Integrating Operational and Financial Information

Oct. 8, 2016
There is definitely interest by manufacturing to correlate manufacturing metrics to finance and business metrics, but the wall dividing the two remains steadfast.

The wall impairing understanding between manufacturing and finance appears to be one of the best built walls in history. In reviewing the results of the Manufacturing Enterprise Solution Association’s (MESA) 2016 Metrics That Matter survey, the evidence shows the wall has almost no signs of deterioration. For example, when manufacturers were asked, “Do you have a corporate analytics program that uses manufacturing data?” only 14 percent said yes. When asked, “How are analytics used in the enterprise?” only 13 percent said they correlate manufacturing and business performance information together.

The Metrics That Matter survey showed many areas where manufacturing data and information were adapting rapidly, such as in adopting and automating information using the Internet of Things (IoT). However, integration with finance continues to be highly resistant to improvement. The fact that these questions are on the MESA survey indicates there is significant interest by manufacturing to correlate manufacturing metrics to finance and business metrics. Additionally, Big Data technology with the ability to connect organizational data has made tremendous leaps in recent years. What is holding back progress in this area? Two possibilities seem to exist: Either finance is resistant to coordinating with manufacturing, or correlating manufacturing data with financial data is extremely difficult.

Organizational resistance is an unlikely culprit. Executive management is normally highly skilled at overcoming it. Furthermore, the accounting profession advertises itself as a business partner. The problem is deeper than behavior. It is a two-part problem: first, lack of skills and knowledge within the accounting profession; and second, the nature of financial data. Accounting and finance education focuses heavily on financial accounting for regulatory external reporting. The rules and constructs of this data are defined by a social consensus organized by standard-setting bodies with oversight from national governments. Though financial reporting standards seek to represent “real world economic phenomena” for investors and creditors, they are established by a process that involves many powerful interests and compromises between preparing companies, auditors, and capital market users and regulators. The standards are laws developed by men to represent business through that lens.

Pure manufacturing data must represent the reality of resource and process cause-and-effect relationships on the factory floor. No manmade standard can suffice–only reality. The accounting profession isn’t trained to build financial models that create data based on the detailed, causal and highly granular reality of resources and process. In fact, surveys by the Institute of Management Accountants in 2003 and again in 2012 show finance has a diminishing interest in creating advanced cost models that could reflect resources and processes more accurately. In clear contradiction to the willingness to create cost information, the same surveys show increasing interest in reducing costs.

The knowledge and techniques exist to build advanced cost models that link manufacturing and finance in a cause-and-effect manner—Resource Consumption Accounting, Grenzplankostenrechnung (GPK), and capacity/pull focused activity-based costing techniques. These techniques make causality the primary principle, not financial accounting standards. They build costing information to support an operational model of the enterprise, and don’t limit financial data to what the existing general ledger can provide. Many, if not most, advances in cost modeling and cost information have come from engineers over the past two centuries, arguably due to their intimate understanding of the processes and a view of business value creation that is not impaired by accounting practices and standards. Maybe the time has come for manufacturers to just solve the problem, create actionable cost information that shows the progress they are making, and let the accountants catch up.

>>Larry White, CMA, CFM, CPA, CGFM, [email protected], is executive director of the Resource Consumption Accounting Institute, which trains and advocates for improved cost information connecting operations to business performance.