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Joel Nash
5 years ago
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1 $$$ $$$ $$$ $$$ $$$ $$$ $$$ $$$ $$$ $$$ These were all necessary and the cost of doing business things to be automated, outsourced, $$$ value stream mapped, measured and optimized right up until someone figured out they added no $$$ $$$ $$$ $$$ $$$ value and did not be incurred at all

2 Price Cuts Lift P&G Profits In Q4, But Market Share Deteriorates overall sales were down 1.2% to $20.2bn Bob McDonald, the group s under-pressure CEO, said the group will now lower prices on entry-level versions of brands such as Bounty and Charmin, as well of some health & beauty products, after having cut the prices of brands such as Tide and Gilette. It also revealed that the announced jobs cuts are coming in ahead of schedule. P&G had said it would look to eliminate 1,600 jobs in fiscal 2012 and another 4,100 during fiscal However, it noted it has already eliminated 2,000 jobs by 30 June, and now expects to complete most of the remaining layoffs by the end of calendar 2012 "The 172-year-old company built its fortunes after World War II on Americans' growing affluence and inclination to equate 'better' with a higher price. P&G flooded radio and television with ads promising its products delivered superior performance in everything from teeth cleaning to floor shining. In return, P&G got a superior price. "After years of spending $17 on bottles of Matrix shampoo and conditioner, 28-year-old Ms. Ball recently bought $5 Pantene instead. I don't know that you can even tell the difference.'"

P&G Razor Launches in Recession's Shadow A four-pack of the new manual cartridges the

about $16.99, and blades for the battery-powered razor for $17.

com is bursting through to the mainstream media with a cheeky attitude and a viral video

3 P&G Razor Launches in Recession's Shadow A four-pack of the new manual cartridges the first significant upgrade to Gillette's Fusion line since its 2006 launch will sell for about $16.99, and blades for the battery-powered razor for $17.99, a 15% premium to regular Fusion blades, which already run about twice the average price in the category. The $13 billion shaving industry is in a lather this week as the startup DollarShaveClub.com is bursting through to the mainstream media with a cheeky attitude and a viral video with over 4 million views. The most nervous razor execs of all must surely be sitting at Procter & Gamble, which paid $57 billion in stock and cash for Gillette just seven years ago.

4 Most companies take the simplistic, but logical, view that PROFIT is a function of PRICES minus COSTS If they can raise prices and lower costs they will make more money PRICES COSTS

5 PRICES NON- VALUE ADDING COSTS COSTS VALUE ADDING COSTS Advertising Packaging Administration Unnecessary features Factory waste Lots of others

6 Worry less about cost behavior: Fixed versus variable Worry less about conventional cost categories: Direct versus indirect / overhead / SGA Worry less about cost type: Labor or outside service Worry more about classifying costs as value adding versus non-value adding

7 Raising prices is no an option so PRODUCT Direct Material $ 5.00 Direct Labor $ 1.30 Variable Overhead Unapplied direct labor $ 0.34 Shop Supplies $ 0.51 Machine Maintenance $ 0.30 Quality Control $ 0.26 Material Handling $ 0.21 Utilities $ 0.47 Training $ 0.13 Total Fixed Overhead $ 3.76 TOTAL COST $ SELLING PRICE $ MARGIN $ (0.29) MARGIN % -2% M Finally, let s take material out and hope it doesn t degrade the value of the product too much If that doesn t work let s move it to China - we can get a big labor savings there These won t be looked at - There s not enough money in any of this areas to make a difference First let s argue about the allocations and try to get some of this charged elsewhere

8 Instead of this.. Lets do this TOTAL SALES FORECAST $ 2,500, % StandardMaterial DIRECT MATERIAL $ 1,005,000 40% Standard Hours Direct Labor $ per hour Standard Labor DIRECT LABOR $ 152,000 6% Variable Overhead Unapplied direct labor $ 60,000 Shop Supplies $ 50,000 Machine Maintenance $ 30,000 Quality Control $ 25,000 Material Handling $ 25,000 Utilities $ 55,000 Training $ 15,000 Total Variable Overhead $ 260,000 10% Fixed Overhead Management $ 100,000 Supervision $ 90,000 Depreciation $ 75,000 Regulatory Comliance $ 65,000 Building Maintenance $ 60,000 Miscellaneous $ 50,000 Total Fixed Overhead $ 440,000 18% Gross Margin $ 643,000 26% SG&A $ 400,000 16% Profit $ 243,000 10% TOTAL SALES FORECAST $ 2,500, % StandardMaterial DIRECT MATERIAL $ 1,005,000 40% Standard Hours Direct Labor $ per hour Standard Labor DIRECT LABOR $ 152,000 6% Value Adding Depreciation $ 75,000 Shop Supplies $ 50,000 Preventive Maintenance $ 10,000 Factory Utilities $ 35,000 Total Value Adding $ 1,327,000 53% Non-Value Adding Unapplied direct labor $ 60,000 Breakdown Maintenance $ 30,000 Quality Control $ 25,000 Material Handling $ 25,000 Office Utilities $ 20,000 Management $ 100,000 Supervision $ 90,000 Training $ 15,000 Regulatory Comliance $ 65,000 Building Maintenance $ 60,000 Miscellaneous $ 50,000 Total Non-Value Adding $ 540,000 22% Gross Margin $ 643,000 26% SG&A $ 400,000 16% Profit $ 243,000 10%

9 TOTAL SALES FORECAST $ 2,500, % StandardMaterial DIRECT MATERIAL $ 1,005,000 40% Standard Hours Direct Labor $ per hour Standard Labor DIRECT LABOR $ 152,000 6% Value Adding Depreciation $ 75,000 Shop Supplies $ 50,000 Preventive Maintenance $ 10,000 Factory Utilities $ 35,000 Total Value Adding $ 1,327,000 53% Non-Value Adding Unapplied direct labor $ 60,000 Breakdown Maintenance $ 30,000 Quality Control $ 25,000 Material Handling $ 25,000 Office Utilities $ 20,000 Management $ 100,000 Supervision $ 90,000 Training $ 15,000 Regulatory Comliance $ 65,000 Building Maintenance $ 60,000 Miscellaneous $ 50,000 Total Non-Value Adding $ 540,000 22% Gross Margin $ 643,000 26% SG&A $ 400,000 16% Profit $ 243,000 10% If the objective is to eliminate nonvalue adding costs waste it stands to reason that we need to know what the waste is

10 VALUE STREAM 3 PRODUCT K PRODUCT L PRODUCT M PRODUCT N Capacity Utilization 79% Planning Forecast 13,500 19,000 19,500 7,000 Current Price $ $ $ 9.75 $ SALES FORECAST $ 249,750 $ 270,750 $ 190,125 $ 73,500 $ 784,125 StandardMaterial $ 8.00 $ 5.00 $ 5.00 $ 5.00 DIRECT MATERIAL $ 108,000 $ 95,000 $ 97,500 $ 35,000 $ 335,500 Standard Hours Direct Labor $ per hour $ $ $ $ Standard Labor $ 1.00 $ 1.20 $ 1.20 $ 1.30 DIRECT LABOR $ 13,500 $ 22,800 $ 23,400 $ 9,100 $ 68,800 Value Adding Depreciation $ 15,000 Shop Supplies $ 16,000 Preventive Maintenance $ 5,000 Factory Utilities $ 13,000 Total Value Adding $ 453,300 Non-Value Adding Unapplied direct labor $ 12,000 Breakdown Maintenance $ 10,500 Quality Control $ 8,000 Material Handling $ 10,000 Office Utilities $ 6,000 Management $ 28,000 Supervision $ 36,000 Training $ 3,000 Regulatory Comliance $ 20,000 Building Maintenance $ 20,000 Miscellaneous $ 18,000 Total Non-Value Adding $ 171,500 Value Stream Contribution $ 159,325 SG&A Profit SELLING PRICE $ $ $ 9.75 $ STANDARD COST $ $ $ $ MARGIN $ 4.89 $ 2.52 $ (1.98) $ (1.79) MARGIN % 26% 18% -20% -17% This is the fundamental lean metric Value Adding Expenses Total Expenses $ $ 453, ,800 = Value Adding Ratio = 72.5%

11 LAST 3 MONTHS NEXT 3 MONTHS MAY JUNE JULY AUGUST SEPTEMBER OCTOBER Capacity Utilization 79% 79% 79% 79% 79% 79% Planning Forecast Current Price SALES FORECAST $ 750,000 $ 801,000 $ 784,125 $ 784,125 $ 784,125 $ 784,125 StandardMaterial DIRECT MATERIAL $ 322,000 $ 362,000 $ 335,500 $ 335,500 $ 335,500 $ 335,500 Standard Hours Direct Labor $ per hour Standard Labor DIRECT LABOR $ 65,000 $ 70,500 $ 68,800 $ 68,800 $ 68,800 $ 68,800 Value Adding Depreciation $ 15,000 $ 15,000 $ 15,000 $ 15,000 $ 16,500 $ 16,500 Shop Supplies $ 15,000 $ 16,750 $ 16,000 $ 16,000 $ 16,000 $ 16,000 Preventive Maintenance $ 5,200 $ 4,950 $ 5,000 $ 5,000 $ 5,000 $ 5,000 Factory Utilities $ 12,900 $ 13,800 $ 13,000 $ 13,000 $ 13,000 $ 13,000 Total Value Adding $ 435,100 $ 483,000 $ 453,300 $ 453,300 $ 454,800 $ 454,800 INSTEAD OF ANNUAL BUDGETS SOFP Non-Value Adding Unapplied direct labor $ 13,500 $ 11,000 $ 12,000 $ 12,000 $ 12,000 $ 12,000 Breakdown Maintenance $ 9,500 $ 11,000 $ 10,500 $ 10,500 $ 10,500 $ 10,500 Quality Control $ 8,000 $ 8,500 $ 9,000 $ 8,000 $ 8,000 $ 8,000 Material Handling $ 10,000 $ 9,500 $ 9,750 $ 10,000 $ 10,000 $ 10,000 Office Utilities $ 6,000 $ 6,000 $ 6,000 $ 6,000 $ 6,000 $ 6,000 Management $ 28,000 $ 28,000 $ 28,000 $ 28,000 $ 28,000 $ 28,000 Supervision $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 $ 36,000 Training $ 3,000 $ 1,500 $ 2,800 $ 3,000 $ 3,000 $ 3,000 Regulatory Comliance $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 Building Maintenance $ 20,000 $ 22,000 $ 22,750 $ 20,000 $ 20,000 $ 20,000 Miscellaneous $ 18,000 $ 18,000 $ 18,000 $ 18,000 $ 18,000 $ 18,000 Total Non-Value Adding $ 172,000 $ 171,500 $ 174,800 $ 171,500 $ 171,500 $ 171,500 Value Stream Contribution $ 142,900 $ 146,500 $ 156,025 $ 159,325 $ 157,825 $ 157,825

12 YOU YOUR CUSTOMER END CUSTOMER The end customer in the chain determines Value Not You Not your customer VALUE is a combination of: QUALITY UTILITY RELIABILITY

13 WASTE YOU YOUR CUSTOMER VALUE END CUSTOMER You can also create value by improving your customer s Value Adding Ratio

14 WASTE What you spent to create actual value Your consensus understanding of the value proposition will be continually sharpened Direct Materials Applied Direct Labor Machine Operating Costs With lots of room for serious discussion in between Scrap Inspection Paper Pushing Material Handling

15 VALUE STREAM 3 PRODUCT K PRODUCT L PRODUCT M PRODUCT N Capacity Utilization 79% Planning Forecast 13,500 19,000 19,500 7,000 Current Price $ $ $ 9.75 $ SALES FORECAST $ 249,750 $ 270,750 $ 190,125 $ 73,500 $ 784,125 StandardMaterial $ 8.00 $ 5.00 $ 5.00 $ 5.00 DIRECT MATERIAL $ 108,000 $ 95,000 $ 97,500 $ 35,000 $ 335,500 Value Adding Costs Standard Hours Direct Labor $ per hour $ $ $ $ Standard Labor $ 1.00 $ 1.20 $ 1.20 $ 1.30 DIRECT LABOR $ 13,500 $ 22,800 $ 23,400 $ 9,100 $ 68,800 Value Adding Depreciation $ 15,000 Shop Supplies $ 16,000 Preventive Maintenance $ 5,000 Factory Utilities $ 13,000 Total Value Adding $ 453,300 Non-Value Adding Unapplied direct labor $ 12,000 Breakdown Maintenance $ 10,500 Quality Control $ 8,000 Material Handling $ 10,000 Office Utilities $ 6,000 Management $ 28,000 Supervision $ 36,000 Training $ 3,000 Regulatory Comliance $ 20,000 Building Maintenance $ 20,000 Miscellaneous $ 18,000 Total Non-Value Adding $ 171,500 Value Stream Contribution $ 159,325 SG&A Profit SELLING PRICE $ $ $ 9.75 $ STANDARD COST $ $ $ $ MARGIN $ 4.89 $ 2.52 $ (1.98) $ (1.79) MARGIN % 26% 18% -20% -17% Operational waste Non-Value Adding Costs Managemen t controlled Regulatory waste

16 Value Adding Costs This does not mean you should not try to reduce value adding expenses It means you should do so very carefully Outsourcing makes continuous improvement of the value proposition very difficult and often kills it completely Increases in value adding expenses should result in Increased sales, higher prices, or both!

17 Operational waste The Cost of Quality Inventory costs Defects Inspection Sorting Rework Material handling labor Floor space, racks, forklifts, pallets and containers Freight and logistics Administration Other Supervision and record keeping Meetings, paperwork

18 OSHA Regulatory waste EPA EEOC Regulatory Accounting Taxes Other Let s toss ISO in as well This is not to say you should not comply In fact you should do all you can to assure the intent a safe work place, a clean environment, absolutely no discrimination, excellent quality, and full compliance with the tax laws but you should spend the least amount legally necessary to document your compliance

19 Staff Managemen t controlled Training Performance measuring Computers and software Morale boosting Sales and marketing Packaging Perks These should be viewed as long term investments in the business the return on thse investments should be an improvement in the Value proposition will spending the money result in a more than commensurate reduction in non-value adding expenses? Or an increase in the value of the products?

20 The Basis for Aligning the Organization into Value Streams Customer, channel or market #1 Customer, channel or market #2 Value Adding Expenses Value Adding Expenses Non-Value Adding Expenses Non-Value Adding Expenses

21 Classifying costs by Value Adding and Non-Value Adding Simple Requires no major systems work Will have an immediate cultural and managerial impact The most important contribution accounting can make If you don t lead this, who will?

P&G DELIVERS FIRST QUARTER CORE EPS OF $1.06, +5%

News Release The Procter & Gamble Company One P&G Plaza Cincinnati, OH 45202 P&G DELIVERS FIRST QUARTER CORE EPS OF $1.06, +5% CINCINNATI, Oct. 25, 2012 - The Procter & Gamble Company (NYSE:PG) increased