Is It Truly Lean Manufacturing?
Mar 24, 2016
I recently met with the CFO of a large manufacturing firm located in Northern Ohio which primarily produced automotive parts. This particular firm was part of a much larger organization with multiple plants across North America, as well as internationally. As we discussed the current state of the industry and his individual division, he mentioned a number of years earlier the entire company, including the international affiliates, went to lean manufacturing.
The primary goal of lean manufacturing is to use the least amount of resources necessary to make a given product and to maintain your inventory to avoid retaining large inventories. Providing customers with continuous, perfectly timed shipments without creating a stockpiling effect is also an element of lean manufacturing.
As we talked about how the operations were working, he mentioned one of the plants in his division recently failed to deliver and as a result, the assembly line was shut down for an extended period. He was concerned because the penalty rate for causing a shutdown of this operation was $15,000 a minute. Given the shut down for his plant was over an hour, this cost can add up quickly. At the time of our discussion, he had yet to receive the penalty charge from the customer and was hoping due to mitigating circumstances there would be no such penalty.
Such experience led to a conversation about how lean manufacturing was working in his operation. He acknowledged a number of plants had become very efficient, however behind the scenes, there was slippage occurring in each of the organizations.
He explained many manufacturing plants operating under extreme penalty provisions from their customers kept a small, off the books inventory, containing some of the most critical parts. There is no actual inventory kept in the plant, but instead in storage trailers on the grounds or at the customer’s location. The idea being if there is an absolute need due to a failure in the production process, the customer’s assembly line would not be shut down. Instead, the hidden inventory would be used to keep operations running. Based on his description, this concealed inventory never appeared on any of the lean analysis. In fact, it represented an off the books safety margin for emergencies.
The CFO spoke about how many of the operations have become very lean in relationship to manufacturing labor costs. In fact, some of the plants were running with exceptional efficiencies as a result of lean initiatives. It has also helped reduce crew sizes and still maintain production. However, the slippages have occurred in that some of the production support or perhaps production indirect labor was being recorded as an administrative charge. In doing so, the particular labor involved was not being considered with regard to the lean analysis being done on the overall labor. In effect what was happening is the crew was being supported and maintained by an indirect or support of direct labor positions, but the accounting department recorded such indirect support position as an administrative cost. Therefore, it was ignored as part of the overall efficiencies.
This manufacturing CFO was totally supportive of the lean manufacturing initiative and believed it did bring improved efficiencies to the operations. However, perhaps the true gains were somewhat less than reported gains if all of the slippages had been accounted for completely. The results may be quite different and may even result in a different conclusion.
Categories: Cost Accounting
The Role of The Cost Accountant
Mar 21, 2016
As a cost accountant, it is not uncommon to encounter individuals who are unfamiliar with cost accounting and what our profession entails. I hear “you must enjoy numbers” or “I bet you are great at math”. There is so much more involved in cost accounting. I would not consider it math in the truest sense, but really more analysis and critical thinking. The unawareness of cost accounting is typical among the general public. However, what about a business owner? Does the owner of the business your work for truly understand what cost accounting is?
If you answered yes, then I believe you are in the minority. Why do you think this is the case? Do you consider it an issue?
Some cost accountants may feel if no one understands what they do, then why do it. Others believe it is a free pass because no one will know otherwise. However, I believe if no one recognizes the value you offer, the responsibility falls on you. You are the only one who understands the importance of accurate costing data and the value it brings to any business.
It can be discouraging when those running a business do not fully comprehend the importance of your role. However, if view the situation from a new perspective and see they believe you are then you make a positive impact.
Cost accounting has one of the most unique perspectives in a business. You control some of the most insightful information which can ultimately make or break your organization. Having the ability to observe trends before they occur allows for predictability which can be life changing. Recognize the fact that the owner does not need to understand how you know what you know, but it is much more critical for them to trust in you and the validity of the information.
In the end, I do not think it matters if everyone understands exactly what you do. What matters most is they respect what you do and recognize the value and necessity of the information you provide. What experiences have you had and what is your opinion?
Categories: Cost Accounting
Business Growth & Investing in Talent
Mar 16, 2016
I recently met with a long time friend who also happens to be the CFO of a large manufacturing corporation in Northern Ohio. We discussed some of the business changes occurring as the result of increased sales growth in his area. His organization started 10 years ago with sales of around $50 million and it is currently he track to reach $100 million in sales in the next few years.
Drastic sales growth offers tremendous opportunities, but there are paralleling challenges which are equally as large. The individuals who started the business had unique talents and motivations which set the stage for growth. Their quality product combined with exceptional customer service laid the foundation for success and set the stage for future growth. Every area of the business had dedicated employees with the necessary skills and the experience to ensure the company would be successful at the beginning and have the capacity to pursue additional growth.
As the company grew, the level of complexity in virtually every department of the company grew proportionately. Hence, the talents of the newly hired employees were developing to include more sophisticated skills necessary to maintain the company’s current market position. As a result, many of the founding members were unable to provide the guidance necessary to keep the company growing, profitable and able to expand. In spite of having loyal, hard-working employees, it became necessary to hire additional staff with the experience and training necessary to allow the company to continue to grow.
For example, the company engineers, who had been there since inception, were experts in the engineering concepts required for actual production. However, when a new engineer with extensive experience with larger companies arrived, it became clear that there were issues which needed resolution but there were not even on the team’s radar screen. My friend described how the topics in the engineering meetings have changed dramatically since the new engineer joined the team. They are now focused on level of activity and maintaining the company’s productivity to remain competitive in the marketplace. The basic engineering requirements have not changed but instead have become more sophisticated to keep production at the level of $100 million annually.
He concluded that unless businesses are willing to invest in new talent as the company grows, they will soon be antiquated and unable to fully capitalize on the opportunities and exploit the market properly. This is true not only in the production and engineering areas, but in all the supporting areas such as marketing, sales, accounting, administration, and personnel. Every area has growth-related challenges and opportunities, and only individuals trained and experienced in how those can best be met have the tools to fully benefit the company. Talent acquisition can ultimately play a significant role in your business development.
Categories: Cost Accounting
The Value Of A Chart of Accounts
Mar 07, 2016
How important is a chart of accounts? Does it matter what is in your chart of accounts? Does it make you more profitable or better at what you do? I am curious to hear your answers. I would tend to think some business owners would argue a chart of accounts is irrelevant and does not affect the profitability of your business. However, I say, not so fast!
Obviously, having a chart doesn’t necessarily add money to your pockets. However, correctly structuring your chart of accounts can aid in your profitability. Of course, there is more to it than just having the chart of accounts, it must be correctly utilized for optimum outcomes.
Having the essential accounts (i.e. direct costs and overhead accounts) and correctly managing them will provide you with invaluable information. For example, you are able to determine your gross margin and your profitability. With such data, you can make quality business decisions to improve or maintain your level of profitability. Without such accounts and without recording the appropriate information, it is impossible to have a handle on your gross profit.
In addition, utilizing a reasonably accurate chart of accounts can provide information from which to calculate many accounting ratios. These ratios can be used to benchmark your company in comparison with other businesses in the industry. As a result, improvements can be identified to ensure your business is competitive in your market.
Furthermore, an accurate chart of accounts can provide insight to be used for better decision making. Comparing your accounts over periods can help you identify and predict trends and downturns. You can be prepared to take the necessary actions to ensure you maintain or even enhance your profitability during periods of historical growth.
With that being said, I would caution against constantly modifying your chart of accounts. There may be times when you believe there is better information available which could be true. However, if you are regularly altering your accounts then you will lose the ability to analyze comparable data.
Next time you think it’s just a chart of accounts, think again!
Categories: Cost Accounting
Business Decisions: Taking The Necessary Time To Evaluate
Mar 02, 2016
We apologize for our lack of posting. Bill and I have been busy working on an engagement to determine if a given business location should be shut down. As it stands, the location is not profitable. It would be easy to say, if it is not profitable eliminate the location and stop adding to loss. However, it is not quite that simple. I’m sure any business owner can think of a time when you considered scraping an idea, but then it ended up being profitable.
This is not to say if you have a product line, a customer, or even a process which is not producing a profit that you should continue on. Instead, do not be so quick to react regardless of the decision you make. It is imperative to take the appropriate time to perform the necessary analysis to determine if there is a different method or approach to be taken. Sometimes it is not the idea that is poor, it is the execution.
These are not always easy decisions to be made. Any business decision always has impact, whether it be positive or negative. Taking the time to analyze and reflect gives you an opportunity to evaluate various scenarios and determine what is best for your business. I for one think it’s quite exciting to peel back the layers and have all the relevant information in front of you.
You may discover there is a different method to run a location, or way to cut costs, or even increase sales. Without doing a proper analysis, how do you know? Also consider what could be lost if you stop doing what you’re doing. Are there credits you are currently able to receive which may be eliminate? Are there losses to take advantage of that would be lost?
Do not just give up without a comprehensive review and analysis of all possible scenarios.
Categories: Cost Accounting