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| October 1, 2011
Manufacturing Metrics That Matter to Finance
MESA has just completed a revision to its Metrics Guidebook and Framework. The revision has focused on explaining the root causes of the challenges to improving financial insights into operations.
Performance metrics for manufacturing operations can be extremely frustrating. You invest money, time and effort to gain control and insight into your operations. You know what’s working. You’re seeing improvement opportunities. You’re even starting to see problems before they have a quality or performance impact. And then, in come the accountants with the crudest, most elementary operational measures questioning your performance. No one would listen to them…except they are speaking about the company’s financial results.
You are naturally concerned, so you ask questions. The accountants tell you the way costs are calculated. You counter with logic based on your detailed knowledge of the operations. The accountants again tell you their way: They don’t answer your questions, they won’t consider looking at costs any other way…. You get nowhere. You know you’ve done the right things operationally, so why won’t they take a different and very logical look at what is going on?
This situation is very common. If you’ve read this column, you understand that logical cause and effect insights aren’t going to win the day with accountants focused on external financial statements, especially not in the short term. The accountants have a job to do, and it requires following financial statement rules, even if they fly in the face of logic… and frequently good sense.
The question is, how can you change the game over the longer term to better align operational and financial metrics? This issue has been examined by the Manufacturing Enterprise Solutions Association (www.MESA.org) for a number of years. MESA has just completed a revision to its Metrics Guidebook and Framework. The guidebook continues to provide great information on designing operational metrics, and the revision has focused on explaining the root causes of the challenges to improving financial insights into operations. It also provides a framework to apply costs to operations in a logical, quantifiable, cause-and-effect manner based on the Resource Consumption Accounting approach to costing.
One of the key concepts presented is the difference between actionable and reportable metrics. Operational metrics are normally designed to be action-oriented, while traditional financial metrics are report-oriented—they provide insight into a 30 day period that ended a week ago. The MESA framework creates operationally oriented financial metrics and takes an action-oriented approach by applying financial information to a real-time operational model. The idea is that resources are consumed as they contribute their output to the production process, or they are idle or unproductive. Costs move with the consumption or remain with the idle or unproductive resource.
This means resources have to be logically arranged into work groups or resource pools that contribute their homogeneous output to the productive process—a component of the final product or hours of air pressure. The nature of the consumption relationships between the resources in the pool and their output must be understood, and those relationships are traced through the full production process to final product.
In tracing the resources and their consumption relationships, you will use a mix of real time operational data and standards based on the information available. Note: Cost hasn’t been mentioned yet. The cost framework uses the model of operations. Applying costs to the operational model normally takes some research, since it requires more detailed information than is needed for external financial statements. Using a combination of standards for resource costs and near-real-time cost information, costs can be applied to the resource pools and flowed in the same manner as the resource consumption.
The revised MESA Metrics Guidebook and Framework is free to premium MESA members via www.mesa.org.
Manufacturing Enterprise Solutions Association (www.MESA.org)
ON THE WEB: Lean Production and Managerial Costing. Larry White explains Resource Consumption Accounting and how it supports Lean initiatives. Visit bit.ly/awnews_132.
Larry White, CMA, CPA, CGFM, [email protected], is the Executive Director of the Resource Consumption Accounting Institute (www.rcainstitute.org) which seeks to advance management accounting’s ability to contribute to improving business performance.
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