Finance Must Adapt as It Adopts the Digital Factory

The business of manufacturing is changing with the adoption of artificial intelligence, automation, robotics, 3D printing and more. Is finance ready?

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The digital revolution underway in today’s factory will have wide-ranging impacts on the business of manufacturing. The dynamics of human, machine and technological resources are fundamentally changing with the adoption of artificial intelligence, automation, robotics, additive technology and human-machine interaction as well as the associated data collection, analysis, and management. Real-time information is expected and, increasingly, every component of the factory is geared to support predictive analytics to help anticipate and identify problems. End markets are changing also as the Internet of Things (IoT) blurs the line between products and services.

What is the impact of all this change on the finance function? More importantly, is finance ready for the pace that this digital transformation demands?

Justifying the investment

The first challenge for finance is to justify the investment in the digital factory. The nature of disruptive change is that it comes without a proven track record. Data is scarce. Plans and projections are unique and unproven. Stories of success and failure come with equal frequency, and solid expertise is difficult to find.

Finance personnel need to take a deep dive into operations and gain a firsthand understanding of the inevitability and massive benefits of the digital revolution in the factory, or the CEO needs to put down the hammer and require it. Of course, investment in the digital factory is much different than a traditional capital investment because the digital world requires much more hardware, software, and consulting and permanent human expertise. This emerging world will also have a significant impact on regulatory and financial reports, and make the economics of the new plant for costing and profitability planning and analysis even more challenging.

Adapting to change

The second challenge for finance is planning for and adapting to a new business model for the organization. There are two significant aspects to this. First, the nature of production will dramatically change as digital factories become able to reconfigure rapidly and allow much greater customization and range of product. In some cases, these factories can be quite small, perhaps even operating inside a customer’s plant.

Second, factories will produce more “smart” products able to connect to the IoT. This not only makes these products more complex and specialized, it also creates the potential for downstream services that provide long-term value. The data a smart part creates can be even more valuable than the part itself because of the ongoing services it enables; and naturally, finance personnel must consider the associated investment in hardware, software, service and management capabilities to provide these services.

The third challenge is to adapt the organization’s performance management information and supporting systems to effectively support, manage and control the digital factory and its new business model. There are two aspects to this challenge as well. First, the traditional manufacturing financial accounting model might change to more of a service model. This could require a new general ledger, a new chart of accounts and possibly a new financial system.

Second, and more challenging, is the need to create cost information that can support internal decisions in real time, as well as forward-looking operational information. Compared with traditional manufacturing, digital factories have much less direct labor and much more complex overhead. However, they also have much more data to create causal links to the many elements that factor into production and other customer services. The challenge is to design cost data to match operational data, and provide information that supports the rapid pace of decisions required to manage operations and the business in a highly customizable, fast-paced environment.

The challenge for finance personnel is to understand and adapt to the digital factory in order to maintain the organization’s relevance in a digital world. Traditional financial statements are simply an admission ticket. The creation of information and insights to support a business environment that is in a continual state of disruptive change requires radical redesign of financial models, new skills and thinking by the accounting profession, and aggressive participation in designing new operations, products, services and business strategies.

>>Larry White, CMA, CFM, CPA, CGFM, lwhite@rcainstitute.org, is executive director of the Resource Consumption Accounting Institute, which trains and advocates for improved cost information connecting operations to business performance.

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