The LEAN Accountants

Achieving World-Class Cost Optimization

In the years since the economic downturn, most companies have pursued quick and easy procurement cost reductions. However, many businesses continue to leave money on the table because transformational change is challenging and imposing. Most organizations know they can reduce costs further, but take shortcuts to implement quick fixes that have little long-term impact. Nevertheless, companies can develop a culture of continuous cost optimization by utilizing a focused organization to plan, execute, and sustain advanced cost-reduction practices.

 Even when companies establish a "center-led" strategic sourcing and procurement organization, limitations of effectiveness often arise. These are due to specific issues (like a lack of technical expertise) in the sourcing and procurement organization, limitations (often of negotiation or management expertise) of the business units responsible for contracting goods and services, or a lack of coordination between the two. By combining the knowledge of the sourcing and procurement organization and the insight from the business units, organizations can shift their focus from cost-cutting band-aids to long-term cost structure optimization.

The first step for a company is to establish a new organization focused on driving company-wide cost optimization. This organization must have a senior leader who reports directly to the C-suite, as well as "category teams" to leverage the knowledge and experience of those involved in the daily processes of good and service procurement. Each category team should include a manager, key spenders and support members, transactional members (buyers), and a finance representative to act as an independent "scorekeeper." The team could also include strategic sourcing or procurement staff or other key stakeholders.

The second step is for the new cost optimization organization and its category teams to plan and execute advanced cost optimization practices. The focus should be on rate (or price) reductions, which impact supplier relationships, and usage (or consumption) reductions, which impact internal stakeholders. Leading organizations address these areas with maximum effectiveness using multiple tools and practices, often in the areas of:

 

• Advanced Strategic Sourcing and Category Management Practices such as developing and implementing a formal sourcing strategy.
• Advanced Supplier Relationship Management (SRM) practices such as implementing cost improvement programs, supplier audits, contract restructurings, and contract compliance reviews. 
• Demand and Specification Management such as developing demand forecasts, identifying pooling opportunities, and evaluating and optimizing goods and service specifications.
• Benchmarking, Market Intelligence and Should-Cost Modeling such as leveraging relevant rate and usage benchmarks and developing should-cost modeling capabilities for key spend categories. 

The final and most critical component is ensuring the savings "stick." Just like how it took you four times of trying a low-carb diet and seeing your ten pound weight loss come grumbling back a month later to realize that it wasn't a "diet" you needed but a "lifestyle change," many cost reduction efforts by organizations never fully come to fruition due to a number of poor practices, controls, and other internal changes. Savings "leakages" are most common in vendor relationships, where inadequate vendor set-up, negligent maintenance of item masters, and too many change orders can erode cost savings. Savings also tend to run away during the procure-to-pay process, often due to insufficient control of purchase requisition and PO approvals and a lack of three-way matching for goods and services. The independent "scorekeeper" is vital to tracking cost savings and reducing the budget line items accordingly, thus preserving the integrity and effectiveness of the program. Many businesses struggle to capture savings and increase operating income. Best practice is to reduce relevant budget accounts with the negotiated savings, then track realization with the suppliers and business units.

By planning, executing, and sustaining advanced cost optimization practices (via a dedicated and focused organization), companies can develop a culture of continuous savings maximization. Organizations willing to invest in establishing world-class cost optimization capabilities, instead of quick fixes, will realize benefits ranging from cost-based competitive advantages to improved gross and operating margins. Plus, no one likes ripping off a band-aid.

This post was first seen at www.spendmatters.com. The post was written by Hani Alexander, Managing Director at Alvarez and Marsal. Mr. Alexander can be reached at www.alvarezandmarsal.com.

To learn more about this post or other matters related to LEAN, please contact the LEAN Accountants of McKonly and Asbury, LLP.

The iPad And Its Role In Lean Manufacturing Success

The following article, written by Andy Amalfitano, VP & General Manager, Manufacturing Execution and Intelligence Division, Solarsoft Business Systems, was first seen on the website www.foodmanufacturing.com

When it comes to going lean in manufacturing, the iPad is much more than a space saver, it’s an agile money-saver and money-maker, too.

Although it plays a vital role in manufacturing, executives continue to struggle with the intersection of analytics and information to support lean manufacturing initiatives. But this code has suddenly been cracked, thanks in part to the iPad.

Why the iPad?

What’s the iPad’s secret for a significant production increase and more uniform conformance to a manufacturer’s lean manufacturing initiative? It’s simple. iPad’s iOS provides a new way to touch applications and manipulate data. Gone are the days with people stuck navigating through menus while juggling a laptop or netbook.  More than any other executive, today’s manufacturing professional needs agility and mobility. And when squeezing insight and meaning out of every piece of data adds up to reduced costs, improved throughput and ultimately greater profitability, the new iOS approach can make the world of difference.

Take a manufacturing company with global facilities as an example — how do operations management and senior executives quickly drill down to the latest production run statistics for a given line or machine at a glance? Enter the iPad. While there are plenty of cases where an iPad has been used on the manufacturing floor to keep track of tactical functions, it can be even more powerful in the hands of management, looking at every strategic advantage that could boost the bottom line. That’s where manufacturing intelligence comes into play.

Yet one of the biggest challenges with some business intelligence applications is that the very data and detail that makes them so powerful can make them cumbersome. For example, data from various locations may not be centralized, making performance comparisons between manufacturing sites a time consuming task. But the same design that makes consuming media on an iPad such a joy also makes it possible to rapidly drill in to the latest data sets, and can even make slicing and dicing data fun.

Lean Six Sigma Could Reduce Debt but Faces Obstacles

Lean Six Sigma could help reduce the soaring national debt but faces some key challenges in government implementations, according to a new survey by ASQ, the leading global network of quality experts. The biggest obstacle, survey respondents said, is a U.S. federal government structure that can be a barrier to comprehensive evaluation and accountability.

Lean Six Sigma has been in the spotlight recently as several U.S. presidential candidates have pledged to use the management tool, if elected. The Obama administration is currently studying how Lean Six Sigma could help eliminate federal government waste.

More than 2,500 ASQ quality improvement professionals participated in the survey. The online survey of ASQ members was fielded from August 29 through September 6, and represents quality improvement professionals from a number of industries including government, manufacturing, service, healthcare and education. In addition to noting challenges with the federal government’s structure, survey participants ranked other obstacles to implementing Lean Six Sigma in government agencies:

1. An environment faced with conflicting strategies, goals, and priorities
2. Creating a sense of urgency to deploy a comprehensive improvement methodology across all government agencies
3. The personnel management model currently used by many government agencies
4. A lack of familiarity with Lean Six Sigma and how it can benefit the organization
5. Ongoing political partisanship.

5 Ways to Foster Innovation

The following article was first seen on the CBS Interactive Business Network. The article post was written by Kimberly Weisul. Ms. Weisul can be contacted through the CBS Interactive Business Network at www.bnet.com.

A recent email from Harvard Business School does a nice job of summing up the efforts of its faculty to discover what companies can do to increase their capacity for innovation. Some of these findings have already been written about in this blog, while others are new. Here’s how the researchers suggest managers can do a better job of creating and managing innovative ideas:

1. Prizes make a difference. Today, the best-known prize for innovation is probably the Ansari X Prize, which offered $10 million for the first privately funded manned spacecraft that could break through the earth’s atmosphere within two weeks. There are other X Prizes now being offered for designing fuel-efficient cars, reaching the moon, and sequencing the human genome. But skeptics claim that these prizes don’t spur people to create things they wouldn’t have created anyways-they just reward existing behavior.

Josh Lerner and Tom Nicholas, both of Harvard Business School, and Liam Brunt of the Norwegian School of Economics, set out to find out if prizes really matter. The team looked at a series of awards given by the Royal Agricultural Society of England during the 19^th century. The Society offered dozens of awards for the invention of new farming equipment and techniques. By analyzing databases from the British Patent Office, the researchers found that the number of patents and patent renewals shot up in various specialties the years that prizes were awarded. Interestingly, it didn’t matter if the prize was cash or a medal-the effect was the same.

Avoid The Pitfalls and Make Benchmarking A Successful Initiative

Benchmarking is a process that allows companies to track performance for staff and personnel as well as operations and business lines. Benchmarking supports change and facilitates the process of transforming a business process by involving key stakeholders and process owners who can initiate change through understanding and learning in order to eliminate performance gaps. It identifies key improvement opportunities through process analysis, reveals others’ processes and practices that can serve as improvement models, reduces barriers through demonstrated success, and fosters adaptation of best practices. While benchmarking can take organizations to new levels of performance, the major challenge, just like change, is it isn’t easy!

High performance organizations recognize that benchmarking must go beyond taking simple benchmarks or gathering numbers for comparison. These random acts might be easy, but they don’t offer significant learning for lasting, consistent improvement. Benchmarking encompasses understanding the quantitative side of performance. It also must include examining and adapting enabling factors that support high performance. It is a continuous learning process.

Effective benchmarking focuses on how to make data useful, as opposed to focusing solely on the data. Developing project plans that include a business case for change, resources that support the change, and the actions/milestones for implementation will enable real process change. Yet benchmarking’s reward is elusive in many organizations.

Plan, Do, Check and Act - A How To

Plan, Do, Check and Act or PDCA, is a cycle that can be used as a tool for almost any project from simple to complex or as an effective tool for company-wide policy change. PDCA can be used in a number of circumstances such as

• For development of a new product or service
• For improvement of an existing product or service
• For creating formal policy and formal work process flow
• For analysis and collection of data for problem solving existing issues
• To create a policy for continuous improvement* As a tool for seamless implementation of any change

PDCA is most effective when you make it a policy for change within your organization. Embed this process into any continuous improvement model that your company may have. Create teams of people who will actually implement the stages of PDCA which are usually your front line staff or personnel. By doing this, you will get buy-in from your front-line staff by soliciting their feedback in the planning stages of the PDCA. This is absolutely essential and is often the most neglected phase of initiation of PDCA implementation. A PDCA has to be structured using feedback from the people who are doing the actual work

Once you have effectively implemented a team to act as the change agents for your company and have gained the appropriate buy-in, then it is time to roll-out the PDCA cycle company-wide.

Some examples of how to roll out a PDCA are:

• Training for supervisors, team leads, and front-line staff
• Development of a desk-aide (or template) for ensuring that the PDCA is a visible, living policy document for staff
• Publicize PDCA accomplishments. Highlight results and  accomplishments of the PDCA model.

As with any process implementation, sustaining the process is as critical as the implementation of the process. Similar to the fifth S in 5S LEAN thinking (Sustain), the ability to appropriately sustain the process to gain real long term process improvement is mission critical to PDCA. When implementing PDCA, the most important thing to keep in mind is that PDCA is not designed as a one-way project plan. The PDCA design is circular, which means that any one of the four processes can be revisited and repeated as needed for refinement and correction. Consider a regularly scheduled review of the PDCA, or make the review a part of monthly leadership meetings.

Finally, make it a part of your company-wide staff meetings. Give front-line staff the opportunity to offer honest feedback about each stage of the process. The PDCA cycle can be repeated for continuous improvement, and can be revised as needed. Outside of data, your subject matter experts are the only people who can tell you how the PDCA changes are working at the front-line level.

Portions of this article was written by Tiffany Willis, an expert in the logisitics and supply chain management. Ms. Willis can be reached at http://www.yoexpert.com/. For further information on PDCA or other LEAN strategies and principals, please contact the LEAN Accountants of McKonly and Asbury, LLP.

A3 Thinking – Let's Solve Problems

In our LEAN Manufacturing series we have talked a lot about the processes and functions of LEAN. Now let's talk about how to use LEAN to problem solve. 

Problem solving can tend to be the most difficult part of LEAN. After you have identified the problem, usually through the use of LEAN concepts, improving the process tends to be more straight forward. But, what is it that is so difficult about problem solving? 

What is it that usually gets in the way of being able to solve problems? In most environments, whether or not a manufacturer, the problem usually is: 

• The problem is not obvious.
• There are multiple causes of the problem.
• No common problem solving method.

 Now the causes of these problems can be rooted to people, lack of data, communication, politics or a number of reasons. However, ultimately, these roots lead to the ultimate problem. 

A concept that started here in the United States and was then implemented and refined by Toyota is called A3 Thinking. A3 Thinking is considered the Deming approach to solving problems. What A3 Thinking does is to “Highlight the Problem” in order to implement a solution to resolve the issue. A3 Thinking allows all participants to learn from every issue by: 

• Allowing everyone who touches the issue to see it thru the same “lens.”
• Capturing the issue on a single sheet of paper.
• Solving the issue through following common logic.

 A3 Thinking is most commonly used by manufacturers to improve safety, increase quality or increase productivity. A3 Thinking specifically focuses on four areas: 

1. Plan
2. Do
3. Check
4. Act 

Webinar Recap: LEAN Operation Practices

We had another fantastic webinar yesterday presented by David Blain around LEAN Operation Practices! Thank you to everyone that attended and received CPE credit.

LEAN teaches a systematic approach to eliminating wastes and creating flow throughout the enterprise. We will be discussing the 5S concept of establishing a standard process and sustaining that process to create efficiency in any environment to help you reduce their internal cost of operations and overhead.

Be sure to check out our Upcoming Events page for news and updates on our future seminars and webinars.

Below, you will find the links to download a copy of the PowerPoint slides as well as replay the presentation, enjoy!

Download the PowerPoint LEAN 5S Webinar Slides.pptx

Link to view the presentation in a new window

A How To For Implementing LEAN In Your Supply Chain

Many manufacturers and distributors in this country are familiar with the value of LEAN principles and operating a LEAN business. Besides reducing lead times, cutting costs and increasing quality, LEAN thinking also leads to stability or a reduction in the high variation in a company’s processes and outputs of those processes.

Stability throughout any business is often a critical component of its long-term success. It typically boosts financial performance, builds a more stress-free workplace and creates a more organized work environment that positively impacts the flow of information throughout the business and, in particular, the supply chain.

Still, many companies haven’t begun to implement LEAN processes in the supply chain. While senior executives understand how they can add value, many still haven’t moved past the education stage into full-scale implementation. One reason may be that they haven’t made the mental leap as to how to accomplish this task. 

Don’t Let Price Pressure Affect Your Bottom Line

In today’s economy, customers are always looking for the best product at the most desireable cost. Squeezed margins and a very keen focus on cash flow have forced companies to do so. As a supplier of services or products, how can you avoid pricing pressures from your clients to ensure appropriate margins for work performed. Before you can even determine your strategy to handle and avoid price pressures from clients, first you must know the signs of price pressure.

What is price pressure? Price pressure is any buyer policy or practice that lowers your product or service asking price. It can be obvious and intense or subtle and slight.

Price pressure is obvious when customers eliminate preferred provider status, institute new competitive processes, or demand low prices for extended timeframes. It’s intensified with examples such as:

• Request to provide your “best price”
• Is there any additional room to negotiate the price
• Request for item quote without providing for the ability to ask questions.
• Request to itemize the quote

These actions show that price is the priority. Knowing these signs can help with determining your businesses strategy to handle price pressure.