Shared Value Stream Costs

Shared value stream costs exist because resources or consumption of goods & services may be shared by value streams. Shared value stream costs are operational in nature and each value stream can influence the total cost through operational practices and decisions, however the actual spending decisions and management of the costs are outside of any one value stream.

Shared value stream costs are typically assigned to value streams when creating a value stream income statement in order to understand value stream profitability. Assigning shared costs to value streams should be done using the simplest method possible, based on how the value stream influences the shared cost.

The 3 primary types of shared value stream costs are facilities & warehouse; production monuments and operational support functions. Let’s look at each in detail.

Facility & Warehouse Costs

Facility and warehouse costs consist of the rent, interest, utilities, repairs, maintenance and depreciation. Value streams can influence total facility and warehouse costs by reducing the amount of space needed. Therefore, assigning facility and warehouse costs to value streams is best done based on space (square feet or meters).

Production Monument Costs

A production monument is a value-added process step shared by value streams.  Production monument costs consist of the direct costs of labor, material, machine and other costs. Value streams can influence production monument costs based on demand for the parts the monument must produce. Therefore, product monument costs should be assigned to value streams based on percentage of parts produced for each value stream.

Operational Support Costs

Operational support functions consist of purchasing, planning, engineering, quality, maintenance, receiving and material management. In the early stages of a lean transformation, operational support functions may exist as separate departments, which would mean these costs need to be assigned in some fashion to value stream income statements.

In the middle stages of a lean transformation, you may see some operational support work move into value streams, either by moving operational support people directly into specific value streams or moving the work into the value streams to use available capacity. The result is more direct value stream costs and less shared costs.

This process will continue as the lean transformation matures and the organizational structure moves towards more of a value stream organization, at which point there would be minimal shared costs.

Determining how to assign operational support costs to value streams can create a lot of interesting discussion, so it is best to go back to the standard explained earlier: Assigning shared costs to value streams should be done using the simplest method possible, based on how the value stream influences the shared cost.

For operational support functions that consist of primarily labor costs, it’s best to assign costs based on ratio of full-time equivalent operational support employees that work in each value stream to total employees in the function (whole numbers only). Don’t overthink this or attempt to create a complex tracking system in an attempt to be “precise.”

For example, use the 80/20 rule to determine “full-time equivalent”: If on average a certain number of employees in an operational support function spend 80% of their time in one value stream, use this number as full-time equivalent. And if this cannot be done simply and easily, don’t try to assign the costs because over time, it may get easier due to the maturity patch of shared operational support costs.