In conversations with manufacturing companies, it’s not long before the discussion of effective costing processes turns to a chat about profitability. Read the latest article by Andy Bigalow, “The Cost of Poor Costing“, to explore how knowing your true manufacturing costs directly affects a company’s profitability.
Posts Tagged ‘Andy Bigalow’
Operations and finance managers have the same goal, helping their companies grow profits. But if you’ve participated in an executive team meeting, you know that these two groups often disagree with each other on how to measure and interpret metrics like inventory levels, operating costs, and WIP levels.
During a presentation with one of our prospects, the company’s CFO expressed his interest in breaking the fixed and variable overhead rates into specific categories, or cost elements. His concern was that when cost variances were reported on production run, operations would push them off as a process variance. The CFO realized during our chat that by using an enterprise costing system with a more detailed model, he could determine exactly where the variance originated – machine run times, staffing, machine down time, or anywhere else. That detail would help his team to identify inefficiencies and correct them, reduce costs, save money and ultimately increase margins.
Once we’d moved past the discussion on cost elements, the COO arrived to the meeting. Without knowing what we’d already discussed, his initial reaction to costing systems is “all these solutions are the same and they don’t let you allocate the costs to where they really should be”. Not seeing the first part of the presentation on building unique cost elements, he missed the gun. But the bigger point is that the COO fired a shot across the bow at the CFO over the topic of costs allocations and cost variances. The COO’s reaction was not uncommon. Many operations managers feel that their cost accounting processes are inadequate and don’t provide the information needed to truly run the business. And, the CFO had a valid point as well – operations managers must provide more detail about how costs are accrued during the manufacturing process.
The beauty of a true enterprise cost system is its flexibility to build the cost structure that best represents the business and to accurately allocate overhead across the finished goods. Instead of having to duke it out, finance and operations leaders can both get the information they need, the way they want it.
I have spent the majority of my technology career in the Manufacturing Computer Systems space and have been most impressed with how the world of technology has improved our ability to automate our business transactions. MRP solutions morphed into ERP solutions. The ability for a company to design, order, buy, build, ship, invoice and produce a financial statement reflecting their business during a given period of time has provided tremendous gains in not only the transactions costs of doing business, but the ability to manage that information in large quantities. Multi-country, multi-language, multi-plant, multi-tax code, multi-currency, multi-multi-multi has been a godsend for those large international manufacturing companies. The likes of SAP, Oracle and others have provided the transactional information essential for running a complex organization.
These systems do a great job of building a standard cost for a product or SKU. This cost is needed to build a cost-of-goods sold and provide the basis for financial reporting. However, where these transactional processing ERP systems fall short, is the ability to provide detailed managerial cost accounting information and flexibility. These systems were not set up to track simultaneous multiple costs for the same SKU and easily manage these different cost attributes by plant, by process, by date, by material substitution, by shift, by packaging etc. Only a standard cost and current cost are easily handled. Building rates inside the factory at the machine, work-center and department levels don’t exist.
By using ERP systems for process manufacturing costing processes is often like forcing a square peg into a round hole. The detailed cost data they need to track is splintered away and they’re forced to use a spreadsheet or build a database program to handle the analysis. I had one controller tell me that his company had “blown up” several computers trying to replicate their costing processes in a spreadsheet. Process manufacturing companies must become aware that there is an alternative solution of managerial cost accounting that resides in complete harmony with the traditional transaction ERP systems.