stream
Mapping
Voice of Customer

Identify the value for change

Understand the current process and
customer needs

Identify and eliminate the areas of waste

in the process
Produce only what is needed when it
is needed
First time right

Background
o
o
o

You have associates that are either new to

their jobs or new to the company
You have several processes that have only 1
or 2 experts
You have identified the need to cross-train
associates

However. Time to cross-train was not

readily available due to current workloads

Work longer to fit

in training???

Add headcount???
Skip cross-training due
to workloads???

Work longer to fit

in training???

Add headcount???
Skip cross-training due
to workloads???

Or is there a way to cross-train without

just adding hours to the workday or
increasing headcount????

Resources being allocated to Value Added Work

Fewer hours needed to complete the same VALUE of
work

More satisfied customers

Cross-trained associates

Higher degree of job satisfaction

Higher morale of associates

Lean tools to use:

o

SIPOC

Value Stream Mapping

Voice of the Customer

Process Mapping

Lean tools to use:

o

Error-Proofing

Standard Work

Cycle Time

Lean tools to use:

o

Voice of the Customer

Standard Work

Cycle Time

Lean tools to use:

o

Error-Proofing

Standard Work

Problem: Inaccurate cycle count data

was creating inventory adjustments (a
non-deductible expense) and consuming
assembly resources.
Opportunity: Improve accuracy to
reduce taxes and increase productivity.

But FirstLets try an exercise

1.
On your piece of paper, draw a line
2.
Make it an arrow by putting an arrow
tip on it
3.
Put a box around the line

 In the center of the page make a box that

is 4 inches by 4 inches
Beginning in the upper right corner of the
box, draw a diagonal line down to the
left corner, making sure to touch both
corners
Make the lower left end of the line into
an arrow by adding an arrow tip

Cause and Effect Diagram

Method
Scrapping - missing procedure, scrapping based on phys. count in "red
box" - losing correct part number, job no., etc.

Low level of final inspection after grinding causes high level of scrap and
rework in ass embly

Responsibilities - VS responsible person is not

the same as the one responsible for reporting
movements in VS

Palstat x Oracle - part numbers do not match - mistakes in rework jobs

Descrapping - miss ing procedure, no matching against previously
scrapped parts

Receipt x job matching - there is no tool to identify what

material should be used for what job or part, no locations
in VS
MS and WIP clearing to VS

Material

Missing incomming inspection from QS and BS

Missing overall procedures for material

movements and reporting in assem bly
VS transactions without physical flow though ass embly (.D and einzelteile)
No reporting of honing rework - mixing with ordinary jobs in grinding
Releasing Jobs for assembly - not in correct order ans qantities

Assembly inaccuracy
Environment

Weighing differences

Low personnel training

Machine

Mistakes in filling issue slips

Missing refernce (is sue slip no.) in MS to VS transactions
In time booking
Rests - possible OSMI
Preassembly - no reporting
Mixing part numbers - issue s lips etc.
Missing material flow control increases the extent of VS and reduces
pos sibility of control

Flow of components not according to the WIP

procedures
Transactions - assembly to HV
Clearing VS after returns to inventory - ris k of mixing part numbers in 2
places

Manpower

Improvement: Document work

instructions, re-train on procedures,
enforce standard work.
Outcome: Reduced reported shrinkage
by $400k and generated cash savings of
$131k.

Eliminated manual, reoccurring entry of data for

monthly reports
o
o

Automated the transfer pricing function

o
o
o

Eliminated 50% of an associates workload

Reduced the time to train new associates in process
Reduced the potential for errors

Automated the data transfer of closing information

needed for journal entries
o
o

Saved 4 hours per month in just 1 area!!

Reduced the potential for errors due to data entry

Will reduce the time needed to complete month-end

journal entries from 8 hours on Day 2 to ~30 minutes
Will reduce potential for errors

ASSOCIATE MORALE

A philosophy, with corresponding practices, that focuses on:

o

Eliminating waste

To make processes run more efficiently

To deliver more customer value

A business philosophy characterized by eliminating non-value added

activities (NVAs) which are any activity that:
o

Adds cost without adding value to the product, service, or customer.

An organization that is Lean systematically eliminates waste (NVAs) in

their operations to get the job done timely, by minimizing:
o

Labor (Effort)

Materials

Cash

Machines

Space

Investorwords: The systematic

recording, reporting, and analysis of
financial transactions of a business.
Wikipedia: The measurement,
disclosure or provision of assurance
about financial information primarily
used by managers, investors, tax
authorities and other decision makers to
make resource allocation decisions.

Lean Accounting is the method of

control and measurement of financial
information which supports and drives
continuous improvement in a Lean
Organization
Lean Accounting eliminates wasteful
transactions
Lean Accounting focuses on value, not
cost

Here are examples of paradigms that

have traditionally controlled
accounting:
o

Profit is maximized at full resource

utilization
Excess capacity is a waste

How would Lean thinking treat these

paradigms:
o

Profit is maximized by eliminating waste

and optimizing throughput at the
constraint
Excess capacity provides flexibility to
meet changing customer and market
demands

The problem: the measurement and

control system (Accounting) is not
aligned for Lean success

Traditional Accounting:
o
o

Utilization reports
Direct/Indirect ratio

What do they drive?

o
o

Overproduction
Waste of people

Who is absent from

these measures?

Lean Accounting
o
o

Throughput / cycle time / flow days

Delivery

What do they drive

o
o

Lower inventory
Increased value to customer

Here is an example of how standard

costing works against Lean success:
Typical manufacturing process

Raw
Matl

1,000
pcs.

10 min.

15
Weeks

60 min.

20 min.

20 min.

40 min.

Process Statistics:
Total Labor Time = 150 minutes
Labor Rate = $10.00 / hour
Material Cost = $20.00

Overhead = $75
Total Labor = $25
Total Cost = $120

Inventory: 8 Weeks

64%
OTD

Lean improvements are made:

Improved manufacturing process
5
Weeks

Raw
Matl

100
pcs.

40 min.
Process Statistics:
Total Labor Time = 160 minutes
Labor Rate = $10.00 / hour
Material Cost = $20.00

40 min.

40 min.

40 min.

Overhead = $80
Total Labor = $26.67
Total Cost = $126.67

Inventory: 2 Weeks

94%
OTD

Lead time reduced 10 weeks

o Huge OTD improvements
o Eliminated a process step
o Inventory dropped 6 weeks
But
o Cost went up $6.67
o Two process steps take longer
o

Did we succeed?

P&L
Net Sales
-Material
-Conversion Costs
-Overheads
-Inventory Change
Total Cost
Gross Profit

Before Lean

After Lean

250,000

250,000

- 20,000
- 130,000
- 90,000
-0
- 240,000

- 20,000
- 120,000
- 90,000
- 25,000
- 255,000

10,000

(5,000)

Practical Lean Accounting: A Proven System

for Measuring and Managing the Lean
Enterprise
o

Whos Counting? A Lean Accounting Business

Novel.
o

Brian H. Maskell and Bruce Baggaley

Jerrold M. Solomon

The Goal
o

Eliyahu Goldratt & Jeff Cox