03 - John Darlington - 21 TOCPA - UK - 11 Nov 2015 - For Web

21st International Conference of the
TOC Practitioners Alliance - TOCPA

www.tocpractice.com
Flow Accounting
John Darlington, Value Flow, & University of
Buckingham, UK
11th November 2015
11 November 2015, UK
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:
johndarlington@me.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
Finance 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 the University of Buckingham where he is Director of the MSc in Lean
Enterprise and was appointed Visiting Professor of Practice at The University of Wales Newport Business School in June
2011.
www.tocpractice.com

Formula and Experience

Though their particulars are those
That each particular artist knows
Unique events which once took place
Within a unique time and space
In the new field they occupy
The unique serves to typify
Becomes though still particular
An algebraic formula
An abstract model of events
Derived from dead experiments
And each life must itself decide
To what and how it be applied
W.H. Auden New Year Letter 1940
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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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There is a problem with conventional

accounting systems
Actively work against flow
1. Encourage bigger batches to reduce unit

costs
2. Treat bottlenecks and non bottlenecks the
same
Lead us to the wrong decisions
1. Focus on costs instead of value

2. Encourage local efficiencies
Are confusing and complex to people
1. Give credit for over production

2. Encourage cost reductions which often
prove to be mirages
www.tocpractice.com

What is Flow Accounting?
Flow accounting is a management accounting methodology.

The objectives of a flow accounting implementation are
To show in monetary terms how the systems interacts with the outside world
To make sure that sub systems understand how to contribute positively to the overall goal of the
organisation
To assist in working out the scope for improvement in money
To encourage the right behaviours.
It is based on common sense and developed out of practical application.

It is not a new way to allocate overhead
It does emphasise growth of value adding rather than cost reduction
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Structure of the Flow Accounting Process

Big Picture Financial
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
whole in one
Break down into

chunks
Quantitative financial assessment of the initial future state
Value Flow Accounting

& Decision Making
Data Acquisition
Structure & Modelling
Value Flow
Performance Measures
Financially quantified current state

Financial consequences of the future state agreed
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Demand
Flow Accounting Process
Completing the Current State Map
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Typical Feedback
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What is the profile of the demand and

how well are promise dates made and
adhered to?
Demand
Demand Analysis
Demand Categories
Type
Description
Normal
Continuous history with relatively high volumes, can be forecast

with confidence. (Up to 2 periods of zero demands)
Erratic
Intermittent history with medium to high volumes, can be forecast

with reasonable confidence (Between 3 and 6 periods of zero
demand)
Lumpy
Very intermittent history with medium to high volumes, can be

forecast but with limited confidence. Preferably not made to
stock. (Between 7 and 10 periods of zero demand)
Management
Control
Very intermittent and unpredictable demand. Should not be made

to stock. (Between 10 and 11 periods of zero demand)
New
More than 6 periods with zero demand but with 4 most recent
periods with demand greater than zero
All Demands Zero No demand in the last 12 months
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Demand Analysis: Normal
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Demand Analysis: Lumpy
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Demand Analysis: Beltline
Beltline
No of Items
50
35.0%
30.0%
39
40
35
29
30
Beltline
No of items as a %
27.8%
23.0%
25.0%
20.0%
15.1%
15.0%
19
20
31.0%
10.0%
10
3.2%
5.0%
0.0%
0
Normal
50000
Erratic
Lumpy
New
Normal
Man Control
Beltline
Average Demand Per Month
47194
100.0%
40000
80.0%
30000
60.0%
20000
40.0%
10000
20.0%
2099
697
649
145
Lumpy
New
Man Control
0
Normal
Erratic
Erratic
Lumpy
New
Man Control
Beltline
92.9% Average Demand as a %
4.1%
1.4%
1.3%
0.3%
Erratic
Lumpy
New
Man Control
0.0%
Normal
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OTIF (On Time In Full)
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To maintain service we can buffer with capacity or

inventory. WIP and Finished Goods give us a good idea
about how well capacity is being deployed.
Demand
Demand Analysis
What are the cash consequences of current

flow practices?
Demand
Demand Analysis
Working Capital Relationships Current State
Inventory Pipeline in Days

Raw
WIP
24
100
Fin Gds
7
Debtor days
30
Payables days
50
Finance days
111
September End Inventory of $211m

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What is the pareto of the real

money being spent?
Demand
Demand Analysis
Key Drivers
P&L Actual 2010 Eur 000s
Sales
30899
Material Cost
11810
Throughput
19089
Labour
6387
Staff
2967
Depreciation
1566
Energy
1438
Purch Servs
1181
Freight
1090
Consumables
1029
Maintenance
748
Other variable
652
Toolcrib
495
Loss prevention
373
Op Profit/(Loss)
1163
Sensitivity Analysis
A 5% Change for better effects the bottom line by: -
Pareto Works.. Use it!!

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Key Performance Indicators

and Policies drive behaviour
Demand
Demand Analysis
?????
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Cause and effect analysis (speculation for

feedback)
Medium to strong negative correlation of -0.64. Bonus Incentives (25%) to make

volume of parts over the right mix of parts could be a contributory factor (If Null
were true a correlation as great as this would occur by chance alone with a
probability of less than 2.5%)
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Demand
Demand Analysis
A Case Study example Its too expensive

to stop
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Big Picture Financial 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 Big Picture Financial Map
Die Shop
Cutting
Control
Cooled
Shotblast
Heat
Treatment
Shotblast
Finish
South Line
Forge
Induction
Heating
Finish
North Line
Joy
Mining Line
www.tocpractice.com


Add the main routes of products flowing through
production to final customers
Finish
North Line
Die Shop
Cutting
Control
Cooled
Shotblast
Heat
Treatment
Shotblast
Finish
South Line
Forge
Induction
Heating
Joy
Mining Line
www.tocpractice.com


We only MAKE money one way so lets record on
our BPFM how much money different parts of the
process generate for us
Finish
North Line
Die Shop
Cutting
Control
Cooled
Shotblast
Heat
Treatment
Shotblast
Con. Cooled 000s

Sales
9263
Material costs(4179)
Throughput
5084
Finish
South Line
Forge
Induction
Heating
OTIF
82% by
week
Heat Treated 000s
Joy
Mining Line
Sales
Throughput
www.tocpractice.com
2738
1715


OTIF
82% by
week
Where is the inventory tied up in the system?

Die Shop
1707
3760
Finish
North Line
Fgds
604
Cutting
1610
Control
Cooled
616
Induction
Heating
Throughput
Forge
1574
9263
5084
Shotblast
1759
Heat
Treatment
Sales
1489
RM
12670
Con. Cooled 000s
Finish
South Line
Fgds
416
Shotblast
Heat Treated 000s
786
2009
Joy
Mining Line
Fgds
1290
Sales
Throughput
www.tocpractice.com
2738
1715


OTIF
82% by
week
How do we turn the inventory into time? Days of

sales cover?
Die Shop
1707
3760
Finish
North Line
Fgds
604
Cutting
1610
Control
Cooled
616
Induction
Heating
Throughput
Forge
1574
9263
5084
Shotblast
1759
Heat
Treatment
Sales
1489
RM
12670
Con. Cooled 000s
Finish
South Line
Fgds
416
Shotblast
Heat Treated 000s
786
2009
Joy
Mining Line
Fgds
1290
Sales
Throughput
www.tocpractice.com
2738
1715

Big Picture Financial 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 opening position is to be
compared with future sales
Month
Opening
Jan
Feb
Mar
Apr
May
Jun
Jul
Accounting days
20
21
23
19
22
20
17
000's
000's
000's
Raw Materials
419438
421,804
420,478
411,332
461,278
430,780
476,068
530,740
Inventory FG
348769
365,010
352,350
369,041
375,689
360,554
361,049
353,199
Inventory WIP
1048765
1,103,376
1,073,247
1,150,408
1,009,595
1,107,902
1,083,007
1,075,086
000's
Working Inventory Sales

1397534
1,468,386
846,293
1,425,597
1,089,873
1,519,449
1,174,546
1,385,284
950,220
1,468,457
964,689
1,444,057
1,067,380
1,428,285
871,243
000's
000's
000's
000's
000's
Mat Cost
D Lab
Variable
Fixed Overhead
Cost of Sales
366,758
472,838
509,388
412,148
418,710
460,462
376,754
146,987
150,236
152,673
141,682
148,999
148,765
140,354
115,865
117,834
119,874
113,351
115,923
112,347
111,946
270,987
274,900
281,009
264,981
230,931
260,432
249,870
900,597
1,015,808
1,062,944
932,162
914,563
982,006
878,924
www.tocpractice.com

Big Picture Financial Mapping.How

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

Big Picture Financial

Mapping.How can we convert
the inventory in tonnes into days
of sales cover?
Step 3 apply the smoothed figures to the inventory
balances at the start of the month (or end of the prior
month).
Raw material
430780 x 30.5 days =
Smoothed raw material cost of sales 460462
Work in progress
1107902 x 30.5 days =
Smoothed cost of sales
982006
Finished goods
360554 x 30.5 days =
Smoothed cost of sales
982006
www.tocpractice.com


OTIF
82% by
week
Who is responsible for what?
Die Shop
1707
3760
Finish
North Line
Fgds
604
Control
Cooled
Cutting
1610
616
Induction
Heating
Sales
9263
1489
RM
12670
Con. Cooled 000s
Throughput
5084
Shotblast
1759
Forge
Heat
Treatment
Finish
South Line
Fgds
416
Shotblast
Heat Treated 000s
786
2009
1574
Joy
Mining Line
Fgds
1290
Sales
Throughput
Raw material
Work in Progress
Finished goods
28.10 days
34.70 days
11.30 days
www.tocpractice.com
2738
1715


OTIF
82% by
week
If responsibility followed flow it would look like this
Die Shop
1707
3760
Finish
North Line
Fgds
604
Control
Cooled
Cutting
1610
616
Induction
Heating
Sales
9263
1489
RM
12670
Con. Cooled 000s
Throughput
5084
Shotblast
1759
Forge
Heat
Treatment
Finish
South Line
Fgds
416
Shotblast
Heat Treated 000s
786
2009
1574
Joy
Mining Line
Fgds
1290
Sales
Throughput
Raw material
Work in Progress
Finished goods
28.10 days
34.70 days
11.30 days
www.tocpractice.com
2738
1715


OTIF
82% by
week
What are the operating expenses of running the

production system per annum?
Overheads 3048k
628k
Die Shop
1707
3760
Finish
North Line
Fgds
604
Control
Cooled
Cutting
1610
616
Throughput
1759
Heat
Treatment
Finish
South Line
28.10 days
2255k
5084
Fgds
416
Shotblast
Heat Treated 000s
786
2009
1574
Joy
Mining Line
Fgds
1290
Sales
Work in Progress
34.70 days
366k
www.tocpractice.com
2738
Throughput
Raw material
9263
Shotblast
Forge
Induction
Heating
Sales
1489
RM
12670
Con. Cooled 000s
1715
Finished goods
11.30 days


What about looking at the due date
performance & inventory lead times by the
distinctive streams (Jan Sales Dec Inventory)
OTIF
82% by
week
Overheads 3048k
628k
Die Shop
1707
3760
Finish
North Line
Fgds
604
Control
Cooled
Cutting
1610
616
Throughput
1759
Heat
Treatment
Finish
South Line
28.10 days
2255k
5084
Fgds
416
Shotblast
Heat Treated 000s
786
2009
1574
Joy
Mining Line
Fgds
1290
Sales
Work in Progress
34.70 days
366k
2738
Throughput
Raw material
9263
Shotblast
Forge
Induction
Heating
Sales
1489
RM
12670
Con. Cooled 000s
1715
Finished goods
11.30 days
The second level of inventory analysis; the average is broken down into its
constituent parts
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CC OTIF
90% by
week

What about looking at the inventory lead times
by the distinctive streams (June results)
HT OTIF
72% by
week
Overheads 3048k
628k
Die Shop
5.2d
11.4d
Finish
North Line
Fgds
1.8d
Control
Cooled
Cutting
3.9d
1.5d
Throughput
5.3d
Heat
Treatment
Finish
South Line
28.07 days
2255k
5084
Fgds
1.3d
Shotblast
Heat Treated 000s
9.6d
24.5d
19.2d
Joy
Mining Line
Fgds
15.7d
Sales
Work in Progress
33.85 days
366k
2738
Throughput
Raw material
9263
Shotblast
Forge
Induction
Heating
Sales
4.5d
RM
30.8d
Con. Cooled 000s
1715
Finished goods
11.01 days
What does this tell us.. It is screamingly

obvious where the biggest issue is at present
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Big Picture Financial 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 Big Picture Financial 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.
www.tocpractice.com

Big Picture Financial Mapping.What other financial

information can we develop that helps us focus on the
most important aspects of the business?
Sales
Material costs
Throughput
Overheads
Wages
Consumables
Sales Org
Depreciation
Warranty
Head Office
Freight Out
Profit
12001200
5202000
6799200
2160000
1722864
1236000
450000
380000
120012
208000
20000
502324
Step 6 choose a reasonable period of time

like the last 12 months and get hold of the
data regarding what the company really
generated in terms of sales and what it
really spent its money on. Arrange it in
terms of impact a bit like this: Step 6 Now apply a factor to each of the
headings and ask yourself what is the
impact on the bottom line if this figure was
to improve by X %?
Pick a low number like 5%, we want people
to understand that relatively modest real
improvements can make a big difference to
the bottom line.
Step 6 check out the completed sensitivity

slide on the next page, what does it say to
you about where to focus to make the most
impact on the bottom line?
www.tocpractice.com

Key Drivers
Sept YTD Profit and Loss
Actual
s
Sales
Material costs
Throughput
Overheads
Wages
Consumables
Sales Org
Depreciation
Warranty
Head Office
Freight Out
Profit
12001200
5202000
6799200
2160000
1722864
1236000
450000
380000
120012
208000
20000
502324
Sensitivity Analysis
A 5% Change for better effects the bottom
line by: 600060
Sell Price
260100
Material costs
339960
Throughput
108000
Overheads
86143
Wages
Consumables
61800
Sales Org
22500
Depreciation
19000
Warranty
Head Office
Freight Out
6001
10400
1000
www.tocpractice.com

Working Capital Relationships Current State

Raw
WIP
28
34
Fin Gds
11
Debtor days
50
Payables days
60
Finance days
63
June Inventory of 1.4 million

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Measure of Improvement
Manufacturing Lead Time as Measured by Days Inventory in WIP
35
20,000
28.1
30
29.1
29.0
25
22.9
20.1
20
20.0
18.4
16.7
10,000
15
14.6
13.0
12.4
10
9.0
8.9
5,000
Days
No. of Pieces
26.3
15,000
7.8
5
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)
WIP Days
11107 11748 14275 1308514401 13945 11010 11440 13700 15600 20759 1247615104 16473 16216
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 Future State

Throughput
Inventory
Operating
Expense

Raw
WIP
20
OTIF
95% by
week
Fin Gds
5
Debtor days
50
Payables days
60
Finance days
63
June Inventory of 1.4 million

www.tocpractice.com

Summary Flow Accounting

Current Cost Accounting
Actively works against flow
Lead us to the wrong decisions
Are confusing and complex to people
Flow Accounting
Analyses and Interprets accountancy data in an different way resulting in Flow:
Improved customer service
Reduced lead times
Focus on Throughput and total cost
Clearer understanding of the operating expenses of current capacity
Improved bottom line results
www.tocpractice.com

Next Steps for Flow Accounting

49
www.tocpractice.com
Many TOC people will recognise P & Q

Q
P
Purchase
Part
5/unit
D
15 min
D
5 min
C
10 min
C
5 min
B
15 min
A
15 min
B
15 min
A
10 min
RM1
20/u
RM2
20/u
www.tocpractice.com
RM3
20/u
www.tocpractice.com

PROFIT & LOSS ACCOUNT FOR WEEKS 2 TO 22

P
SALES
240000 2000
COGS
207734
STANDARD MARGIN
32266
Sell Price
90
Standard Material COG
114000 90000
Actual Material Costs
114000
Material price variance
0
LABOUR
Direct Labour
40000
Labour Recoveries
31912
Labour Under Recovery
-8088
OVERHEAD
Depreciation
8000
Salaries
56000
consumables
10000
Rent and Rates
6000
total
80000
Overhead Recoveries
63823
Overhead Under Recovery
-16177
ACTUAL PROFIT/LOSS
Q
600
CASH FLOW STATEMENT FOR WEEKS 2 TO 22

PROFIT/(LOSS)
100
24000
NON CASH ITEMS

DEPRECIATION
ACCRUALS
MOVEMENTS
DEBTORS
CREDITORS
INVENTORY
WIP
RM
FG
PP
CASHFLOW
8001
RECONCILIATION OF COST OF GOODS SOLD (COGS)

OPENING RAW MATERIAL STOCK
19200 OPENING PP STOCK
PURCHASES
100000
PURCHASES
SUB TOTAL
119200
SUB TOTAL
CLOSING RAW MATERIAL STOCK
15200 CLOSING PP STOCK
RAW MATERIAL COG
104000
PP COG
750
10500
11250
1250
10000
Work in Progress
Raw Material
Finished Goods
Purchased Part
Debtors
8001
8000
-89400
23500
-2000
4000
0
-500
-48399
BALANCE SHEET AS AT END OF WEEK 22

ASSETS
LIABILITIES
17125
Creditors
15200
Bank Account
0
Accruals
1250 Accumulated Depreciation
107800
Reserves
141375
www.tocpractice.com
65250
52400
7200
8800
7725
141375


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03 - John Darlington - 21 TOCPA - UK - 11 Nov 2015 - For Web

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21st International Conference of the

TOC Practitioners Alliance - TOCPA

21st International Conference of the

Formula and Experience

W.H. Auden New Year Letter 1940

21st International Conference of the

Observations about Improvement Activity

21st International Conference of the

Most improvement activity does not

Local efforts tackling isolated parts of the system to no overall

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There is a problem with conventional

1. Encourage bigger batches to reduce unit

Lead us to the wrong decisions

1. Focus on costs instead of value

Are confusing and complex to people

1. Give credit for over production

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What is Flow Accounting?

Flow accounting is a management accounting methodology.

It is based on common sense and developed out of practical application.

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Structure of the Flow Accounting Process

Clarification of the financial consequences of the current state

Break down into

Quantitative financial assessment of the initial future state

Value Flow Accounting

Financially quantified current state

TOC Practitioners Alliance - TOCPA

Flow Accounting Process

Completing the Current State Map

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What is the profile of the demand and

Flow Accounting Process

Continuous history with relatively high volumes, can be forecast

Intermittent history with medium to high volumes, can be forecast

Very intermittent history with medium to high volumes, can be

Very intermittent and unpredictable demand. Should not be made

All Demands Zero No demand in the last 12 months

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Demand Analysis: Normal

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Demand Analysis: Lumpy

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Demand Analysis: Beltline

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OTIF (On Time In Full)

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To maintain service we can buffer with capacity or

Flow Accounting Process

What are the cash consequences of current

Flow Accounting Process

Working Capital Relationships Current State

Inventory Pipeline in Days

September End Inventory of $211m

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What is the pareto of the real

Flow Accounting Process

Pareto Works.. Use it!!

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Key Performance Indicators

Flow Accounting Process