Lean Cost Management at MarquipWardUnited: Lean Cost Management at MarquipWardUnited: Lessons Learned ... • Labor cost no longer primary cost ... "It was not enough to chase out

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Lean Cost Management at MarquipWardUnited: Lessons Learned

& Corporate Insight: Part I

Jerry SolomonVice President of Operations – MarquipWardUnited - Hunt Valley

Bill StablerGroup Vice President, Finance – Barry-Wehmiller, Inc.

Rosemary Fullerton Associate Professor of Accounting -- Utah State University

AgendaPart I

C b k dPart II

A i h• Company background• Reasons for changing the

accounting system• Organizational prerequisites• Accounting transformation

at MWU – Hunt Valley– Steps required to make the

• Accounting changes to Assembly

• “Plain English” Profit-and-Loss Statements

• Corporate considerations• Auditor concerns• Challenges and benefits

change• Detailed accounting system

changes– Machine Shop– Revisions to process

g• Summary

©Solomon,Fullerton,Stabler LA Summit 2011 1

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Company Background

2©Solomon,Fullerton,Stabler 2LA Summit 2011

Worldwide Presence

5,400+ Associates

42 Facilities with approx. 3.5

Million Square Feet of

Manufacturing &

More than 700 Engineers and

Consultants

Barry-Wehmiller Company was founded in 1885. With a rich history of strategic acquisitions, organic growth initiatives and diverse product offerings, Barry-Wehmiller

Companies, Inc. has emerged as a worldwide industry leader through a process of “Achieving Principled Results on Purpose.”

Assembly Space

©Solomon,Fullerton,Stabler 3LA Summit 2011

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Barry-Wehmiller Revenue GrowthAnnual growth has exceeded 20 percent for more than 20 years, strengthening our position as a great American company serving U.S. and global markets.

$400

$600

$800

$1,000

$1,200

$ M

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$0

$200

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Fiscal Year

$63 $85Corrugated,Folding Carton

IndustrialContainer Manufacturing

Tissue, Nonwovens& Film Converting

Balance of Markets

$17 $36

$175 $44

$215

$36

$209

$63 $85

$197

BFood

Household &Personal Care

OtherPharmaceutical

g& Fine Paper

& Film Converting

Beverage

Snack FoodBarry-Wehmiller has grown from providing equipment for the beverage industry to being a diversified supplier of technology and services across a broad spectrum of industries.

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• $250M+ division of Barry-Wehmiller– Designs, manufactures, & sells custom box making

MarquipWardUnited

g gequipment for the corrugated industry

• Low volume, high cost job shop environment• Machine characteristics:

– Sale price in excess of $1million– Total parts from 10,000 to 15,000– Throughput time is two to three months– Network of approximately 450 suppliers

• Four value streams: new machines, parts, field service and upgrades



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Video of Machine

10©Solomon,Fullerton,Stabler LA Summit 2011

New Product

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Typical Plant Cost Structure

Decades Ago Today

Labor60 – 70%

Overhead10 – 20%

Overhead25% Labor

15%

Decades Ago Today

©Solomon,Fullerton,Stabler 12

Material20 - 30% Material

60%

LA Summit 2011


Decades Ago Today

Labor60 – 70%

Overhead10 – 20%

Overhead25% Labor

15%

Decades Ago Today



60%

Where do we focus our improvement efforts?

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Decades Ago Today

Labor60 – 70%

Overhead10 – 20%

Overhead25% Labor

15%

Decades Ago Today

But how much is really

direct labor?



60%

LA Summit 2011

• Incentive is to produce labor hours, not product• No linkage between labor hrs & customer demand

Why Not Standard Costing?

• No linkage between labor hrs & customer demand– Credit received for anything produced

• Labor cost no longer primary cost driver• Very confusing, time consuming, & inaccurate• Variances difficult to manage


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• Examples from MWU sister plant

Why Not Standard Costing?

• In 6-month period: $1.5 M in aggregate standard cost variances for over 15,000 individual variance transactions. No one variance greater than $30,000!

• Annually 252 00 individual direct labor records• Annually, 252,00 individual direct labor records with 120 different shop rates. Over 100,000 mfg work orders closed out.


"It was not enough to chase out the cost

Why Accounting for Lean?

accountants from the plants. The problem was to chase cost accounting from my people's minds"

Taiichi Ohno, founding father of the Toyota Production System


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Accounting Transformation at MarquipWardUnited – Baltimore

18LA Summit 2011 18©Solomon,Fullerton,Stabler

Production Flow

Vendors

M hi Sh

Stores

Purchased Parts

Raw Materials

Machined Parts

Purchased Parts & Machined Parts

LA Summit 2011 19

Machine Shop Assembly

Machined Parts

©Solomon,Fullerton,Stabler

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Pre - Lean System at MWU

• Standard costs Report inventory and cost of goods sold at pre–Report inventory and cost of goods sold at pre-set standards for material, direct labor, and overhead

• Activity and price variances recorded monthly–Twelve different variances reported

• Budgeted numerous variances–Acknowledged inaccuracy of standard rates

LA Summit 2011 20©Solomon,Fullerton,Stabler

Standard Rates – Pre - Lean

• Material standards– Constant for yearConstant for year– Most recent year-end prices for each item

• Direct labor standards– Processing times reported for all machining operations– Hourly rates for each part per processing times

• Overhead ratesOverhead rates– Rates several years old – Allocated per relationships to direct labor– Include all indirect product costs


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Reasons for Accounting Changes at MWU

• Inaccurate and outdated overhead standards contribute to poor make/buyand product development decisions

• A tremendous amount of time devoted toaccount for and review variances with littlebenefit

• Month-end close activity is stressful and consumed by work order close-outs and variance analysis

• Only unfavorable variances typicallyreviewed


Accounting for Lean

• Traditional concepts of standard costing, labor reporting, and variances replaced with performance metrics

• Inventory valuation simplified – material only at detail level, other costs in pools

• Metrics maintained by employees at the

23LA Summit 2011 23

Metrics maintained by employees at the work cell and form basis for continuous improvement


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Organizational Prerequisites for Accounting for Lean Transformation

Significant progress on Lean manufacturing journeyIdentification of product families/value streamsWillingness to reorganize into value streams

• People/Leadership• Equipment• Space

Identification of monuments and rules for sharingLeadership buy-inRealization and acceptance that financial reporting will change


Information Flow Prior to Lean Journey

P M PE U A AN R C A C IN R C A C I

S G C H S K NA I H I S VL N N E & OE E & E M IS E B S C

R P S L H II L H Y I NN N O P GG G P

Information Flow Information Flow


Information Flow Information Flow

Traditional Challenges

1. Work is “pushed” from silo to silo2. Optimization occurs functionally3. Tremendous communication challenges

LA Summit 2011

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MWU Value Streams

C C

Aftermarket Value Stream - May 2005 Start Date

Sales, Engineering, Purchasing & Planning, Assembly, Pack, Ship & Install, Part Time - Accounting, HR and IT

U U

S S

T T

O O

M M

E E

Parts Value Stream - Q1 - 2006 Start Date

New Equipment Value Stream - 2007 Start Date



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Monuments/Shared Resources

Machine shop ( not for long!)

Accounting/HR/IT 26

R RField Service Value Stream - 2009 Start Date

Sales, Ship, Install & TrainPart Time - Accounting, HR and IT

Value Stream Costing

Labor Costs Materials

Value Stream

27LA Summit 2011 27

Fixed Costs

of Value Stream

Conversion Costs (Consumables & other non – BOM items)


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Steps in Accounting Transformation

1. Define new costing categories – value stream costing2. Restate historical product costs (spending) and month-end

inventory into new categoriesinventory into new categories 3. Establish methodology to track product costs by value

stream 4. Segregate product costs and all other costs into Value

Streams5. Identify costs remaining in overall “Plant” value stream6. Prepare format for monthly “Plain English” P&L’s 7. Determine valuation scheme for inventory by area –

machine shop and assembly


Steps in Accounting Transformation (continued)

8. Decide on changeover date and restate inventory based on new methodology

9. Educate management about changes10. Discuss changes with corporate11. Identify how required corporate reporting will be

maintained12 Discuss changes with external auditors12. Discuss changes with external auditors13. Review process for improvement ideas


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Accounting System Changes in the Machine Shop


Accounting for Lean –Machine Shop

Initial questions:1.How to value inventory without detailed trackingy g2.How to manage capacity without

labor reporting3.How to determine part costs without

standard costing4.How to record monthly expenses on financial

statements5.How to charge machine shop costs to three

other value streams


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Inventory Valuation –Pre - Lean

• Record raw materials on balance sheet at standard

• Apply direct labor and overhead through work in process

• Track and record each machining process

C ti ll d t t l i t d• Continually update perpetual inventory records

• Send part to Stores with new part number when completed in machine shop


Inventory Valuation the Lean way

• Determine relationships of individual inventory components (materials, labor, & conversion p ( , ,costs)

• Determine relationships of individual components of spending costs

• Eliminate tracking of labor & overhead• Value labor conversion & fixed costs in total• Value labor, conversion, & fixed costs in total• Determine ratios for labor, conversion costs, &

fixed costs as a % of material costs


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Inventory Valuation the Lean Way

• Record actual material costs• Expense all labor conversionExpense all labor, conversion,

& fixed spending costs• Determine ending material inventory• Determine ending inventory for labor, conversion

costs, & fixed costs per cost ratios related to materialmaterial

• Adjust ending to/from inventory account on Plain English P&L


Restatement of Inventory at Year-End and 1st Month of New Year

PackCo Machine Shop Inventory

MonthRaw

Material Direct Labor Overhead Labor Conversion Fixed

Total Inventory

December 31, 2006 - Traditional Close 765,000$ 95,000$ 290,000$ 1,150,000$ January 1, 2007 - Lean Approach 765,000$ -$ -$ 254,513$ 76,801$ 53,686$ 1,150,000$

Month Raw

Material Direct Labor

Overhead Labor

Conversion Fixed

Total Inventory

December 31 2006 Traditional Close 765000$ 95000$ 290000$ $ $ $ 1150000$

PackCo Machine Shop Inventory

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December 31, 2006 - Traditional Close 765,000$ 95,000$ 290,000$ -$ -$ -$ 1,150,000$ January 1, 2007 - Lean Approach $ 765,000 $ - $ - $ 254,513 $ 76,801 $53,686 $ 1,150,000 January 31, 2007 700,000$ -$ -$ 236,255$ 71,292$ 49,835$ 1,057,382$


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Lean Accounting & Recession


Lean Accounting & Recession Effects

$119$120.0

$140.0Annualized Total Qtrly Orders • In Jan 2009, volume

dropped over 50%$89 $89

$64 $62

$29

$56

$88

$109

$85

$94$88

$40.0

$60.0

$80.0

$100.0

$ M

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ns

dropped over 50%

• Faced with such a dramatic event: – Workplace behaviors

changed– Customary key indicators


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$20.0

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Customary key indicators and ratios needed adjustments

– Lean accounting system needed reevaluation

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Changes to Lean Accounting

• In 2007 and 2008, a steady flow of production made inventory valuation easier—initial lean accounting method worked well

• In 2009 flow came to a halt with the economic downturn;• In 2009, flow came to a halt with the economic downturn; – Suppliers’ inability to respond JIT– Furloughs fluctuated workforce– No layoff policy– Associates worried about future & productivity waned– Artificial demand pushed through plant to keep people working

• As a result our lean approach to inventory valuation methodAs a result, our lean approach to inventory valuation method no longer produced consistent, reliable results. Ratios of costs no longer valid!

Changes needed!!©Solomon,Fullerton,Stabler LA Summit 2011 38

• Original lean accounting inventory valuation approach:– WIP labor & conversion costs determined per ratio of

Lean Accounting Journey

materials – The ratio of labor & conversion costs rarely fluctuated

• Starting in 2009, relationships among materials, labor, & conversion costs became disconnected.

• Needed new approach: operations provided work order data showing completion stage of WIP in terms of labor hoursshowing completion stage of WIP in terms of labor hours

• By applying actual labor & conversion rates to labor hours, in total, month- end inventory more accurately valued than using initial lean method


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Month-End Machine Shop Inventory Valuation Method Today

YEAR Year Oct-10 Nov-10 Dec-10MONTH End FY11OCT FY11NOV FY11DECDays FY 2010 21 18 22

Actual Actual ActualMACHINE SHOP STD HOURSBeginning Parts In Process (Actual Hours) 2,549 2,173 1,790

+ Std Run Labor Hours-Machines 5,582 5,483 6,584 + Std Run Labor Hours-Aftermarket 1,133 976 1,559 + Std Run Labor Hours-Parts 1,761 1,399 1,652 + Total Std Run Labor Hours Reported 8,476 7,858 9,795

Hrs per Day (Check) 404 437 445 - Total Std Hours Closed to Stock (8,852) (8,241) (9,591)


( , ) ( , ) ( , )

Ending Machine Shop Std Hrs. 2,549 2,173 1,790 1,994

Mach Shop Std Rate Per Hour 86.49$ 86.49$ 86.49$

Total Payroll, Conv. & Fixed $'s in Machine Shop 200,000$ 187,943$ 154,817$ 172,461$ Net Cost (To)/From Inventory 12,057$ 33,126$ (17,644)$

Machine Shop Current State

Current State Machine Shop

GearMaterial

CylinderMaterial

Cross Tie

Cylinder

Machine Shop

Assembly Floor Space

Cross TieMaterial

Gear

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Machine Shop Future State

Future State Machine Shop

CylinderMaterial

Cross TieMaterial Cross Tie

Cylinder

AdditionalAssembly

Floor Space

Assembly Floor Space

Machine Shop

GearMaterial Gear

Managing Machine Shop Capacity

• Eliminate direct labor financial reporting• Maintain direct labor hours• Maintain direct labor hours

– Report physical activity by part • Provide more visibility to material flow• Track actual material costs


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Determining Part Costs

• Calculate individual part costs for decision making outside systemg y

• Separate variable cost file for each part number– Determine variable labor and conversion costs

• Identify significant conversion spending categories: maintenance & tooling

• Identify machine types: manual & automatic

U t k t i & d t• Use to make outsourcing & new product development decisions.


Current Outsourcing Process

• Machine Shop Sourcing Strategy• Confirm core necessities and therefore non-Confirm core necessities and therefore non

core necessities• Work both ends of the parts spectrum

simultaneously• Outsource non-core parts immediately starting

from the most obvious• Create cells and improve core partsCreate cells and improve core parts

performance


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Current Outsourcing Process• Shaft & Cylinder Machined Parts

• Current StateN b f SKU’ 137• Number of SKU’s – 137

• Estimated current cost - $3,525,000• Number of associates – 10• W-2 of 10 associates - $734,000• Est. # of standard hours per annum – 12,850• Condition of equipment – Various• Spending required WC 218 rebuild $100• Spending required – WC 218 rebuild - $100 -

$200K, others TBD


Out-Sourcing Option Summary($000’s)

Current State

Outsource Option

1

Premium @ Current

V l

Premium w/Growth

M d l1 Volume ModelTotal Variable Costs $ 2,980

Fixed Costs 545

Total Standard Costs

3,525

Less Non Cash Fi d C t

230Fixed CostsEst. Cash Costs $ 3,295 $ 4,615 $ 1,315 $ 1,975

The next two competitive suppliers had cost increases of about 30 – 50% above option 1 and would only be able to handle a

portion of the product line©Solomon,Fullerton,Stabler LA Summit 2011

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Will we ever really know the cost of an individual part?

• Problems with system generated std and actual part costs– Was the time clocked correctly?– Was the machinist working two machines

simultaneously?– Was this part “batched” with another similar part this

time to reduce the set-up?Were the estimated expenses to arrive at a standard– Were the estimated expenses to arrive at a standard correct?

– Were the estimated hours to arrive at a standard correct?

– Was the lot size the same on all batches?©Solomon,Fullerton,Stabler LA Summit 2010 48

Tips for the Transition

• Track material only discretely

• Shut off all financial reporting of labor & overhead activity by zeroing out appropriate fields in cost system

• Analyze operations from a materials costand variable overhead mindset


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Reporting Monthly Expenses

• All changes in conformity with GAAP• Lean closer to actual than standards• Lean closer to actual than standards• All non-material spending costs expensed • Ending inventories determined using

estimation techniques• Monthly adjustment made from/to• Monthly adjustment made from/to

inventory


Machine Shop Costs to other Value Streams

• Machine Shop still monumentthat serves other value streams

• Raw material transferred per discrete part value• Labor, conversion, & fixed costs flow to three

value streams based on total hours delivered, not by discrete party p

• Goal to eliminate machine shop monument & create right-sized machine shops for each value stream


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Questions


Documents

Lean Cost Management at MarquipWardUnited: Lean Cost Management at MarquipWardUnited: Lessons Learned ... • Labor cost no longer primary cost ... "It was not enough to chase out