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Internal Tasks

The term “Internal Tasks” stands for all work to be performed in a company that is not directly caused by the units produced or by the activity of the receiving cost center. Internal tasks are only indirectly related to the products and services produced or sold. For better distinction we always write the term in our blogs with a capital “I”.

Examples of Internal tasks:

- Management, planning and control work in all areas
- Work of all sales-oriented cost centers
- The entire production planning and control as well as work preparation
- Work of personnel administration, payroll accounting and the time spent on training and further education
- Work of procurement, warehousing, forwarding
- Development and operation of the entire information technology as far as its services are not directly caused by orders from individual cost centers or customers.
- Work to keep buildings, company premises, installations and machines ready for operation
- Administrative work to comply with legal requirements.

All these Internal tasks have in common that they are rendered to keep the whole organization ready to perform. How much work capacity is built up and provided by employees or plant capacity is decided by managers as part of strategic and operational planning.

Planning hourly requirements for internal tasks

More than 50% of total personnel costs are incurred for Internal tasks in many industrial and service companies today. Therefore, the annual hourly requirements for these tasks must be planned and recorded in each cost center.

The difficulty lies in creating reliable capacity requirement plans for all Internal tasks. On the one hand, this is due to the fact that people in these areas perform a wide variety of tasks more or less in parallel. On the other hand, only a few companies record time consumption for Internal tasks. This makes it difficult to plan requirements.

To get a better grip on capacities and the cost block for Internal tasks, we recommend since years that the worked hours for Internal tasks should also be recorded by types of work. The presence time of a person can be measured quite easily using time recording devices but many managers are not even required to perform this recording for themselves. But just from recording the presence time it is not possible to evaluate for which task type how much time was spent.

We made the experience that already the planning of the task types in the internal areas generates important insights for capacity planning. For this purpose, the Internal tasks are divided into six groups, which occur in almost every cost center:

For the factual tasks (Row 5) subgroups can be created in individual cost centers as needed. In the sales-related functions for example:

- Addressing potential customers
- Support of existing customers, preparation of offers
- Capacity requirement for contract negotiation.

In the human resources department subgroups could be:

- Recruitment and selection of personnel, payroll and social security
- personnel and sickness care
- Documentation of the potentials of managerial and professional staff.

Planning at this level of detail brings benefits to the whole company. Since employees are usually reluctant to record the time spent for different Internal tasks, a user-friendly and thus largely automated recording application must be set up.

Thanks to the lean production movement impressive improvements were already achieved in the area of directly product-related services and production management. Now it is time to apply the findings to Lean Administration as well (see the corresponding posts in the Lean Management area of this blog).

Fixed Cost Reduction with Lean Management

Lean Administration becomes more important as fixed costs often grow faster than proportional costs

The short- and long-term profitability of an organization is increasingly determined by the fixed costs of the supporting functional areas (procurement, human resources administration and development, information technology, facilities, investment and finance, sales and marketing, executive management). As a result of increasing complexity, the costs incurred for these functions are rising continuously. In many companies they are today higher than the proportional product costs. If an organization is to become more profitable, it is therefore particularly important to reduce fixed costs in these areas through Lean Management.

Fixed cost reduction with Lean Management

This is the field of Lean Administration, Lean Logistics and Lean Sales. It is about making the total fixed costs of the organization increase more slowly than the net revenue. The first and most important starting point for this is to reduce or prevent working hours that are used to win and keep customers, as well as for the administration and management of the organization. The second is to ensure that investments for successful further development in all areas (especially IT and buildings) grow more slowly than net revenues, because they lead to fixed operating and depreciation costs.

Lean Administration

Efforts are made to reduce labor input for:

- Complying with government/regulatory requirements (primarily personnel administration and compliance with labor laws).
- Maintaining operating permits (documenting legal compliance)
- Documentation of legally compliant functioning of plant and equipment
- Documentation and traceability of product creation
- Recording data and ensuring data quality
- Planning and recording of costs and revenues plus evaluation
- Recording and evaluation of all accounting data
- Performing management duties in all areas to be managed.

Lean Sales

is to ensure that the labor input for the following tasks grows more slowly than the net revenues generated. Of main concern are:

- The entire sales and distribution process (from address acquisition (lead) to customer follow-up),
- Travelling time and cost,
- Product management and sales promotion, and
- Advertising and other marketing activities.

Lean Logistics

should ensure that

- Raw materials, supplies and other goods and services can be purchased at lower cost (contract design, delivery terms, other materials that also meet the requirements),
- All specifications for goods and services to be procured are available electronically before the ordering process is triggered,
- Transportation costs for delivery and shipment become cheaper per unit,
- The workload for order and delivery processing is reduced,
- All relevant data is available directly and without access to paper files, and
- Procurement processes can be handled in a single pass and without waiting times.

Increased efficiency through higher master data quality and service recording

The master data quality of customer, employee, and supplier data is a priority if search processes and requests for current data are to take up less working time. In our opinion, the availability of up-to-date data at all times is a central prerequisite for the realization of administrative processes that are as waste-free as possible. It remains to be seen whether a company’s master data should be maintained centrally or by department, and who should be responsible for what content.

In all the areas mentioned, the aim is to achieve efficiency gains and thus remain competitive. This requires planning and measuring the work input for the various (sub-)processes. For this purpose, these must be captured in terms of content so that the time worked on internal tasks can be measured. Shop floor data collection as is common in the manufacturing sector must also be applied to the measurement of working times for internal tasks. Many “white collar” workers resist this recording, but only this data makes it possible to measure achieved effectiveness (are we doing the right thing?) and efficiency improvements (are we doing it right?).

Recording of time spent on internal tasks must be done on a contemporaneous basis. After all, tomorrow you no longer know exactly how much working time you spent on which task yesterday. If a suitable electronic recording application is available directly at the workplace, this recording is easy. The post “Capacity requirements for internal tasks” shows how internal tasks can be structured so that their recording and classification is simple and does not take a lot of time.

In Lean Administration projects, the main goal is to reduce time consumption for repetitive work. This requires direct observations and consumption records per work step, as small time savings can be found, which add up to entire full-time positions through repetition thousands of times.

Practical order processing example

In this example from a manufacturing company, the entire process from customer order to delivery and invoicing to the customer was examined. The company wanted to reduce the time required for processing and at the same time shorten the lead time of an order. This was to create free capacity for more customer orders. When the as-is status was recorded, it was found that the turnaround time was 2-8 days; after implementation, it was 1-3 days. The average processing time per order dropped from 40 minutes to an average of 20 minutes, i.e. to about 50%. With around 13,000 orders per year, this corresponds to a time saving of approximately 4’300 working hours per year.

Fixed cost reduction with Lean Management

If the staff were to be reduced, a total of 2.5 fewer full-time positions could be planned in the next planning year in the cost centers sales processing and production planning. If the freed-up personnel capacity is shifted to other cost centers, these would have to increase their planned personnel costs accordingly in the next plan year.

Lean Production for less Proportional Costs

The example company manufactures brake valves for precise moving and holding of heavy loads. These valves, of which there are approximately 3,000 types, are integrated into the example company’s own products as well as into those of other manufacturers.

Lower Proportional Costs with Lean Production

The mission was to reduce proportional costs with Lean Production, while also realizing shorter lead times and lower average inventories in the work in process and finished goods inventory accounts.

This goal was mainly achieved by redesigning the production flow. All individual parts to be assembled into a specific brake valve are now prepared on a slide in a setup line and delivered via conveyor to the final assembly station. The manual final assembly and the computer-aided test process were merged into one overall process (during the test process, the specialist assembles the next valve and determines the test result).

Increase flow and reduce processing time

At the end of the test phase, the following results were measured:

Lower proportional costs with Lean Production — Lower Proportional Costs with Lean Production

Result: Lower product costs, shorter lead time, less space required, higher production capacity.

Since the material input (semi-finished and purchased parts) has not changed, only the standard times in the work plans have to be adapted for the standard cost estimate of the products. The project implementation leads to the reduction of the standard time per piece of 4 minutes. Assuming that an employee in this cost center, including social benefits, costs 85,000 per year and works a net 1,700 hours per year, this results in an hourly rate of 50.- and a minute rate of EUR 0.833. The proportional manufacturing costs per brake valve are therefore reduced by EUR 3.333, since 4 minutes are saved. The standard proportional manufacturing cost also decreases by EUR 3.333 in the next plan year. This development increases competitiveness and decreases the value of work in process and inventory. As a result, total assets are smaller and there are reduced interest costs.

If the management accounting system is set up in the form of proportional standard cost accounting, the implementation success of the lean project can be read directly from the target to actual variances on a monthly basis. If the target times from the lean project are not adhered to, working time variances occur. If the actual order-related material consumption does not correspond to the planned consumption according to the bill of materials, material consumption variances occur. Similarly, variances in setup times and quantities or yield rates can also be measured.

Improved throughput and less space needed

The effect of the reduction in throughput times in terms of value cannot be answered unambiguously, as it depends above all on customer behavior. If customers can be supplied more quickly as a result of this time gain, this can lead to additional sales and possibly also to new customers. Whether these additional sales will be made is usually difficult to assess and should therefore not be included in sales planning. In any case, the customer benefit increases due to faster delivery.

The reduced space requirement only has a financial consequence if suitable space becomes a bottleneck in the case of extensions or conversions and, as a result, new rooms have to be built or rented. Any resulting cost increase would have to be planned in the enlarged cost center. (Note: In decision-relevant management accounting, the space costs are not allocated to the products, since they are fixed costs that continue to be incurred even if no more production takes place).

Lean Production and Management Accounting

A standard costing system that only charges proportional costs to the single unit creates a symbiosis between lean management and value-based considerations.

Link lean production and management accounting

Lean Production aims to reduce consumption of product-related working hours, input materials and externally sourced services, as well as the assets required for these, to the minimum necessary for the successful running of the business. The extent to which this can be achieved must be judged from a value-based perspective. This is why lean production and management accounting belong together.

This requires a management accounting that shows cost, activities, revenue and results. The system must be able to depict planned and actual values, variances, and forecasts for the individual item through all cost centers to the overall result in an activity-based manner. Management accounting is the collective term for this system. In management accounting, the success of lean management projects can be planned and tracked in terms of actual value.

Financial accounting only contains values but no activities that can be planned or tracked, cost allocation to products and services can only be done with the help of (arbitrary) allocation keys. Such a full cost allocation system is not qualified to support decision-making in lean management projects.

Management accounting must be structured as a standard cost system. This creates a symbiosis between lean management and value-based considerations because quantities and services are evaluated with monetary units and thus made synonymous.

The new specifications resulting from lean production considerations (standard quantities, standard times, setup and setup times, scrap rates) are the quantitative basis for calculating the proportional standard costs of an item (target to be achieved). The planned material consumption and times resulting from the lean project are to be stored in various files:

Lean production and management accounting

Lean targets and cost accounting

In the managerial cost accounting system described in our book on Management Control, the planned times and quantities resulting from the lean project and directly related to the product are entered in the fields highlighted in yellow:

Represent lean targets in cost accounting

Transfer Lean target values to ERP

In the next plan year these activity-related objectives form the basis for the standard cost calculation of the planned proportional cost of goods manufactured. The resulting values then have a direct impact on the contribution margin calculation and on the planned profit and loss calculation, as well as on the value development of inventories.

If fixed cost center costs are reduced through the lean project, this does not change the proportional product costs (bill of materials and work plan remain the same). The adjustment of planned fixed values must therefore be made in cost center planning.

The different procedure for proportional and fixed costs is necessary because the fixed costs are never incurred for a product unit, but always in the cost centers. This is because fixed cost center costs are the result of the operational readiness of a cost center, not the activity performed. The cause of the operational readiness costs are always management decisions. If, for example, rooms are freed up for other areas as a result of a lean project, or if fewer personnel hours are required for cost center management, this is indeed a success, but whether this also results in a reduction in total costs only becomes clear when management decides to rent the room to someone else and to reduce the freed-up work capacity (lower headcount).

Charge only proportional costs to products

Therefore, it is important that in the cost accounting system only the planned proportional cost rates of the cost centers be attributed to products or other cost centers (cost splitting), both for the correct tracking of the progress of a lean project in terms of value and for the development of results in line with the period. The cost rates of the cost centers must not contain any fixed costs or allocations (see the post “Proportional and Fixed Costs”).

This also applies to internal activity allocation if service areas (research + development, laboratories, workshops, internal transportation, or IT) provide services for other cost centers or projects. Only if the recipient (receiving cost center) can either decide for itself whether it wants to obtain an internal service from another cost center or if there is an automatic link between the activity of the recipient and that of the service area, is it a case of genuine internal service charging. The proportional cost is charged to the recipient. In all other allocation cases, the term “fixed cost allocation” is appropriate.

For management purposes, it is advisable to always valuate in- and outflows in warehouses of products at planned proportional production costs only. This is because proportional costs are defined by the products manufactured, while fixed costs are period costs (e.g., month, year). They are charged to the period result regardless of the manufacturing and sales quantities. Successful lean projects usually result in a reduction of both proportional unit costs and fixed period costs. The reduction in unit costs also reduces the value of inventories, which in turn increases ROI.

Since the implementation of a lean project rarely coincides with a fiscal year change, the progress in the project’s start year must still be evaluated on the basis of existing planned costs. In management accounting, these improvements initially lead to positive cost variances that improve earnings.

Lean Management

Lean management refers to the totality of thinking principles, methods, and procedures required for the efficient operation of the value chain. As such, lean management supports the ideas and processes of holistic management advocated for in this blog.

Try to avoid waste everywhere

Through innovative changes in the value-added process, customer benefits can be increased while at the same time improving a company’s own cost position and competitiveness. All areas of the company should strive to achieve faster, safer, more cost-effective and standardized process handling while avoiding, or at least reducing, the wasting of resources.

Initially companies focused on lean production. However, since resources are wasted in all areas additional approaches have now been developed in line with the functional areas, such as lean sales, lean logistics, lean maintenance, lean development, lean administration and lean healthcare.

Waste is defined as the consumption of resources that does not create value for the customer or the company. Up to nine types of waste can be distinguished:

- Overproduction: More units are produced than ordered by customers or by inventory planning.
- Circulating and warehouse inventories: All inventories take up space, tie up money, cost interest, lead to write-downs when they are no longer in demand or become obsolete. Often they are located throughout the whole production area.
- Transportation: Basically all transportation is waste. Only for logistics companies is transportation value-adding.
- Waiting and idle times: Machine downtime, unavailable personnel, stock transfers and waiting for work reduce efficiency and thus increase fixed costs.
- Unnecessary movements: These are mostly the result of impractical workplace design (including poor ergonomics), searching for documents, materials, supplies or information. They also do not add value.
- Inappropriate means and procedures: They are the result of unclear or incomplete orders or information, insufficiently maintained work plans, inappropriate tools, or insufficient training.
- Errors/rejects: These are largely the result of inadequately maintained systems or uncertainties in process flow, as well as quality deficiencies in input materials (raw materials).
- Non-utilization of employee knowledge: Employee skills, abilities, and application knowledge are insufficiently recognized and utilized.
- Demanding normal performance: Agreeing on objectives as results to be achieved and learning on the job, monitoring adherence to deadlines, encouraging employees.

The types of waste can be divided into obvious and necessary waste. The former are caused by the types of waste listed above. The necessary wastes do not generate any added value for the customers or the company but arise because regulations and specifications (mostly of an external nature) have to be fulfilled.

Less waste = higher profit

Lean projects increase productivity

By reducing waste in the direct value-added area as well as reducing necessary and obvious waste costs, profits increase compared to the starting position or, if demand is present, existing personnel and machine capacities can be better utilized while maintaining value-added costs, thus generating higher net revenues. In both cases the input/output ratio improves, i.e. productivity increases. Also, in both cases the company’s competitiveness increases because the better cost position allows it to cushion price cuts by competitors and still make a profit.

Lean management is therefore an indispensable element of sustainably successful corporate management.

To be able to plan the effects of lean management efforts and measure their success at the appropriate level, they must be represented in management accounting in terms of quantity, activities, capacity and monetary values.