10132014
1
wwwaccellentcom
Helping People Live Better Lives
CONFIDENTIAL
Eliminating Standard Costs at Accellent Inc
Lean Accounting Summit
October 22 2014
Jeremy Friedman EVP amp CFO
2 CONFIDENTIAL
Accellent Completes Acquisition
of Lake Region Medical Inc March 12 2014
Accellent Rebrands as
Lake Region Medical September 22 2014
10132014
2
Eliminating Standard
Costs at Accellent Inc
Jeremy Friedman
Executive Vice President
President and COO Cardio amp Vascular
Company Confidential | Page 4
Lake Region ndash Leading Medical Device Manufacturer
of Components Sub-Assemblies amp Finished Devices
~$800 million revenue
5000+ employees
17 Factories5 countries
Approximately 20000 skus
Representative Customers Cardio amp
Vascular
Advanced
Surgical
Products
10132014
3
Company Confidential | Page 5
Sound Familiar
ldquoHow does your month look Edrdquo
ldquoWell my direct labor headcount is in line with my forecast and so is my Spend Tracker My inventory is down revenue is slightly up I havenrsquot hired any additional OH resources so I think wersquoll be okay But wersquoll have to wait and see You know how it goes when we get the actual PampL statement The results are usually quite different than what I expectedrdquo
Company Confidential | Page 6
After Ed gets the PampLhellip
ldquoI thought we were ok But my direct labor absorption variance was
much greater than we planned My standard cost of sales of direct
labor was higher than my forecast My direct labor efficiency variance
was negative when we forecast it to be positive My direct cost
absorption variance was greater than my outlook but my direct costs
incurred were on forecast My incurred overhead was slightly higher
than my forecast but my overhead absorption variance was much less
Taking into account my overhead efficiency variance and standard cost
of sales of overhead I think we did pretty well this month donrsquot yourdquo
10132014
4
Company Confidential | Page 7
Wow did that drive everyone crazy
Company Confidential | Page 8
Why
Incurred Costs
Absorption Variances
Standard Costs
Overhead Efficiency Variances
Absorbed Costs
Capitalized Labor amp
Overhead Reported
Costs
10132014
5
Company Confidential | Page 9
We learned thathellip
Our standard cost accounting and financial
management system was
Confusing to everyone
Frustrating to those trying to manage
Time consuming to those trying to analyze
Hurting our ability to win profitable business
Where the heck do these numbers come from
Why donrsquot the numbers represent the levers I controlled
Thousands of variances and none make any sense
Why are our prices 3x as high as our competitors
Company Confidential | Page 10
We tried to fix it buthellip
Hypothesis Strong cost accounting managers cost accountants and a solid
FPampA team could improve our standard costing system
Discovery After significant people upgrades and additions as well as process
improvements the results were no better
ndash Thousands of skus with relatively low volumes
bull Standard cost system inherently inaccurate
ndash Allocation methods used to assign overhead costs were impossible to
accurately assess
bull Vast number of assumptions
bull Budgets and actual costs are not stable over a full year making standard
rates meaningless
ndash Capturing true direct labor and machine hours at a product level was not
possible
bull Constant adjustment to manmachine ratios based on daily needs and
capabilities
bull Mix of direct and indirect labor always used
10132014
6
Company Confidential | Page 11
bull Researched alternatives amp met with consultants
bull Discussed with auditors and accounting community
bull Read a number of books (Whorsquos Counting Making the Numbers
Count Accounting for World Class Operations)
bull Talked with experts (Solomon Maskell Katco)
I saw the light and came to a very simple conclusion
So what did we do There had to be a better way
Eliminate Standard Costs
On October 1 2012 we turned off labor and overhead rates in our ERP
system for all sites and have not created a standard cost since
3 months after acquiring Lake Region we did the same with their factories
Company Confidential | Page 12
Were people concerned
bull Absolutelyhellip
ndash How will I know how we are doing
ndash How will I track performance on the line
ndash How will I understand product profitability
ndash Irsquove always looked at variances What will I do now
ndash What if I build inventory for a customer that doesnrsquot
get sold for a while Wonrsquot all those costs hit my PampL
now
ndash And my personal favorite from a board member
ldquoMake sure you donrsquot F up the accountingrdquo
10132014
7
Company Confidential | Page 13
But the benefits were many bull Started using ldquoPlain Englishrdquo PampL statements which are easily
understood by everyone
ndash No more shocks and surprises
bull Analyses and decisions now based primarily on incurred costs
ndash People could understand the implications of their actions
ndash Focus on leaning out processes
bull Eliminates complex and time wasting allocation methods
ndash These werenrsquot correct regardless
bull Time consuming variance analyses are largely eliminated
ndash They didnrsquot drive performance anyway
ndash Costs were reduced as positions were no longer required
bull Began value stream management approach
ndash Focused on average costs and total costs
ndash Analysis and decision making to the operator level in real time
bull And the accounting went very smoothly
Company Confidential | Page 14
We also had a couple of key challengeshellip
bull For decades we priced our products using a standard cost and then
added a markup We had to change the way we set prices break
long entrenched habits and teach everyone a new method
ndash Not easy to do
ndash ldquoPricing is not a function of costrdquo
ndash No longer quoting prices three times too high or one third of what
they should be
bull A new method was needed to evaluate business opportunities and
profitability
ndash We created the concept of Lean Cash Flow and the tools
necessary to use this approach
10132014
8
Company Confidential | Page 15
Pricing ndash The new paradigm
bull The new paradigm ndash changing from cost plus a margin
pricing model First question now is ldquoHow did you arrive at
the pricerdquo
bull Training on how to determine value and obtain market
pricing
bull Validating that we achieve an acceptable financial return
with market pricing
Price validation tool incorporating
Lean Cash Flow approach
Company Confidential | Page 16
Pricing ndash Driving a cultural change
Old thinking
What is the lowest price we can charge that
gives an acceptable return based on standard
cost
New thinking
What is the highest price we can charge and
still win the business
10132014
9
Company Confidential | Page 17
After two years everything is still great
Thank you Questions
10132014
2
Eliminating Standard
Costs at Accellent Inc
Jeremy Friedman
Executive Vice President
President and COO Cardio amp Vascular
Company Confidential | Page 4
Lake Region ndash Leading Medical Device Manufacturer
of Components Sub-Assemblies amp Finished Devices
~$800 million revenue
5000+ employees
17 Factories5 countries
Approximately 20000 skus
Representative Customers Cardio amp
Vascular
Advanced
Surgical
Products
10132014
3
Company Confidential | Page 5
Sound Familiar
ldquoHow does your month look Edrdquo
ldquoWell my direct labor headcount is in line with my forecast and so is my Spend Tracker My inventory is down revenue is slightly up I havenrsquot hired any additional OH resources so I think wersquoll be okay But wersquoll have to wait and see You know how it goes when we get the actual PampL statement The results are usually quite different than what I expectedrdquo
Company Confidential | Page 6
After Ed gets the PampLhellip
ldquoI thought we were ok But my direct labor absorption variance was
much greater than we planned My standard cost of sales of direct
labor was higher than my forecast My direct labor efficiency variance
was negative when we forecast it to be positive My direct cost
absorption variance was greater than my outlook but my direct costs
incurred were on forecast My incurred overhead was slightly higher
than my forecast but my overhead absorption variance was much less
Taking into account my overhead efficiency variance and standard cost
of sales of overhead I think we did pretty well this month donrsquot yourdquo
10132014
4
Company Confidential | Page 7
Wow did that drive everyone crazy
Company Confidential | Page 8
Why
Incurred Costs
Absorption Variances
Standard Costs
Overhead Efficiency Variances
Absorbed Costs
Capitalized Labor amp
Overhead Reported
Costs
10132014
5
Company Confidential | Page 9
We learned thathellip
Our standard cost accounting and financial
management system was
Confusing to everyone
Frustrating to those trying to manage
Time consuming to those trying to analyze
Hurting our ability to win profitable business
Where the heck do these numbers come from
Why donrsquot the numbers represent the levers I controlled
Thousands of variances and none make any sense
Why are our prices 3x as high as our competitors
Company Confidential | Page 10
We tried to fix it buthellip
Hypothesis Strong cost accounting managers cost accountants and a solid
FPampA team could improve our standard costing system
Discovery After significant people upgrades and additions as well as process
improvements the results were no better
ndash Thousands of skus with relatively low volumes
bull Standard cost system inherently inaccurate
ndash Allocation methods used to assign overhead costs were impossible to
accurately assess
bull Vast number of assumptions
bull Budgets and actual costs are not stable over a full year making standard
rates meaningless
ndash Capturing true direct labor and machine hours at a product level was not
possible
bull Constant adjustment to manmachine ratios based on daily needs and
capabilities
bull Mix of direct and indirect labor always used
10132014
6
Company Confidential | Page 11
bull Researched alternatives amp met with consultants
bull Discussed with auditors and accounting community
bull Read a number of books (Whorsquos Counting Making the Numbers
Count Accounting for World Class Operations)
bull Talked with experts (Solomon Maskell Katco)
I saw the light and came to a very simple conclusion
So what did we do There had to be a better way
Eliminate Standard Costs
On October 1 2012 we turned off labor and overhead rates in our ERP
system for all sites and have not created a standard cost since
3 months after acquiring Lake Region we did the same with their factories
Company Confidential | Page 12
Were people concerned
bull Absolutelyhellip
ndash How will I know how we are doing
ndash How will I track performance on the line
ndash How will I understand product profitability
ndash Irsquove always looked at variances What will I do now
ndash What if I build inventory for a customer that doesnrsquot
get sold for a while Wonrsquot all those costs hit my PampL
now
ndash And my personal favorite from a board member
ldquoMake sure you donrsquot F up the accountingrdquo
10132014
7
Company Confidential | Page 13
But the benefits were many bull Started using ldquoPlain Englishrdquo PampL statements which are easily
understood by everyone
ndash No more shocks and surprises
bull Analyses and decisions now based primarily on incurred costs
ndash People could understand the implications of their actions
ndash Focus on leaning out processes
bull Eliminates complex and time wasting allocation methods
ndash These werenrsquot correct regardless
bull Time consuming variance analyses are largely eliminated
ndash They didnrsquot drive performance anyway
ndash Costs were reduced as positions were no longer required
bull Began value stream management approach
ndash Focused on average costs and total costs
ndash Analysis and decision making to the operator level in real time
bull And the accounting went very smoothly
Company Confidential | Page 14
We also had a couple of key challengeshellip
bull For decades we priced our products using a standard cost and then
added a markup We had to change the way we set prices break
long entrenched habits and teach everyone a new method
ndash Not easy to do
ndash ldquoPricing is not a function of costrdquo
ndash No longer quoting prices three times too high or one third of what
they should be
bull A new method was needed to evaluate business opportunities and
profitability
ndash We created the concept of Lean Cash Flow and the tools
necessary to use this approach
10132014
8
Company Confidential | Page 15
Pricing ndash The new paradigm
bull The new paradigm ndash changing from cost plus a margin
pricing model First question now is ldquoHow did you arrive at
the pricerdquo
bull Training on how to determine value and obtain market
pricing
bull Validating that we achieve an acceptable financial return
with market pricing
Price validation tool incorporating
Lean Cash Flow approach
Company Confidential | Page 16
Pricing ndash Driving a cultural change
Old thinking
What is the lowest price we can charge that
gives an acceptable return based on standard
cost
New thinking
What is the highest price we can charge and
still win the business
10132014
9
Company Confidential | Page 17
After two years everything is still great
Thank you Questions
10132014
3
Company Confidential | Page 5
Sound Familiar
ldquoHow does your month look Edrdquo
ldquoWell my direct labor headcount is in line with my forecast and so is my Spend Tracker My inventory is down revenue is slightly up I havenrsquot hired any additional OH resources so I think wersquoll be okay But wersquoll have to wait and see You know how it goes when we get the actual PampL statement The results are usually quite different than what I expectedrdquo
Company Confidential | Page 6
After Ed gets the PampLhellip
ldquoI thought we were ok But my direct labor absorption variance was
much greater than we planned My standard cost of sales of direct
labor was higher than my forecast My direct labor efficiency variance
was negative when we forecast it to be positive My direct cost
absorption variance was greater than my outlook but my direct costs
incurred were on forecast My incurred overhead was slightly higher
than my forecast but my overhead absorption variance was much less
Taking into account my overhead efficiency variance and standard cost
of sales of overhead I think we did pretty well this month donrsquot yourdquo
10132014
4
Company Confidential | Page 7
Wow did that drive everyone crazy
Company Confidential | Page 8
Why
Incurred Costs
Absorption Variances
Standard Costs
Overhead Efficiency Variances
Absorbed Costs
Capitalized Labor amp
Overhead Reported
Costs
10132014
5
Company Confidential | Page 9
We learned thathellip
Our standard cost accounting and financial
management system was
Confusing to everyone
Frustrating to those trying to manage
Time consuming to those trying to analyze
Hurting our ability to win profitable business
Where the heck do these numbers come from
Why donrsquot the numbers represent the levers I controlled
Thousands of variances and none make any sense
Why are our prices 3x as high as our competitors
Company Confidential | Page 10
We tried to fix it buthellip
Hypothesis Strong cost accounting managers cost accountants and a solid
FPampA team could improve our standard costing system
Discovery After significant people upgrades and additions as well as process
improvements the results were no better
ndash Thousands of skus with relatively low volumes
bull Standard cost system inherently inaccurate
ndash Allocation methods used to assign overhead costs were impossible to
accurately assess
bull Vast number of assumptions
bull Budgets and actual costs are not stable over a full year making standard
rates meaningless
ndash Capturing true direct labor and machine hours at a product level was not
possible
bull Constant adjustment to manmachine ratios based on daily needs and
capabilities
bull Mix of direct and indirect labor always used
10132014
6
Company Confidential | Page 11
bull Researched alternatives amp met with consultants
bull Discussed with auditors and accounting community
bull Read a number of books (Whorsquos Counting Making the Numbers
Count Accounting for World Class Operations)
bull Talked with experts (Solomon Maskell Katco)
I saw the light and came to a very simple conclusion
So what did we do There had to be a better way
Eliminate Standard Costs
On October 1 2012 we turned off labor and overhead rates in our ERP
system for all sites and have not created a standard cost since
3 months after acquiring Lake Region we did the same with their factories
Company Confidential | Page 12
Were people concerned
bull Absolutelyhellip
ndash How will I know how we are doing
ndash How will I track performance on the line
ndash How will I understand product profitability
ndash Irsquove always looked at variances What will I do now
ndash What if I build inventory for a customer that doesnrsquot
get sold for a while Wonrsquot all those costs hit my PampL
now
ndash And my personal favorite from a board member
ldquoMake sure you donrsquot F up the accountingrdquo
10132014
7
Company Confidential | Page 13
But the benefits were many bull Started using ldquoPlain Englishrdquo PampL statements which are easily
understood by everyone
ndash No more shocks and surprises
bull Analyses and decisions now based primarily on incurred costs
ndash People could understand the implications of their actions
ndash Focus on leaning out processes
bull Eliminates complex and time wasting allocation methods
ndash These werenrsquot correct regardless
bull Time consuming variance analyses are largely eliminated
ndash They didnrsquot drive performance anyway
ndash Costs were reduced as positions were no longer required
bull Began value stream management approach
ndash Focused on average costs and total costs
ndash Analysis and decision making to the operator level in real time
bull And the accounting went very smoothly
Company Confidential | Page 14
We also had a couple of key challengeshellip
bull For decades we priced our products using a standard cost and then
added a markup We had to change the way we set prices break
long entrenched habits and teach everyone a new method
ndash Not easy to do
ndash ldquoPricing is not a function of costrdquo
ndash No longer quoting prices three times too high or one third of what
they should be
bull A new method was needed to evaluate business opportunities and
profitability
ndash We created the concept of Lean Cash Flow and the tools
necessary to use this approach
10132014
8
Company Confidential | Page 15
Pricing ndash The new paradigm
bull The new paradigm ndash changing from cost plus a margin
pricing model First question now is ldquoHow did you arrive at
the pricerdquo
bull Training on how to determine value and obtain market
pricing
bull Validating that we achieve an acceptable financial return
with market pricing
Price validation tool incorporating
Lean Cash Flow approach
Company Confidential | Page 16
Pricing ndash Driving a cultural change
Old thinking
What is the lowest price we can charge that
gives an acceptable return based on standard
cost
New thinking
What is the highest price we can charge and
still win the business
10132014
9
Company Confidential | Page 17
After two years everything is still great
Thank you Questions
10132014
4
Company Confidential | Page 7
Wow did that drive everyone crazy
Company Confidential | Page 8
Why
Incurred Costs
Absorption Variances
Standard Costs
Overhead Efficiency Variances
Absorbed Costs
Capitalized Labor amp
Overhead Reported
Costs
10132014
5
Company Confidential | Page 9
We learned thathellip
Our standard cost accounting and financial
management system was
Confusing to everyone
Frustrating to those trying to manage
Time consuming to those trying to analyze
Hurting our ability to win profitable business
Where the heck do these numbers come from
Why donrsquot the numbers represent the levers I controlled
Thousands of variances and none make any sense
Why are our prices 3x as high as our competitors
Company Confidential | Page 10
We tried to fix it buthellip
Hypothesis Strong cost accounting managers cost accountants and a solid
FPampA team could improve our standard costing system
Discovery After significant people upgrades and additions as well as process
improvements the results were no better
ndash Thousands of skus with relatively low volumes
bull Standard cost system inherently inaccurate
ndash Allocation methods used to assign overhead costs were impossible to
accurately assess
bull Vast number of assumptions
bull Budgets and actual costs are not stable over a full year making standard
rates meaningless
ndash Capturing true direct labor and machine hours at a product level was not
possible
bull Constant adjustment to manmachine ratios based on daily needs and
capabilities
bull Mix of direct and indirect labor always used
10132014
6
Company Confidential | Page 11
bull Researched alternatives amp met with consultants
bull Discussed with auditors and accounting community
bull Read a number of books (Whorsquos Counting Making the Numbers
Count Accounting for World Class Operations)
bull Talked with experts (Solomon Maskell Katco)
I saw the light and came to a very simple conclusion
So what did we do There had to be a better way
Eliminate Standard Costs
On October 1 2012 we turned off labor and overhead rates in our ERP
system for all sites and have not created a standard cost since
3 months after acquiring Lake Region we did the same with their factories
Company Confidential | Page 12
Were people concerned
bull Absolutelyhellip
ndash How will I know how we are doing
ndash How will I track performance on the line
ndash How will I understand product profitability
ndash Irsquove always looked at variances What will I do now
ndash What if I build inventory for a customer that doesnrsquot
get sold for a while Wonrsquot all those costs hit my PampL
now
ndash And my personal favorite from a board member
ldquoMake sure you donrsquot F up the accountingrdquo
10132014
7
Company Confidential | Page 13
But the benefits were many bull Started using ldquoPlain Englishrdquo PampL statements which are easily
understood by everyone
ndash No more shocks and surprises
bull Analyses and decisions now based primarily on incurred costs
ndash People could understand the implications of their actions
ndash Focus on leaning out processes
bull Eliminates complex and time wasting allocation methods
ndash These werenrsquot correct regardless
bull Time consuming variance analyses are largely eliminated
ndash They didnrsquot drive performance anyway
ndash Costs were reduced as positions were no longer required
bull Began value stream management approach
ndash Focused on average costs and total costs
ndash Analysis and decision making to the operator level in real time
bull And the accounting went very smoothly
Company Confidential | Page 14
We also had a couple of key challengeshellip
bull For decades we priced our products using a standard cost and then
added a markup We had to change the way we set prices break
long entrenched habits and teach everyone a new method
ndash Not easy to do
ndash ldquoPricing is not a function of costrdquo
ndash No longer quoting prices three times too high or one third of what
they should be
bull A new method was needed to evaluate business opportunities and
profitability
ndash We created the concept of Lean Cash Flow and the tools
necessary to use this approach
10132014
8
Company Confidential | Page 15
Pricing ndash The new paradigm
bull The new paradigm ndash changing from cost plus a margin
pricing model First question now is ldquoHow did you arrive at
the pricerdquo
bull Training on how to determine value and obtain market
pricing
bull Validating that we achieve an acceptable financial return
with market pricing
Price validation tool incorporating
Lean Cash Flow approach
Company Confidential | Page 16
Pricing ndash Driving a cultural change
Old thinking
What is the lowest price we can charge that
gives an acceptable return based on standard
cost
New thinking
What is the highest price we can charge and
still win the business
10132014
9
Company Confidential | Page 17
After two years everything is still great
Thank you Questions
10132014
5
Company Confidential | Page 9
We learned thathellip
Our standard cost accounting and financial
management system was
Confusing to everyone
Frustrating to those trying to manage
Time consuming to those trying to analyze
Hurting our ability to win profitable business
Where the heck do these numbers come from
Why donrsquot the numbers represent the levers I controlled
Thousands of variances and none make any sense
Why are our prices 3x as high as our competitors
Company Confidential | Page 10
We tried to fix it buthellip
Hypothesis Strong cost accounting managers cost accountants and a solid
FPampA team could improve our standard costing system
Discovery After significant people upgrades and additions as well as process
improvements the results were no better
ndash Thousands of skus with relatively low volumes
bull Standard cost system inherently inaccurate
ndash Allocation methods used to assign overhead costs were impossible to
accurately assess
bull Vast number of assumptions
bull Budgets and actual costs are not stable over a full year making standard
rates meaningless
ndash Capturing true direct labor and machine hours at a product level was not
possible
bull Constant adjustment to manmachine ratios based on daily needs and
capabilities
bull Mix of direct and indirect labor always used
10132014
6
Company Confidential | Page 11
bull Researched alternatives amp met with consultants
bull Discussed with auditors and accounting community
bull Read a number of books (Whorsquos Counting Making the Numbers
Count Accounting for World Class Operations)
bull Talked with experts (Solomon Maskell Katco)
I saw the light and came to a very simple conclusion
So what did we do There had to be a better way
Eliminate Standard Costs
On October 1 2012 we turned off labor and overhead rates in our ERP
system for all sites and have not created a standard cost since
3 months after acquiring Lake Region we did the same with their factories
Company Confidential | Page 12
Were people concerned
bull Absolutelyhellip
ndash How will I know how we are doing
ndash How will I track performance on the line
ndash How will I understand product profitability
ndash Irsquove always looked at variances What will I do now
ndash What if I build inventory for a customer that doesnrsquot
get sold for a while Wonrsquot all those costs hit my PampL
now
ndash And my personal favorite from a board member
ldquoMake sure you donrsquot F up the accountingrdquo
10132014
7
Company Confidential | Page 13
But the benefits were many bull Started using ldquoPlain Englishrdquo PampL statements which are easily
understood by everyone
ndash No more shocks and surprises
bull Analyses and decisions now based primarily on incurred costs
ndash People could understand the implications of their actions
ndash Focus on leaning out processes
bull Eliminates complex and time wasting allocation methods
ndash These werenrsquot correct regardless
bull Time consuming variance analyses are largely eliminated
ndash They didnrsquot drive performance anyway
ndash Costs were reduced as positions were no longer required
bull Began value stream management approach
ndash Focused on average costs and total costs
ndash Analysis and decision making to the operator level in real time
bull And the accounting went very smoothly
Company Confidential | Page 14
We also had a couple of key challengeshellip
bull For decades we priced our products using a standard cost and then
added a markup We had to change the way we set prices break
long entrenched habits and teach everyone a new method
ndash Not easy to do
ndash ldquoPricing is not a function of costrdquo
ndash No longer quoting prices three times too high or one third of what
they should be
bull A new method was needed to evaluate business opportunities and
profitability
ndash We created the concept of Lean Cash Flow and the tools
necessary to use this approach
10132014
8
Company Confidential | Page 15
Pricing ndash The new paradigm
bull The new paradigm ndash changing from cost plus a margin
pricing model First question now is ldquoHow did you arrive at
the pricerdquo
bull Training on how to determine value and obtain market
pricing
bull Validating that we achieve an acceptable financial return
with market pricing
Price validation tool incorporating
Lean Cash Flow approach
Company Confidential | Page 16
Pricing ndash Driving a cultural change
Old thinking
What is the lowest price we can charge that
gives an acceptable return based on standard
cost
New thinking
What is the highest price we can charge and
still win the business
10132014
9
Company Confidential | Page 17
After two years everything is still great
Thank you Questions
10132014
6
Company Confidential | Page 11
bull Researched alternatives amp met with consultants
bull Discussed with auditors and accounting community
bull Read a number of books (Whorsquos Counting Making the Numbers
Count Accounting for World Class Operations)
bull Talked with experts (Solomon Maskell Katco)
I saw the light and came to a very simple conclusion
So what did we do There had to be a better way
Eliminate Standard Costs
On October 1 2012 we turned off labor and overhead rates in our ERP
system for all sites and have not created a standard cost since
3 months after acquiring Lake Region we did the same with their factories
Company Confidential | Page 12
Were people concerned
bull Absolutelyhellip
ndash How will I know how we are doing
ndash How will I track performance on the line
ndash How will I understand product profitability
ndash Irsquove always looked at variances What will I do now
ndash What if I build inventory for a customer that doesnrsquot
get sold for a while Wonrsquot all those costs hit my PampL
now
ndash And my personal favorite from a board member
ldquoMake sure you donrsquot F up the accountingrdquo
10132014
7
Company Confidential | Page 13
But the benefits were many bull Started using ldquoPlain Englishrdquo PampL statements which are easily
understood by everyone
ndash No more shocks and surprises
bull Analyses and decisions now based primarily on incurred costs
ndash People could understand the implications of their actions
ndash Focus on leaning out processes
bull Eliminates complex and time wasting allocation methods
ndash These werenrsquot correct regardless
bull Time consuming variance analyses are largely eliminated
ndash They didnrsquot drive performance anyway
ndash Costs were reduced as positions were no longer required
bull Began value stream management approach
ndash Focused on average costs and total costs
ndash Analysis and decision making to the operator level in real time
bull And the accounting went very smoothly
Company Confidential | Page 14
We also had a couple of key challengeshellip
bull For decades we priced our products using a standard cost and then
added a markup We had to change the way we set prices break
long entrenched habits and teach everyone a new method
ndash Not easy to do
ndash ldquoPricing is not a function of costrdquo
ndash No longer quoting prices three times too high or one third of what
they should be
bull A new method was needed to evaluate business opportunities and
profitability
ndash We created the concept of Lean Cash Flow and the tools
necessary to use this approach
10132014
8
Company Confidential | Page 15
Pricing ndash The new paradigm
bull The new paradigm ndash changing from cost plus a margin
pricing model First question now is ldquoHow did you arrive at
the pricerdquo
bull Training on how to determine value and obtain market
pricing
bull Validating that we achieve an acceptable financial return
with market pricing
Price validation tool incorporating
Lean Cash Flow approach
Company Confidential | Page 16
Pricing ndash Driving a cultural change
Old thinking
What is the lowest price we can charge that
gives an acceptable return based on standard
cost
New thinking
What is the highest price we can charge and
still win the business
10132014
9
Company Confidential | Page 17
After two years everything is still great
Thank you Questions
10132014
7
Company Confidential | Page 13
But the benefits were many bull Started using ldquoPlain Englishrdquo PampL statements which are easily
understood by everyone
ndash No more shocks and surprises
bull Analyses and decisions now based primarily on incurred costs
ndash People could understand the implications of their actions
ndash Focus on leaning out processes
bull Eliminates complex and time wasting allocation methods
ndash These werenrsquot correct regardless
bull Time consuming variance analyses are largely eliminated
ndash They didnrsquot drive performance anyway
ndash Costs were reduced as positions were no longer required
bull Began value stream management approach
ndash Focused on average costs and total costs
ndash Analysis and decision making to the operator level in real time
bull And the accounting went very smoothly
Company Confidential | Page 14
We also had a couple of key challengeshellip
bull For decades we priced our products using a standard cost and then
added a markup We had to change the way we set prices break
long entrenched habits and teach everyone a new method
ndash Not easy to do
ndash ldquoPricing is not a function of costrdquo
ndash No longer quoting prices three times too high or one third of what
they should be
bull A new method was needed to evaluate business opportunities and
profitability
ndash We created the concept of Lean Cash Flow and the tools
necessary to use this approach
10132014
8
Company Confidential | Page 15
Pricing ndash The new paradigm
bull The new paradigm ndash changing from cost plus a margin
pricing model First question now is ldquoHow did you arrive at
the pricerdquo
bull Training on how to determine value and obtain market
pricing
bull Validating that we achieve an acceptable financial return
with market pricing
Price validation tool incorporating
Lean Cash Flow approach
Company Confidential | Page 16
Pricing ndash Driving a cultural change
Old thinking
What is the lowest price we can charge that
gives an acceptable return based on standard
cost
New thinking
What is the highest price we can charge and
still win the business
10132014
9
Company Confidential | Page 17
After two years everything is still great
Thank you Questions
10132014
8
Company Confidential | Page 15
Pricing ndash The new paradigm
bull The new paradigm ndash changing from cost plus a margin
pricing model First question now is ldquoHow did you arrive at
the pricerdquo
bull Training on how to determine value and obtain market
pricing
bull Validating that we achieve an acceptable financial return
with market pricing
Price validation tool incorporating
Lean Cash Flow approach
Company Confidential | Page 16
Pricing ndash Driving a cultural change
Old thinking
What is the lowest price we can charge that
gives an acceptable return based on standard
cost
New thinking
What is the highest price we can charge and
still win the business
10132014
9
Company Confidential | Page 17
After two years everything is still great
Thank you Questions
10132014
9
Company Confidential | Page 17
After two years everything is still great
Thank you Questions
