Evaluación previa y selección del software

The increase in efficiency caused by the application of Kaizen workshops or similar TQM and Six Sigma improvement projects obviously needs to be measured in economic terms. Reducing waste leads to an increase in savings that add up as months go by, leading to an improved efficiency percentage that can be compared to turnover. These savings are easy to spot at the end of the fiscal year, when general accounting reports the EBIT-EBITDA improvement; savings are, however, quite difficult to spot on a day-to-day basis. This can be quite a problem linked to improvement projects in general; TQM and Six Sigma, in fact, use traditional accounting methods, which are based on the division of costs into direct and indirect costs and the use of cost centers.

Traditional accounting was used a lot during the years of mass production; it is based on the concept of an ever bigger production lot, a concept justified by the markets’ demand in those years. When producing in large lots direct costs, such as labor, are much greater than indirect costs, which can thus be calculated at an approximate level. During the mass production market the code demand was low and the amounts very high; set-ups were few, design, research and development were limited and WIP and finished products took up less capital. In fact, during the years of runaway inflation, having extra stock was not such a bad thing because everything would be sold eventually. Unfortunately in the Western economy these concepts still exist and traditional accounting is still alive and well.

Traditional accounting identifies cost centers based on departments, processes, cells, plants, and so on, to which direct labor, plant amortization, raw materials and unfinished products of that center are assigned. In the 1970s and 1980s this method was used to assign the main chunk of costs; what was left was known asoverhead costs, indirect and generally low costs. However, nowadays these indirect costs, such as marketing, design, development, maintenance, transport, quality, supplier management, and so on are continuously increasing; in traditional accounting they tip over on cost centers (i.e. indirect cost are distributed on the cost centers), according to formulas like the following:

ðTotal overhead costs of the period  direct center hoursÞ=

direct labor hours within the period:

The more hours of labor the center absorbs, the higher overhead costs will be:

this is the indisputable postulate of traditional accounting.

Dividing the hours of labor by the number of products of the cost center period output, the average cost per lot or product can be obtained; this is vital information because it helps decide on tag price,Make or Buy budget, and so on. However, this type of accounting can lead to major errors. The following example, based on a real story, will remove any doubts regarding the mistakes of traditional accounting. Two different processing lines (A and B) working on different product families were 130 7 Lean Metric, Lean Accounting and Value Stream Accounting

defined cost centers. The cost of one lot of A and B products, of similar quantities, was calculated using the Table7.3:

Apparently a lot of A products is more expensive a lot of B products because it requires more direct labor and thus more indirect costs. The company manager also underlined the fact that product families A and B had been designed over 10 years ago to have similar design costs, marketing would not need to make a particular commercial effort for either product and performance in terms of rejects and reprocessing of both products is very similar. Thus one could confirm that the results presented in the Table 7.3 are correct. However, a Kaizen workshop uncovered information that was unknown to management: handling that brought products to and from processing lines (overhead costs) only took up 10 % of time for products from processing line A, whereas a staggering 90 % of time was taken up by products from processing line B (see Fig.7.4).

In the end, 10€ of handling were spent for products from line A and 90 € were spent for products from line B. The calculations from the Table7.3were inaccurate.

The controller decided to improve this situation by making handling costs direct.

Activity-Based Costing (ABC) will be explained toward the end of this section; this method takes all direct costs into account, and would have immediately flagged such a situation.

The following example can better illustrate how traditional accounting leads to distortions when calculating improvement program results. Starting off from the situation shown in Fig.7.5, a Kaizen workshop brought results that led to the new situation shown in Fig.7.6. Figure7.7shows the improvements obtained in said workshop; U-cells were introduced and SMED was applied to the press. Several non-value-added activities (those highlighted in gray) were removed, press set-up time was drastically reduced from 330 to 26 min but, unfortunately, lot preparation Table 7.3 Cost of a lot using traditional accounting

Cost center A lot Cost center B lot

Unfinished products and raw material

costs¼ 30 € Unfinished products and raw material

costs¼ 28 €

Direct period labor costs¼ 160 € Direct period labor costs¼ 120 € Plant amortization¼ 10 € Plant amortization¼ 12 € Indirect costs quote¼ (total indirect period

costs direct center labor time)/direct labor (time)¼ (560  16 h)/28 h ¼ 320 €

Indirect costs quote¼ (total indirect period costs direct center labor time)/direct labor (time)¼ (560  12 h)/28 h ¼ 240 € Fig. 7.4 Handling toward the

centers

time increased by 1 min per product (from 2 to 3 min). The controller, having analyzed the situation together with the Kaizen team, filled in a “Finance” ERP form, based on traditional accounting, and printed the report that can be seen in Fig.7.8. The report shows that after over a week of Kaizen workshop carried out by six members of staff, the cost of the product had increased: a complete failure. It is true that the sum of all cycle times had increased by 1 min and thus the cost of direct labor had increased from 3.80€ to 4.00 €; but what about set-up time reduction, WIP reduction and the increase in space? Set-up was carried out by members of staff who were not considered direct, in other words not directly linked to cycle

Visual Inspection

Fig. 7.5 As is process VSM

Visual Inspection Welding Press

Fig. 7.6 Future state process VSM

132 7 Lean Metric, Lean Accounting and Value Stream Accounting

time. The wages of these workers, even after the workshop, stayed among indirect costs, and nowhere, except maybe in the long term, can we see the benefits of having reduced set-up time by 304 min.

During mass production when codes were limited, the demand was stable and lots were big, the analysis by the controller probably would have made sense.

Big lots are usually used when striving to achieve the following goals:

• Customer service based on a large amount of stock;

• Operative margins created by using plants and machines to a maximum;

• Detailed product cost calculation through cost centers;

• Indirect costs calculated in proportion to direct labor.

Fig. 7.7 Activity analysis worksheet

The renowned ABC accounting system started to challenge the traditional accounting system back in the 1990s. The new system is based on the simple, yet effective, principle that there are no indirect costs: all costs are direct regarding the process. To calculate product cost, all costs within the process are added up.

Marketing, design and development, purchases, logistics, maintenance, quality, and so on, all create direct costs, as does cell/process production. Basically, the whole process from start to finish becomes the cost center, and all costs are considered direct. This concept is fairly simple in theory; however putting it into practice can prove to be more complicated. This is because it means that, for example, a designer has to record on a daily basis how many hours were spent on a particular product and how many on another, or that a forklift driver has to register how many products of which code he or she handled altogether. The costs can be considered direct thanks to the cost driver. The example of the forklift driver can better illustrate the cost driver concept. For example, one production line produces three products, A, B and C; management needs to analyze the cost of the forklift driver (a classic overhead cost) and how much this cost influences the total cost of all three products. The following Table7.4shows how this can be calculated with ABC.

Before Kaizen Workshop After Kaizen Workshop Unit cost of the semi-finished

product: 35

Unit cost of the semi-finished product: 35

Cost of direct workforce (minutes of working*cost of the workforce):

19’*0.2=3.8

Cost of direct workforce (minutes of working*cost of the workforce):

20’*0.2=4 Overhead share

(Amount of indirect costs of the period*Direct workforce time in the centre)/Total amount of direct workforce:

Overhead share

(Amount of indirect costs of the period*Direct workforce time in the centre)/Total amount of direct workforce:

18.02 18.03

Plants amortisation share: 2.07 Plants amortisation share: 2.07 Total cost of the product: 57.94 Total cost of the product: 58.01

Fig. 7.8 Table showing product cost according to traditional accounting before and after the Kaizen workshop

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Every product handled by the cost driver costs 0.05€; when analyzing the cost of one lot, or of the products handled in a certain period of time, for example 1 day, the amount of products is multiplied by the cost per unit. The controller can calculate the whole cost of the product by adding up the costs of all the activities within the process. For example, the hours spent using CAD or the amount of drawings completed could represent the cost driver for a designer. ABC accounting remains however quite complicated due to the following reasons:

• To apply ABC, an accurate map needs to be drawn to identify the driver of each activity (e.g. the amount of products handled for handling); in certain processes a product can pass through hundreds of different activities.

• Having identified the driver, the unit cost needs to be calculated.

• The amount of drivers needs to be recorded either on paper or on software; for example, the designer needs to record how many hours were spent on product A, how many on B and so on.

In the 1990s and the first years of the new millennium, ABC was considered handy thanks to the circulation of PCs, tablets barcode readers, Wi-Fi and so on.

Thanks to these systems many calculations can, in fact, become automatic. If the forklift driver uses a barcode system, for example, calculating how many products of which code were handled is quite easy; other activities, however, still need to be analyzed manually. ABC is an interesting concept but application is complex and difficult. In addition, many managers and software developers are hostile towards ABC.

A company had moved from a traditional AS 400 accounting system to an ERP based on a form similar to ABC accounting; a detailed process cost analysis would have made it possible to calculate the cost drivers, cost per unit and the different activities.

The analysis would have required 100 working days; the project was rejected and the old accounting system, based on cost centers and indirect costs, was applied to the new ERP form. The same company has applied Lean Six Sigma and speaks very highly of it; industrial accounting is however still carried out the same way it was carried out in times of mass production.

The theoretical potential of ABC can be seen in Fig.7.9, which shows the cost benefit obtained by the previous workshop. One slightly more enlightened controller repeated calculations using a simple Excel spreadsheet and ABC logistics; the results are visibly different, and the product cost per unit drops by 10 cents after the workshop. Every process was divided into the activities that involve the product, Table 7.4 Example of ABC calculation

Activity Cost driver

Cost driver per unit

Daily product cost¼ number of products handled per day cost driver per unit

Forklift

and for each activity the driver and cost were identified (except for the cost of unfinished products, which consists of a simple invoice from the supplier). By analyzing the gray row, “cell cost”, benefits that caused a decrease of 10 cents can be analyzed.

Figure7.10highlights the improvements introduced by the workshop in terms of removing activities that are not value-added. The rows that have been highlighted in gray show the activities removed after the workshop, which is why they have a 0 in the last column. The third column lists the costs linked to the activity. For example in the second row (“lot preparation”), the driver is the minutes of labor, thus, in the third column the cost is calculated by multiplying the cost of 1 min of labor (0.25€) by the minutes required to prepare one lot, which are 500 (see Fig.7.5). Because the activities within the cell were carried out in lots, the controller had to calculate the costs per lot; in the final cell, product unit cost, the cost is divided by the amount of products per lot: 250 before, 25 after the workshop. ABC makes it easy to analyze the benefits obtained by both reducing press set-up time and by removing non-value-added activities.

Id Before Workshop After Workshop 1 Unit cost of the semi-finished

products (invoice): 35

Unit cost of the semi-finished products (invoice): 35 2 Cost of marketing process:

0.20

Cost of marketing process: 0.20

3 Cost of design and development process: 2.10

Cost of design and development process: 2.10

4 Cost of accounting and IT process: 2.62

Cost of accounting and IT process: 2.62

5 Cost of supply chain management: 3.65

Cost of supply chain management: 3.65 6 Cost of quality management:

0.10

Cost of quality management:

0.10 7 Cost of shipping and

warehouse management: 0.90

Cost of shipping and warehouse management: 0.90

8 Cost of service and post-sales process: 5.10

Cost of service and post-sales process: 5.10

9 Cost of the cell: 3.67 Cost of the cell: 3.57

10 Plant amortisation share: 2.07 Plant amortisation share: 2.07

Total cost of the product: 55.41 Total cost of the product: 55.31 Fig. 7.9 Product cost table according to ABC before and after the workshop

136 7 Lean Metric, Lean Accounting and Value Stream Accounting