Is Finance Helping Your Optimizing Operations?

In order for optimizing operations to move forward, finance needs to work with all of the organization. So, as companies move to optimize, everyone should ask is how finance is helping.

Larry White, Executive Director, Resource Consumption Accounting Institute
Larry White, Executive Director, Resource Consumption Accounting Institute

The expectation for integrated operational analytics is being realized in manufacturing as it implements Industry 4.0 and associated technologies. Many manufacturers are creating roles like a Chief Analytics Officers with dominion over operational data to develop insights into improving manufacturing responsiveness, key performance indicators, and predictive information on every aspect of production and operations. Timely financial information at a granular level is often a missing link. Finance and accounting are diligently minding the financial scoreboard, telling everyone what happened. But are they running with the pack to create value?

Let’s examine what’s often happening.

Manufacturing operations management (MOM) vendors are often promising specific financial results and doing periodic follow-ups to ensure operations including production, quality, warehouse/inventory, maintenance, continuous improvement, and information technology (IT) are achieving operational performance targets. The MOM vendors engage and assist if performance is lagging and then document best practices for future use. And yes, they meet with finance to ensure that the improvements are leading to positive financial results in the expected time for the external financial statements. In this scenario, MOM vendors provide process improvement support and forward-looking management accounting analysis. The impact is that company accountants are not participating with manufacturing to plan and understand operational improvements; they merely confirm the eventual results. Are manufacturing companies losing important internal management accounting analytical capability?

An August 2019 article from McKinsey & Company Insights titled “Reducing Indirect Labor Costs at Semiconductor Companies” discussed an engagement by McKinsey to reduce indirect costs. The basic approach was to understand the value indirect activities added. The article states: “Companies might be able to answer these questions through an analysis that provides transparency into the purpose, end products, and activities of indirect employees.” I read this article as a failure of finance’s management accounting capability. And since indirect costs are normally grouped under Selling, General, and Administrative Expense on financial statements, apparently finance knows little about them. Routine budget analyses should have provided this insight to finance, even if they do not differentiate the details in the general ledger. Apparently, finance at that company only produced regulated external financial reporting. They needed consultants for what should be routine management accounting work to understand and manage costs to create value for the company.

These stories are sad commentaries on the state of management accounting capability, but this problem is increasingly being recognized by the accounting profession. Some recent publications by the Institute of Management Accountants (IMA) and the International Federation of Accountants Professional Accountants in Business (IFAC PAIB) Committee are aggressively advocating for accountants to focus on creating value throughout their companies. If you are wondering what your accountants should offer your company, a quick review of the IMA’s Management Accounting Competency Framework will provide some detailed insights into these key areas: planning and performance management, business acumen and operations, technology and analytics, reporting and control, leadership, and ethics. At the C-suite and board of directors level, the IFAC PAIB has published a 16-category assessment titled, “Evaluating the Finance Function,” to help assess if the finance function is acting in a technical support role or as a business partner enabling long-term, sustainable organizational success. This document is part of a short series titled “Future-Fit Accountants: Roles for the Next Decade” that projects the nature of work and the contributions professional accountants must make in organizations to stay relevant amid significant business trends such as Industry 4.0. Don’t let your company’s accountants sit comfortably in the scorekeeping box, especially in today’s fast-paced economy where creating value requires everyone’s efforts. Monetary information and insights are powerful motivators at every level of the organization. Make sure your finance group is creating and using causal, internally focused managerial costing information effectively for long-term, sustainable value creation.


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

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