In a clip from a recent LEI webinar, BMA’s Nick Katko and Torre Consulting’s Mike De Luca explain how you can improve the performance and profitability of a new product or process value stream by using lean accounting tools.
Go to the LEI Webinar Library to watch the full recording and download the PowerPoint slides. Also, you’ll find a lightly edited transcript of the clip below.
Nick Katko: “What I want to do is I’m going to give you a quick product, new product example, using a box score. So here we have a current state box score. Our return on sales is 20%. That’s at the bottom. We have a hurdle rate of 28%. We’re not doing as well as we’d like. We introduce — we have a new product we’re introducing to an existing value stream. We know what the general plan is for sales. We can calculate the revenue. We can calculate the material costs. There’s a few incremental costs, which are part of the new product. We can also see the impact on capacity.
So, what you see in the right hand column, okay, we’re making money. It’s good. The issue is we don’t have enough capacity to produce this product. So what do we have to do before the new product introduction to be successful?
We have to actually hire more or buy more machines and hire more people. That’s a change in actual costs, which you see in the labor-cost line and the machine-cost line. Now we know we have enough capacity to produce the existing products, to make the new products. We also have enough available time in reserve for things that go wrong. We never want our available time to be 0%, by the way, because that means things might stop. And we can, we talked about the hurdle rate. Our hurdle rate is 28%. So the actual return on revenue with the new product with the additional cost is 28%. So we are achieving our hurdle rate. So again, it’s this incremental analysis, you know, we have a current state. What is the change? What is the impact of the new product?”
Mike De Luca: “I think there’s something really important to add quickly here, Nick, based on the point you made a few slides ago, the feedback loop is too long. When you’re in the process of designing a new product or service and preparing to introduce it as part of your design, we really encourage you to identify upfront, create upfront what these feedback tools, measurement tools are going to be. As soon as you launch implementation delivery production, you can quickly get that feedback. You’re not now all of a sudden in this rearview-mirror world of waiting for a month or a quarters worth of results before you can assess whether or not this new or service is meeting your goals. Right. We don’t want to wait for that lag to view as part of our design of the product or service. We want to design the appropriate financial tools to deliver the relevant information at the same time.“
