13 - John Darlington 4 Tocpa Eng Feb 2013 PDF

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Fourth International TOCPA Conference
9-10 February, 2013, Tallinn, Estonia
Big Picture Financial Mapping

using T,I, and OE
John Darlington
Theory Of Constraints Practitioners Alliance TOCPA

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John Darlington
John Darlington is a management consultant specialising in TOC & Lean
applications applying the principles across the entire enterprise, from design to
delivery.
He develops programmes of practical implementation integrating improvements
to the physical flow of the product or service, and the information flow that
converts customer demand into actions.
A qualified accountant John won the Toyota Prize for Best New Idea at the
South African Production and Inventory Control Society and has been a guest
speaker at APICS. Contact details:
j.darlington@valueflowconsulting.com
+44 (0) 7811 440847
Career history
John worked for AlliedSignal Turbochargers from 1986 1999. During this time, he held a variety of roles including Financial
Director and IT Manager of the Original Equipment site and Plant Manager of the Turbocharger European Aftermarket. A Director of
AlliedSignal Limited John qualified in Constraint based management with Goldratt Institute and as a Lean and Six Sigma Expert
through Renault Institute
As Kaizen Director of United Engineering Forgings, the largest independent forging and machining group in the UK, John led the
systematic introduction of Improvement methodologies across the 6 U.K. sites with particular emphasis on practical application to
improve bottom line performance.
He combines application with teaching for Cardiff Business Schools Lean Enterprise Research Centre founded by Dan Jones on
their MSc course specialising in mapping, capacity planning and scheduling and where he has developed Flow Accounting.
He was appointed Visiting Professor of Practice at The University of Wales Newport Business School in June 2011and joined the
University of Buckingham in 2012 where he contributes to the design and delivery of the new Lean Enterprise Master of Science
course.
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Observations about Improvement

Activity both Operational and
Accounting

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Most improvement activity does not

improve the bottom line! Why?
Local efforts tackling isolated parts of the system to no overall

beneficial effect
Poor understanding of demand and capacity: plant not being run to

maximise the flow of value through the bottleneck
Nave application of lean tools and techniques: often in the wrong

place at the wrong time
Inappropriate delegation of leadership for improvement

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What is wrong with current accounting?
Conventional Accounting systems were designed in an age of mass

production and are completely inadequate at serving todays businesses
Here are just a few areas of contention and conflict with lean practices: -
Conventional accounting systems encourage overproduction by their clumsy

interpretation of the value adding principle.
They do not recognise the importance of bottlenecks, constraints or pacemaker

processes
They encourage local efficiency and consequently create islands of excellence
They have little or nothing to say about lead time
They promote the idea that the bigger the batch the lower the unit cost
They encourage cost reductions which often prove to be mirages

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Structure of the Flow Accounting Process
Value Flow Mapping -

a diagnosis of the
Current State
Policy Analysis Demand Analysis Capacity Analysis Inventory Analysis
Clarification of the financial consequences of the current state
Tackle the Break down into

whole in one chunks
Quantitative financial assessment of the initial future state
Value Flow Accounting Data Acquisition Value Flow

& Decision Making Structure & Modelling Performance Measures
Financially quantified current state

Financial consequences of the future state agreed
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The Big Picture Financial Map (BPFM)

should give us
A pareto of the most important aspects of the business
The overall capability of the system to fulfil the demand placed on it in

terms of money
A feel for the relative emphasis & importance; Throughput, Inventory,

lead time, throughput as a % operating expenses
A view as to where the more detailed mapping activity should focus
An assessment of the required level of improvement activity:

considering:
Customer demands
Competitive pressure
Group aspirations
The scope for improvement
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A Case Study example Its too expensive to stop

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Value Flow Mapping
Draw with a logical flow in mind considering the major
dependencies. Do NOT trying to show real movements
which might come out as a spaghetti diagram.
This is not the objective of a Value Flow Map
Finish
Die Shop
North Line
Control
Shotblast
Cooled Finish
Cutting Forge South Line
Heat
Shotblast
Induction Treatment
Joy
Heating
Mining Line

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Value Flow Mapping
Add the main routes of products flowing

through production to final customers
Finish
Die Shop
North Line
Control
Shotblast
Cooled Finish
Heat
Shotblast
Induction Treatment Joy
Heating Mining Line

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Value Flow Mapping OTIF

82% by
We only MAKE money one way so lets record week
on our VFM how much money different parts of
the process generate for us
Die Shop Finish Con. Cooled 000s

Sales 9263
North Line Material costs(4179)
Control Throughput 5084
Shotblast
Cooled Finish
Heat Heat Treated 000s
Shotblast
Sales 2738
Induction Treatment Joy Material costs(1023)
Heating Mining Line Throughput 1715

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OTIF
Value Flow Mapping 82% by
week
Where is the inventory tied up in the system?
Fgds Con. Cooled 000s

Die Shop 1707 Finish 604 Sales 9263
3760
1489 North Line Material costs(4179)
RM Throughput 5084
Control
12670 Shotblast
Cooled Finish Fgds
175 416
Cutting 616 Forge 9
South Line
Heat
Shotblast
1610 Heat Treated 000s
Induction Treatment 786
Joy Sales 2738
200 Fgds
1574 Material costs(1023)
Heating 9 Mining Line 1290
Throughput 1715

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OTIF
Value Flow Mapping 82% by
week
How do we turn the inventory into time? Days of
sales cover?
Die Shop 1707

Finish Fgds Con. Cooled 000s
604 Sales 9263
3760 North Line
RM Control Throughput 5084
Shotblast
12670
Cooled Finish Fgds
175
Cutting Forge 9 South Line
416
616
Heat
Shotblast
1610 Treatment 786 Heat Treated 000s
Induction Joy Sales 2738
200 Fgds
Heating 1574 Material costs(1023)
9 Mining Line 1290
Throughput 1715

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Value Flow Mapping.How can

we convert the production units
into days of sales cover?
Step 1 find the accounting data and decide on the
alignment i.e. the inventory ending position is to be
compared with future sales
000's 000's 000's 000's 000's 000's 000's 000's 000's
Month Accounting days Raw Materials Inventory FG Inventory WIP Working Inventory Sales Mat Cost D Lab Variable Fixed Overhead Cost of Sales
Opening 419438 348769 1048765 1397534
Jan 20 421,804 365,010 1,103,376 1,468,386 846,293 366,758 146,987 115,865 270,987 900,597
Feb 21 420,478 352,350 1,073,247 1,425,597 1,089,873 472,838 150,236 117,834 274,900 1,015,808
Mar 23 411,332 369,041 1,150,408 1,519,449 1,174,546 509,388 152,673 119,874 281,009 1,062,944
Apr 19 461,278 375,689 1,009,595 1,385,284 950,220 412,148 141,682 113,351 264,981 932,162
May 22 430,780 360,554 1,107,902 1,468,457 964,689 418,710 148,999 115,923 230,931 914,563
Jun 20 476,068 361,049 1,083,007 1,444,057 1,067,380 460,462 148,765 112,347 260,432 982,006
Jul 17 530,740 353,199 1,075,086 1,428,285 871,243 376,754 140,354 111,946 249,870 878,924

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Value Flow Mapping.How

can we convert the inventory
in pieces into days of sales
cover?
Step 2 perform smoothing to reduce the impact of
different accounting days in each period and restate
the sales, material cost of sales, and full cost of
sales
000's 000's 000's

Smoothed Smoothed Smoothed Smoothed Smoothed
Material Raw Smoothed Finished Working Total
Smoothed Cost of Material MLT in Goods in Inventory Inventory
Month Accounting days Smoothed Sales Cost of Sales Sales Days Days Days Days Days
Opening
Jan 20 846293 900597 366758 34.31 34.94 11.62 46.55 80.86
Feb 21 1037974 967436 450322 28.10 34.22 11.32 45.53 73.63
Mar 23 1021344 924299 442946 28.48 34.83 11.44 46.27 74.75
Apr 19 1000231 981223 433840 28.44 35.17 11.28 46.46 74.90
May 22 876990 831421 380645 36.35 36.43 13.56 49.98 86.34
Jun 20 1067380 982006 460462 28.07 33.85 11.01 44.86 72.93
Jul 17 1024992 1034028 443240 32.22 31.42 10.48 41.90 74.12

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Value Flow Mapping.How can we convert

the inventory in pieces into days of sales
cover?
Step 3 apply the smoothed figures to the inventory
balances at the end of the prior month).
Raw material 430780 x 30 days =

Smoothed raw material cost of sales 460462
Work in progress 1107902 x 30 days =

Smoothed cost of sales 982006
Finished goods 360554 x 30 days =

Smoothed cost of sales 982006

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82% by
week
Who is responsible for what?
Die Shop 1707

604 Sales 9263
3760 North Line
Shotblast
12670
Cooled Finish Fgds
1759
416
616
Heat
Shotblast
2009 Fgds
Mining Line 1290
Throughput 1715
Raw material Work in Progress Finished goods
28.10 days 34.70 days 11.30 days

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82% by
week
If responsibility followed flow it would look like this
Die Shop 1707

604 Sales 9263
3760 North Line
Shotblast
12670
Cooled Finish Fgds
1759
416
616
Heat
Shotblast
2009 Fgds
Mining Line 1290
Throughput 1715
Raw material Work in Progress Finished goods
28.10 days 34.70 days 11.30 days

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82% by
What are the operating expenses of running the
week
production system?
Overheads 3048k
Die Shop
366k 1707
604 Sales 9263
3760 North Line
Shotblast
12670
Cooled Finish Fgds
1759
416
616
Heat
Shotblast
2009 Fgds
Mining Line 1290
Throughput 1715
Raw material 2255k Work in Progress
628k Finished goods
28.10 days 34.70 days 11.30 days

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Value Flow Mapping

OTIF
What about looking at the due date performance & 82% by
inventory lead times by the distinctive value streams
week
Overheads 3048k
Die Shop
366k 1707
604 Sales 9263
3760 North Line
Shotblast
12670
Cooled Finish Fgds
1759
416
616
Heat
Shotblast
Fgds
Heating 1574 2009 Material costs(1023)
Mining Line 1290
Throughput 1715
Raw material 2255k Work in Progress Finished goods
28.10 days 34.70 days
628k 11.30 days
The second level of inventory analysis; the average is broken down into its
constituent parts
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Value Flow Mapping

What about looking at the inventory lead times by the
distinctive value streams CC OTIF HT OTIF
90% by 72% by
Overheads 3048k week week
Die Shop
366k 5.2d
1.8d Sales 9263
11.4 North Line
4.5d Material costs(4179)
d
Shotblast
30.8d
Cooled Finish Fgds
5.3d
1.3d
1.5d
Heat
Shotblast
3.9d Treatment 9.6d Heat Treated 000s
24.5d Fgds
Heating 19.2d Material costs(1023)
Mining Line 15.7d
Throughput 1715
Raw material 2255k Work in Progress
628k Finished goods
28.07 days 33.85 days 11.01 days
What does this tell us.. It is screamingly obvious where the biggest issue is
at present
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Value Flow Mapping.Now weve got the inventory in

terms of days worth, what do we do with it?
Step 4 we can chart this information and seek to
explain any trends that emerge.
Relationship between Sales and Manufacturing Lead Time

Inventory Relationships
100000 50.00
90000 45.92 45.00 50.00

45.92
80000 40.00
40.00
35.46
37.15
35.85 35.46 37.15 35.85
70000
33.19
34.33 35.00 33.19 34.33
30.00 28.25 28.05
Days
60000 30.00
28.25
23.08 22.61 23.25
Days
21.84
's
50000 25.00
20.00 18.44 18.34
40000 20.00 14.20 12.32
10.00 10.38 10.95 10.73 9.18 10.97
30000 15.00
20000 10.00
0.00
10000 5.00
Aug Sep Oct Nov Dec Jan Feb
0 0.00
Aug Sep Oct Nov Dec Jan Feb
Smoothed Sales 72114 69759 69674 86454 54439 77228 76239
Smoothed Raw Material Days Smoothed MLT in Days
Smoothed MLT in Days 35.46 37.15 35.85 28.25 45.92 33.19 34.33 Smoothed Finished Goods in Days

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Value Flow Map information output

We are looking for Trends and Relationships which may not have been explicitly analysed
before linking commercial considerations to operations and financial information
Sales over time in units and value.
Inventory over time broken down into: -
Raw materials days
Work in progress days
Finished Goods days
Hours worked
Dependencies
Rules about production organisation
Policies
Obsolete or slow moving inventory
Planned level of utilisation of resources
How do we decide on the number of work centres
Working Capital
Debtor days
Creditor days
Buffering
The list is not exhaustive.

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Quantifying the Value Flow Map
We can now complement our sales and operational map with financial data we have
analysed:
Sensitivity to making money
Working capital profile
Inventory in terms of days of sales cover
Stock age profiles at different parts of the system
Trends on labour hours and work in progress
Trend lines for performance overall
The data helps us quantify the judgements we have made whilst compiling the material and
information flows.
By contrasting these measures with the desired level of business performance, we can
begin to understand the scope for improvement necessary to achieve the goal and
whether improvement must be attempted in stages to ensure success.

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Value Flow Mapping.What other financial information can

we develop that helps us focus on the most important
aspects of the business?
Sales 12001200 Step 6 choose a reasonable period of
time like the last 12 months and get
Material costs 5202000 hold of the data regarding what the
company really generated in terms of
Throughput 6799200 sales and what it really spent its money
on. Arrange it in terms of impact a bit
Overheads 2160000 like this: -
Wages 1722864 Step 6 Now apply a factor to each of the
headings and ask yourself what is the
Consumables 1236000 impact on the bottom line if this figure
Sales Org 450000 was to improve by X %?
Pick a low number like 5%, we want
Depreciation 380000 people to understand that relatively
modest real improvements can make a
Warranty 120012 big difference to the bottom line.
Head Office 208000 Step 6 check out the completed
sensitivity slide on the next page, what
Freight Out 20000 does it say to you about where to focus
to make the most impact on the bottom
Profit 502324 line?
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Key Drivers Sensitivity Analysis
Sept YTD Profit and
Loss Actual A 5% Change for better effects the
s bottom line by: -
Sales 12001200 Sell Price 600060
Material costs 5202000 Material costs 260100
Throughput 6799200 Throughput 339960
Overheads 2160000 Overheads 108000
Wages 1722864 Wages 86143
Consumables 1236000 Consumables 61800
Sales Org 450000 Sales Org 22500
Depreciation 380000 Depreciation 19000
Warranty 120012 Warranty 6001
Head Office 208000 Head Office 10400
Freight Out 20000 Freight Out 1000
Profit 502324
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Working Capital Relationships Current State

OTIF
Inventory Pipeline in Days 82% by
week
Raw WIP Fin Gds
28 34 11
Debtor Days
50
Payables Days
Finance Days
60
63
June End Inventory of 1.4 million

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Why the obsession with the inventory?
Because inventory tells us everything we need to know about how the company
is really using its capacity as opposed to how it describes the system for
deploying capacity
Because inventory is the fingerprint of waste; too much too soon always leads
to too little too late. Ohno did not call over production the worst form of waste for
nothing!
Because inventory is the intermediary between demand and capacity and the
longer it resides there the less well matched is our capacity to demand and the
more likely we are to spend money badly.
Because in manufacturing all the errors end up in the inventory

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Measure of Improvement
Manufacturing Lead Time as Measured by Days Inventory in WIP
35
20,000
30
29.0 29.1
28.1
26.3
No. of Pieces
25
15,000
22.9
20.1 20.0 20
Days
18.4
16.7
10,000
14.6 15
13.0
12.4
10
8.9 9.0
5,000 7.8
5
0 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Closing WIP (Pcs) 10409 11344 12507 12693 8812 9360 7336 8739 7633 6781 6159 5136 7352 4945 4207
Sales (Pcs) 11107 11748 14275 1308514401 13945 11010 11440 13700 15600 20759 1247615104 16473 16216
WIP Days 28.1 29.0 26.3 29.1 18.4 20.1 20.0 22.9 16.7 13.0 8.9 12.4 14.6 9.0 7.8
Period

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Working Capital Relationships First Future State?

Operating OTIF
Throughput Inventory
Expense 95% by
Inventory Pipeline in Days week
Raw WIP Fin Gds

20 7 5
Debtor Days
50
Payables Days
Finance Days
60
22
Real money Extra Throughput in OTIF, less inventory lead time
operating expense centred on FLOW. More real money of x million
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December
Control Cooled Heat Treated
Flow Accounting Sales
's
771933
's
228167
reflecting the flow Material cost

Throughput
348217
423717
85283
142883
4.5 12.5 Wages Basic 29000 19667

Overtime 2900 1967
days days Bonus Scheme 2175 1475
Pension 2552 1731
NI 3408 2311
Energy 11200 2800
Depreciation 1111 556
VS Controllable Expenses 52346 30505
Higher VS Contribution 371371 112378

3.5
days Wages Basic 55333
Overtime 5533
Bonus Scheme 4150
Pension 4869
NI 6502
Energy 26000
Warranty provision 10001
Dies 25500
3rd Party Forge Maintenance 7917
Depreciation Forge Die Shop 29167
& HT
3rd Party fork lift truck maintenance
417
Tooling 12500
Shared VS Controllable Expenses
187889
Lower VS Contribution 295860

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www.tocpractice.

Big Picture Financial Mapping

Theory Of Constraints Practitioners Alliance TOCPA

Observations about Improvement

Theory Of Constraints Practitioners Alliance TOCPA

Most improvement activity does not

Local efforts tackling isolated parts of the system to no overall

Poor understanding of demand and capacity: plant not being run to

Nave application of lean tools and techniques: often in the wrong

Inappropriate delegation of leadership for improvement

Theory Of Constraints Practitioners Alliance TOCPA

What is wrong with current accounting?

Conventional Accounting systems were designed in an age of mass

Conventional accounting systems encourage overproduction by their clumsy

They do not recognise the importance of bottlenecks, constraints or pacemaker

They encourage local efficiency and consequently create islands of excellence

They have little or nothing to say about lead time

They encourage cost reductions which often prove to be mirages

Theory Of Constraints Practitioners Alliance TOCPA

Structure of the Flow Accounting Process

Value Flow Mapping -

Policy Analysis Demand Analysis Capacity Analysis Inventory Analysis

Clarification of the financial consequences of the current state

Tackle the Break down into

Quantitative financial assessment of the initial future state

Value Flow Accounting Data Acquisition Value Flow

Financially quantified current state

The Big Picture Financial Map (BPFM)

The overall capability of the system to fulfil the demand placed on it in

A feel for the relative emphasis & importance; Throughput, Inventory,

A view as to where the more detailed mapping activity should focus

An assessment of the required level of improvement activity:

A Case Study example Its too expensive to stop

Theory Of Constraints Practitioners Alliance TOCPA

Theory Of Constraints Practitioners Alliance TOCPA

Value Flow Mapping

Add the main routes of products flowing

Theory Of Constraints Practitioners Alliance TOCPA

Value Flow Mapping OTIF

Die Shop Finish Con. Cooled 000s

Theory Of Constraints Practitioners Alliance TOCPA

Fgds Con. Cooled 000s

Theory Of Constraints Practitioners Alliance TOCPA

Die Shop 1707

Theory Of Constraints Practitioners Alliance TOCPA

Value Flow Mapping.How can

000's 000's 000's 000's 000's 000's 000's 000's 000's

Theory Of Constraints Practitioners Alliance TOCPA

Value Flow Mapping.How

000's 000's 000's

Theory Of Constraints Practitioners Alliance TOCPA

Value Flow Mapping.How can we convert

Raw material 430780 x 30 days =

Work in progress 1107902 x 30 days =

Finished goods 360554 x 30 days =

Theory Of Constraints Practitioners Alliance TOCPA

Value Flow Mapping OTIF

Die Shop 1707

Theory Of Constraints Practitioners Alliance TOCPA

Value Flow Mapping OTIF

Die Shop 1707

Theory Of Constraints Practitioners Alliance TOCPA

Value Flow Mapping OTIF