Is Your CFO Ready for a Digital Manufacturing World?

June 5, 2019
Amid calls for digital transformation in the manufacturing enterprise, so must the CFO function transform to meet the challenges of digital manufacturing.

Digital manufacturing and the Industrial Internet of Things (IIoT) require significant changes in every facet of manufacturing organizations, including production, products, information systems, logistics, people, and sales and marketing. Larger and new companies are making these changes; but small and medium-sized companies face greater risks and challenges as they ready themselves for digital manufacturing. Understanding the demands of this burgeoning digital business environment is particularly important for the chief financial officer (CFO). A recent article in the Institute of Management Accountants’ Strategic Finance magazine, titled "Digital Manufacturing and the CFO," identifies six key transformations manufacturing CFOs should consider.

The first transformation involves the strategy and business model. Digital manufacturing changes the nature of both production and products. A batch size of one is becoming a manufacturing reality for a wide variety of products, and IIoT is being built into many products. These smart products are increasingly being sold as a service encompassing monitoring, maintenance, and often performance and improvement guarantees. CFOs need to be prepared to rethink accounting systems for regulated reporting; but more importantly, they need to provide advice and analysis for the new decisions and investments that will be needed to reshape the business model.

Investment justifications and priorities are a second area of transformation. The shift to digital manufacturing is increasingly a survival issue, not simply an improvement issue. Traditional budget justification processes need to be adjusted for looming strategic and economic realities. A primary component of digital manufacturing is information technology, which is traditionally viewed as a high-risk area of investment. CFOs need to think creatively about risk: Rather than deferring or slowing an investment, perhaps risk should be mitigated by hiring more IT expertise to improve the probability of success.

The third transformation involves financing options: Financing the investments in digital manufacturing requires creativity and advance planning, especially for small- and mid-size manufacturers. CFOs need to work closely with operations to understand the requirements and benefits of operational decisions, the vendors they work with, and the financing options that large vendors may offer.

Project management, the fourth transformation area, is a critical skill set for implementing the many aspects of digital manufacturing. Developing that skill set and culture will show up in accounting reports as an expense, but it is a critical investment for any manufacturer going digital.

Another transformation involves the use of information. Digital manufacturing is as much about information as manufacturing. CFOs who believe they “control” manufacturing with standard costing metrics need to take a hard look at reality. Digital manufacturing is a data-rich, forward-looking environment and successful manufacturers will have finance functions that can swim like fish in that sea of operational data to help find ways to optimize costs and improve profits. A key part of digital manufacturing is the digital twin for operational data, design and control. Manufacturing companies need a financial digital twin to support and keep pace with the new approach to making operating and business decisions.

The fifth transformation is alignment of financial and operational data. Finance needs to partner with operations in a digital environment. Traditional financial accounting paradigms will still create a financial statement, with some adaptation; but any illusion that they produce information that supports decisions, or any sort of “control” will rapidly deteriorate. Financial accounting rules, standards and theories need to be compartmentalized to their financial reporting task. If the CFO wants to create information to support organizational decisions, the guiding principle of causality needs to be applied to create monetary information that can capture the depth and breadth of manufacturing’s new digital reality. This means developing a sophisticated managerial costing system that reflects operational resources and processes. The model needs to be “an operational model costed” rather than a “financial model that approximates operations.” This requires different approaches to data collection, use of causality-based principles and concepts, and a focus on users throughout the company.

If your organization’s CFO is taking a casual approach toward the changes digital manufacturing will bring, it may be time to alert your human resource department. The conversion to digital manufacturing isn’t the time for a smug “know it all”, it requires innovators and information seekers to venture into the new world of manufacturing.

>>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.