Industry 4.0 Capabilities Come to Enterprise Finance

Traditional financial accounting information is not up to the challenges of an Industry 4.0 world. A focus on acquiring data in real-time opens up a new world of insight and decision making.

Larry White, executive director, Resource Consumption Accounting Institute
Larry White, executive director, Resource Consumption Accounting Institute

The near century long gap between business metrics, as expressed by financial accounting standards designed for regulated financial statements and audits, and operational information with its focus on real-time quality and efficiency, appears to be the new frontier among major software and systems providers. In July 2020, SAP and Siemens announced a partnership of software offerings to improve product lifecycle, supply chain, and asset management. Their announcement included an interesting statement: “Silos between engineering and business have existed in enterprises for decades. This new partnership will help customers to break down these silos so manufacturers, product design teams, and service managers have the information needed to quickly create and manage customer-centric product and service offerings.” I don’t have specific insight into how Siemens and SAP will achieve this. SAP software was originally designed to support German management accounting/controlling techniques that focused on creating a causal monetary model of operations purely for internal decision support and was not used for external financial reporting. Causality is a critical requirement to monetarily reflect operations. The German “controlling” body of knowledge remains very active and continues to focus on internal decision support, though it has expanded beyond manufacturing to other industries and also supports organizational strategy development and execution.

Digitalization is clearly the springboard for changing the nature of information. Traditional financial accounting information is the product of an analog world and simply is not up to the operational and management challenges of Industry 4.0. If a manufacturer’s accountants aren’t designing and creating “fit for digital manufacturing” causal financial information for internal decision support, it appears manufacturing systems providers are ready to develop or find partners that will bring their customers capable Industry 4.0 financial information. This is really a digital steamroller for finance and accounting in manufacturing because it is likely that the internal decision support financial information from these new systems will be completely credible and fully capable to compete in the decision arena with poorly connected, historical regulated financial reporting information.

Continuous, cause-and-effect-based cost information opens up a new world of insight for decision making. Manufacturing costs will be substantially established as the product and production capability will be built on the digital twin, subject possibly to material purchase costs. But manufacturing costs are only part of the story. With an organization-wide decision support system, design selling and marketing costs, warehousing and delivery costs, financing and invoicing costs, and warranty service costs could be estimated based on history. Actual process performance or statistical forecasts are then captured for critical evaluation and forecast improvement continuously. Add in-demand and revenue forecasting and evaluation, which is more common than cost forecasting, and manufacturers are looking at continuous profitability analytics.

Accountants can be instrumental in this exciting new world of internal decision support financial information, but the profession must expand its scope inside organizations. Finance tends to be geared toward “up and out”—meaning the C-suite, board, and shareholder. Finance needs to focus on “around and down”—meaning mid-managers and employees who can add tremendous value with high quality, timely financial information. Numerous initiatives exist at the Institute of Management Accountants, International Federation of Accountants, Resource Consumption Accounting Institute, and many other organizations to increase accountants’ focus on internal customers and internal decision support needs which have long gone under-recognized.

Nearly a century ago HL Gantt, an engineer, and Alexander Church, an accountant, debated the role of accounting in improving efficiency in the factory and supporting value creation. The debate centered on the detrimental effect of the existing accounting perspective on the actual operations in the factory and the business decisions of manufacturers. In the end, they agreed that economic reality was more important than accounting standards. This debate is only dimly recorded and often forgotten. Perhaps Industry 4.0 and digital manufacturing systems will bring back this wonderfully old fashioned, but completely relevant agreement between manufacturers and accountants.