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© BMA Inc. 2009. All rights reserved. Value Stream Cost & Capacity Exercises Lean Accounting for the Lean Enterprise © 2009 BMA Inc. All rights reserved.

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Presentation on theme: "© BMA Inc. 2009. All rights reserved. Value Stream Cost & Capacity Exercises Lean Accounting for the Lean Enterprise © 2009 BMA Inc. All rights reserved."— Presentation transcript:

1 © BMA Inc All rights reserved. Value Stream Cost & Capacity Exercises Lean Accounting for the Lean Enterprise © 2009 BMA Inc. All rights reserved rev BHM revisions

2 © BMA Inc All rights reserved.

3 Value Stream Capacity Exercise

4 © BMA Inc All rights reserved.

5 Step 1. Calculate the Total Available Employee Time (#employees x #days x Labor Hrs per shift) x 3,600 seconds Step 2. Calculate the Employee Productive Time (Qty per Month – (Qty x (scrap + rework rate))) x Cycle Time x Crew Size) Step 3. Calculate the Employee Productive Capacity Percentage. (Employee Productive Time / Total Available Time) Step 4. Calculate the change-over time, scrap & rework time, downtime, inspection time. C/O = (quantity/batch size) x Change-over time Scrap/rework = Qty x (scrap + rework rate) x Cycle Time x Crew size D/T = Downtime% x Total Available Time Inspection= (Inspect% x Quantity) x Inspection time Step 5. Calculate the Total Non-Productive Time Step 4 plus 5S & meetings Step 6. Calculate the Employee Non-Productive Capacity Percentage Total Non-Prod Time / Total Available Time Step 7. Calculate the Employee Available Capacity Percentage. 100% - (Prod. Capacity + Non-Prod Capacity) Calculate the Employee Capacity for this small value stream

6 © BMA Inc All rights reserved.

7 The employee capacity has changed as a result of the kaizen improvements. Calculate the employee capacity after the kaizen

8 © BMA Inc All rights reserved. Notes / Answer Sheet

9 © BMA Inc All rights reserved.

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13 Inventory Valuation Exercise

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15 Calculate the Inventory Value Using the Days of Inventory Method 1.Calculate the material cost per day. 2.Calculate the conversion cost per day 3.Calculate Raw Material value (#days * material cost per day) 4.Calculate the Finished Goods value (#days *( material + conversion cost per day)) 5.Calculate WIP value (#days * material cost per day + #days/2 * conversion cost per day) 6.Calculate total inventory value by adding the three together

16 © BMA Inc All rights reserved.

17 Total Units Manufactured Total Material Cost Average Material Cost per Unit Total Conversion Cost Average Conversion cost per Unit 22,861$849,526$37.16$876,550$38.34 QuantityMaterial ValueConversion ValueTotal Value Raw Material 11,430$424,744$0$424,744 Work in Process 3,430$127,460$65,758$193,218 Finished Goods 4,573$169,898$175,341$345,276 TOTAL INV 19,433$963,238 $722,140$241,098 Calculate the Inventory Value Using the Number of Units Inventory Method 1.Calculate average material cost and average conversion cost 2.Calculate Raw Material value (#units * material cost per unit) 3.Calculate the Finished Goods value ((#units * material + conversion cost per unit)) 4.Calculate WIP value (#units * material cost per unit + #units/2 * conversion cost per unit) 5.Calculate total inventory value by adding the three together

18 © BMA Inc All rights reserved.

19 Calculate the Inventory Value Using the Days of Conversion Cost Method This method is used when the company tracks inventory but maintains inventory value for the,material content only. The conversion cost is then applied based upon the number of days of material. 1.Calculate the number of days of inventory. (Days in the month * Inventory value / Monthly Material Cost) 2.Calculate the Conversion Cost Applied. (Number of days of inventory * total conversion cost / Number of Days in the Month) 3.Calculate total inventory cost. (Add materials value plus conversion cost applied) REVENUE Materials Direct Labor Support Labor Machines Outside process Facilities Other Costs TOTAL COST VALUE STREAM PROFIT Return on Sales Total Conversion Cost Conversion Cost Applied Total Inventory Cost $876,550$489,115$963,151

20 © BMA Inc All rights reserved.

21 Calculate the Inventory Value Using the Monthly Average Cost Method 1.Calculate Days of This Month. (Lower of # Days and Days in the Month 2.Calculate Days for Last Month (# Days minus Days of This Month 3.Calculate Current Month Average Value (Days of This Month * Average Cost this Month * Average Daily Demand for this Month 4.Calculate Last Month Average Value (Days of Last Month * Average Cost Last Month * Average Daily Demand This Month 5.Calculate the Inventory Value (Current Month Average Value + Last Month Average Value) Month Average Value February March April Average Cost Quantity in Stock Average Daily Demand # Days Days in the Month Inventory Value January$ , $130,015 February$ , March$9.2210, April$9.147, Days of ThisDays of LastCurrent MonthLast Month

22 © BMA Inc All rights reserved.

23 Defining Value Streams Exercises

24 © BMA Inc All rights reserved. Exercise: Defining Value Streams Company & Product Description Universal Valve Company manufactures industrial valves Sizes Mini Small Medium Large Types Medium Pressure Low Pressure High Pressure Plastic Brass Alloy Refrigeration Construction DIY Hydraulics Coffee Makers Commercial MANIFOLDS Brass/Alloy Small, Med, Large

25 © BMA Inc All rights reserved. Exercise: Defining Value Streams Company & Product Description The Universal Valve Company (UVC) manufactures valves in four industry standard sizes – Mini, Small, Medium and Large. UVC makes valves for applications classed as Low Pressure (LP), Medium Pressure (MP) and High Pressure (HP). The valves are machined and assembled from –plastic (LP) –brass (LP and MP) –alloy (HP) components. The plastic valves all have low pressure applications and are made exclusively for the plumbing/ water industry – domestic and commercial – and are sold to DIY chains, trade wholesalers and direct to construction companies. Only Small and Medium sized LP valves are made. Brass valves are made for low pressure and medium pressure applications. LP brass valves all have plumbing/ water uses and are made in Small and Medium sizes. MP brass valves are made in all four sizes and serve mainly refrigeration, and coffee machine OEMs. Large MP brass valves are made to order in two cells for fluid applications by specialist OEMs. Alloy valves are for specialized high pressure uses including hydraulics, commercial refrigeration and other technical applications by specialist OEMs. The alloy valves manufactured by UVC are all Mini, Small or Medium sizes. The company also combines brass or alloy valves with other components into Manifolds – with two assembly cells dedicated to this. Small and Medium valves (brass or alloy) are assembled into Manifolds on one cell; with Large valves (brass) assembled on the other cell.

26 © BMA Inc All rights reserved. Exercise: Defining Value Streams Product Data for Valves; MINI family MINI PlasticBrassAlloy Size of Valve: Mini None Medium PressureHigh Pressure % of Total Revenue9%10% Main Customers OEM Refrigeration & Coffee Machines OEM Hydraulics & other specialist uses No. of Manufacturing Cells 3 cells (1 Refrigeration 2 Coffee) 1 cell

27 © BMA Inc All rights reserved. Exercise: Defining Value Streams Product Data for Valves; SMALL family SMALL PlasticBrassAlloy Size of Valve: Small Low Pressure Medium Pressure High Pressure % of Total Revenue 7%3%13%9% Main Customers DIY Stores, Trade Wholesalers, Construction firms Refrigeration OEM, Coffee Machine OEM Commercial refrigeration. Hydraulic OEMs. Specialist OEMs No. of Manufacturing Cells 21 cell 4 cells (2 Refrigeration; 2 Coffee) 1

28 © BMA Inc All rights reserved. Exercise: Defining Value Streams Product Data for Valves; MEDIUM family MEDIUM PlasticBrassAlloy Size of Valve: Medium Low Pressure Medium Pressure High Pressure % of Total Revenue 8%5%12%6% Main Customers DIY Stores, Trade Wholesalers, Construction firms Construction firms & misc. Refrigeration OEM Commercial refrigeration. Hydraulic OEMs. Specialist OEMs No. of Manufacturing Cells 2121

29 © BMA Inc All rights reserved. Exercise: Defining Value Streams Product Data for Valves; LARGE family LARGE PlasticBrassAlloy Size of Valve: Large None Medium Pressure None % of Total Revenue8% Main Customers Made to order for specialist OEM firms No. of Manufacturing Cells 2

30 © BMA Inc All rights reserved. Exercise: Defining Value Streams Product Data for Valves; MANIFOLDS MANIFOLD Brass Alloy Size of Valve:Large Small or Medium Size % of Total Revenue3%7% Main Customers Made to order for specialist OEM firms No. of Manufacturing Cells 11

31 © BMA Inc All rights reserved. Exercise: Defining Value Streams Manifold Assembly Cells –1 cell assembles Small or Medium brass or alloy (never mixed) valves into Manifolds. This accounts for 7% of total UVC revenue with specialist OEMs as the customers. –1 cell assembles Large brass valves into Manifolds. This accounts for 3% of total UVC revenue with specialist OEMs as the customers.

32 © BMA Inc All rights reserved. Exercise: Defining Value Streams Summary of Production Cells SIZE Plastic Low Pressure Brass Low Pressure Brass Medium Pressure Alloy High Pressure Mini 00 3 (1 Refrigeration; 2 Coffee) 1 (specialist) Small 2 (plumbing/ water) 1 (plumbing/ water) 4 (2 Refrigeration; 2 Coffee) 1 (specialist) Medium 2 (plumbing/ water) 1 (plumbing/ water) 2 (2 Refrigeration) 1 (specialist) Large 00 2 (specialist) 0 Manifolds 2 (specialist) 1 (Specialist) Shared with Brass

33 © BMA Inc All rights reserved. Exercise: Defining Value Streams Factory Layout – before Value Streams Plastic Deflash 4 people Engineering 5 people Receiving & Shipping 2 People Plastic Machining & Assembly. 4 cells Brass screw, deburr & assembly. 13 cells Finished Goods Injection Moulding 2 people 12 people 65 people Alloy Screw, deburr & assembly. 3 cells 16 people Manifold Assembly. 2 cells 4 people 6 people Production Control 3 people Purchasing 3 people Customer Service 2 people

34 © BMA Inc All rights reserved.

35 Exercise: Defining Value Streams In your group discuss the possible ways in which you might define the Value Streams for the Universal Valve Company. What are the advantages and disadvantages of each ? State your preferred selection with reasons. Remember: Order Fulfillment Value Streams are primarily defined by materials flow.

36 © BMA Inc All rights reserved. Exercise: Define Value Streams Order fulfillment value streams are primarily set up based upon the flow of materials through the process. We need to create a value stream team that includes both production people and the people that support production. The value stream must be a reasonable size. –No less than 10% of revenues –Between people.

37 © BMA Inc All rights reserved. Exercise: Work Sheet VALUE STREAM Market Number of Cells Revenue % People

38 © BMA Inc All rights reserved.

39 Value Streams by Market Sample Answer #1 Value Streams by Materials PLASTICS BRASS large & Manifolds ALLOY BRASS Mini, Small, Medium Plastic Small LP 7% 2cells Brass Small LP 3% 1 cell Plastic Med LP 8% 2 cells 18 people Brass Mini MP 9% 3 cell Brass Small MP 13% 4 cell Brass Medium MP 12% 2 cell Alloy Mini HP 10% 1 cell Alloy Small HP 9% 1 cell Brass Medium LP 5% 1cell Alloy Medium HP 6% 1 cell Manifolds HP 10% 2 cell Brass Large MP 8% 2 cell 10 people 6 people 5 people 11 people 55 people

40 © BMA Inc All rights reserved. Exercise: Sample Answer #1 VALUE STREAM PLASTICSALLOY BRASS Mini, Small, Med BRASS Large & Manifolds NEW PRODUCT DESIGN SHARED Market DIY Construction Hydraulic Refrigerator Commercial Refrigerator Coffee DIY Construction Make to Order Number of Cells Revenue % 15%25%42%18% Ship/Rec Sales Cust Serv Acct IT Manager People 18 cell 1 FG 1 PC 1 Eng 1 Purchase 16 cell 1 FG 1 PC (share) 1 Eng 1 Purchase 55 cell 2 FG 2 PC 2 Eng 1 Purchase 16 cell 1 FG (share) 1 PC (Share) 1 Eng

41 © BMA Inc All rights reserved. Value Streams by Market Sample Answer #2 Value Streams by Market DIY, Trade & Construction OEM & Specialist Hydraulics Refrigeration & Coffee Plastic Small LP 7% 2cells Brass Small LP 3% 1 cell Plastic Med LP 8% 2 cells 10 people 18 people Brass Mini MP 9% 3 cell Brass Small MP 13% 4 cell Brass Medium MP 12% 2 cell Alloy Mini HP 10% 1 cell Alloy Small HP 9% 1 cell Brass Medium LP 5% 1cell Alloy Medium HP 6% 1 cell Manifolds HP 10% 2 cell Brass Large MP 8% 2 cell 10 people 6 people 5 people 11 people 45 people

42 © BMA Inc All rights reserved. Exercise: Sample Answer #2 VALUE STREAM DIY, Trade & Construction Refrigeration & Coffee Valves Hydraulics OEM & Specialist NEW PRODUCT DESIGN SHARED Products Plastics Brass Low Pressure Brass Medium Pressure Alloy Mini & Small Manifolds Brass Large Alloy Medium Number of Cells 69 cells25 Revenue % 23%34%19%24% Ship/Rec Sales Cust Serv Acct IT Manager People 28 Cell 1 FG 1 PC 1 Eng 1 Purch 45 cell 2 FG 1 PC 1 Eng 1 Purch 11 cell 1 FG (Share) 1 PC (Share) 1 Eng 1 Purch 18 cell 1 FG 1 PC 2 Eng

43 © BMA Inc All rights reserved. Value Streams by Market Sample Answer #3 Value Streams by Detailed Market Water OEM & Specialist Coffee Refrigeration Plastic Small LP 7% 2cells Brass Small LP 3% 1 cell Plastic Med LP 8% 2 cells 10 people 18 people Brass Mini MP 3% 1 cell Brass Small MP 6% 2 cell Brass Medium MP 12% 2 cell Alloy Mini HP 10% 1 cell Alloy Small HP 9% 1 cell Brass Medium LP 5% 1cell Alloy Medium HP 6% 1 cell Manifolds HP 10% 2 cell Brass Large MP 8% 2 cell 10 people 6 people 5 people 11 people 5 people Manifolds Brass Mini MP 6% 2 cell 10 people Brass Small MP 7% 2 cell 10 people

44 © BMA Inc All rights reserved. Exercise: Sample Answer #3 VALUE STREAM WaterRefrigerationCoffeeManifold Specialist OEM SHARED Products Plastic & Brass Low Pressure Brass Medium Pressure Brass & Alloy Small, Medium, & Large Alloy High Pressure Brass large Medium Pressure Number of Cells Revenue % 23%21%13%10%33% Ship/Rec Sales Cust Serv Acct IT Manager People 28 cell 1 FG 1 PC 1 Eng 1 Purchase 25 cell 1 FG 1 PC 1 Eng 1 Purch 10 cell 1 FG Shared 0 PC 1 Eng 0 Purchase 6 cell 1 FG shared 0 PC 1 Eng 0 Purchase 26 cell 1 FG 1 PC 1 Eng 1 Purchase

45 © BMA Inc All rights reserved. Universal Value Company Value Stream Costing Exercise

46 © BMA Inc All rights reserved. Universal Valve Company Creating an Income Statement August($ Thousands) Plastics458.3 Alloy675.0 Brass1,408.3 Large Brass525.0 Total3,066.6 Universal Value has decided to organize around 4 order fulfillment value streams: Plastic Valves Alloy Valves Brass Valves (Mini, Small, & Medium) Large Brass Valves and Manifolds August revenue for these Value Streams is given below:

47 © BMA Inc All rights reserved. Universal Valve Company Cell Staffing & Machines In August there were no staffing changes. Value Stream PlasticsAlloyBrass Large & Manifolds Support Number of Cells Materials Handling (1) Sales (7) Cust.Servc e (1) Accounting (3) IT (3) Engineerin g Mgr (1) Plant Manager (1) Operators Materials Handlers shared with Brass Production Control shared with Alloy Engineerin g 1121 Purchasin g shared with Brass Number of Machines

48 © BMA Inc All rights reserved. Universal Valve Company Breakdown of Costs Payroll per Annum –Operators & Materials Handlers$50,450 –Engineers$82,143 –Engineering Manager$100,000 –Customer Service$40,000 –Production Control, Purchasing, Accounting & IT $55,000 –Plant manager$120,000 –Sales are paid on commission of 0.42% of sales Insurance, payroll taxes, & fringes12.7% Machine depreciation/machine per annum$6,000

49 © BMA Inc All rights reserved. Universal Valve Company More Costs for the month of August Value Stream PlasticsAlloyBrass Large & Manifolds Support Materials $205.8K$562.5K$765.0K$362.5K $44.5K $5.2K Energy Costs $6.4K$25.0K$45.0K$20.5K MRO & Supplies $5.0K$6.5K$16.2K$7.1K$4.3K Space Used Sq. Feet 18,80017,40057,90015,90040,000 Travel Costs $1K$1.2K$2.2K$.8K$8.6K Occupancy cost = $2.00 per square foot per annum

50 © BMA Inc All rights reserved. Universal Valve Company More Information for Costs There are Corporate overhead costs of 1% of sales and Group overhead costs of ½% of sales. These are not allocated to the value streams. In August Universal Valve has gained $56.5K owing to exchange rate changes.

51 © BMA Inc All rights reserved. On your flip chart: Be sure to include all four value streams and support. Add the below the line adjustments to bring the statement into line with GAAP and other external reporting requirements. You may use rounded figures. Develop a plain English income statement for the Month of August Universal Valve Company Value Stream Income Statement

52 © BMA Inc All rights reserved. Exercise Answer

53 © BMA Inc All rights reserved. Universal Value Company Decision-Making Exercise

54 © BMA Inc All rights reserved. Example 1: Special Order with Available Capacity We received a special order of 1000 units per month of a Alloy Medium value –Price = $14.00 per unit –Standard Cost = $15 –Margin = ($1) –Material unit cost - $9.50 We have capacity available to produce these additional products Should we take the order?

55 © BMA Inc All rights reserved. Example 1: Special Order with Available Capacity

56 © BMA Inc All rights reserved. Example 2: Special Order without Available Capacity We have received a special order of 1000 units per month –Price = $14.00 per unit –Standard Cost = $15 –Margin = ($1) Material unit cost - $9.50 Must add an extra person ($4,204 per month) to the value stream Should we take the order?

57 © BMA Inc All rights reserved. Example 2: Special Order without Available Capacity

58 © BMA Inc All rights reserved. Example 3: Special Order with Outsourced Supplier We have received a special order of 1000 units per month –Price = $14.00 per unit –Standard Cost = $15 –Margin ($1) We have no available capacity, but have found a local supplier –Outsourced purchase cost - $12.75 Should we outsource this and take the order?

59 © BMA Inc All rights reserved. Example 3: Special Order with outsourced supplier

60 © BMA Inc All rights reserved. Example 4: Bring Outsourced Processes in House In the Brass Valves value stream continuous improvement has created enough capacity to possibly bring outsourced work in house. –Monthly outsourced cost - $ 62,400 –Material cost (if we make it in-house)= $36,000 To produce in house we must: –buy a 2 machines ($3060 per month) –hire an extra supervisor ($4500/mo) –and 2 more operators ($8,400 per month) Should we bring this work in-house?

61 © BMA Inc All rights reserved. Example 4: Bring Outsourced Processes In House

62 © BMA Inc All rights reserved. Example 5: Capital Purchase Frees Up People We are thinking of buying a new machine to automate a manual production task in the Brass Valves value stream. –Machine cost = $4,000 per month –Machine purchase frees up 2 assembly operators ($8400 per month) We have received orders for 2500 more units per month and the new machine provides the additional capacity. –The price is $18.00 and the material cost is $14.00 Should we buy the machine?

63 © BMA Inc All rights reserved. Example 5: Capital Purchase which Frees Up People


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