Time changes & the impact on ERP, accounting and business practices

The concept of time is changing and it may catch some ERP vendors and their customers by surprise.  Let’s recap several truisms in technology:

1. Technology gets faster and faster but many applications are stuck in the 1980s
2. Cost of sensors, readers, switches, etc. keeps getting cheaper and more powerful
3. Telecom speeds and feeds keep increasing
4. Storage costs continue to plummet 
5. Processing speeds are growing, too

These trends (and others) mean that we have an opportunity, in business, to kick the clock to the curb.

In Payroll applications, the concept of the pay period is fading fast. People can now get paid every day if their employer uses one of the new payroll solutions from firms like Ceridian Dayforce and their Dayforce Wallet. 

Concepts like pay periods, accounting periods, etc. are all arbitrary, man-made inventions that exist because someone decided that we should count or accumulate things at specific, regular times. These determinations were often a compromise where firms balanced out one need (eg: employees would like to get paid in a timely fashion) against another (eg: payroll processing is time consuming and should be done as infrequently as possible). Those decisions, made decades or centuries ago, may have been correct in their day but that day is past.

Behind these timing decisions were manual or automated systems to help with this processing effort. These systems, once placed into production, were often constrained, costly and rigid. So, people and businesses just got used to things being done this way (and frequency) as “it’s the way we’ve always done it”. 

Good news - we don’t have to keep doing things this way!

The Factory of the Future conundrum 

While manufacturers everywhere want to modernize and/or digitally transform their operations, they’ll hit some roadblocks along the way – all of which involve time. Here are just some examples of the time-based challenges facing these Industry 4.0 efforts.

Time and costing – Many cost accounting systems look at data accumulated over an accounting period – typically, a month. Firms use monthly fuel, gas, electricity, water, and other costs and allocate these over the numerous batches, products, etc. manufactured that month. Raw materials may also get the monthly allocation treatment, too. This is really problematic as different batches could have materially different actual costs based on the timing of when the batch was run. For example, one metals company gets significant price reductions from its hydroelectricity provider if it runs its melting during the night. If the accountants only look at electricity consumption at month-end, they have no idea which batches ran at night and which one are more/less profitable. 

These re-thought factories need readers/sensors/switches that capture the beginning and ending consumption of key production components throughout the month and for every unique product made. Why? If a company doesn’t have accurate cost data, how can it know if it is making money on specific orders, contracts or customers? How will Sales know exactly how to price a potential deal so that it meets minimum (or optimal) margin requirements? 

These new time slices could be down to the batch, day, minute, or even millisecond level, if appropriate. Monthly is just not going to cut it. The more exact we can get time intervals, the more likely we can get useful P&Ls by customer, product, product line, batch, etc.

And none of the above is exactly new. This breaking down time into smaller segments has been going on the last several years. One of the more interesting observations out there now involves 5G bandwidth. With 5G in a plant, companies can have wired and wireless data flowing at remarkable speeds. That data can flow into plant systems and to a remote control center thousands of miles away. Moreover, the speed and data handling power of 5G also means that operators can have high-resolution video of key instrumentation, processes, inventory, workers, etc. globally.  

One key point is that businesses need to make decisions in real-time not a month or more later. So, is just adding some sensors to the production line enough? Not by a mile… 

The ERP Cost Accounting module – Chances are most firms configured their cost accounting functionality years ago. They set up these systems assuming that all kinds of costs would be accumulated throughout the month and then allocated to the production.  It was the logical and cost-effective thing to do then. It isn’t anymore.

What firms have are a lot of average costs. It’s not ideal and it means that some products are being produced while their economics are not that great. In contrast, some very profitable products may look less so as they’re covering the losses of less profitable items. This can happen as some products consume more raw material, spend more time in specific machines (e.g., dryers), generate more scrap, use the more expensive machine tools, etc. 

Besides utilities, fuel, etc., machine time costs are another key item that warrants review. Today’s plants have a mix of old, fully depreciated equipment (e.g., a 60-year-old press) and all-new high-tech gear (e.g., 3-D printer or CNC machine). For products that use the older equipment, they should receive a low-cost charge for this while those products using the newer, high-cost equipment should be assessed a higher cost. And, if it turns out that different products spend different amounts of time in these machines, then the usage cost should be based on the minutes spent within each machine. 

This costing issue is quite important as competitors with better production and costing information have the ability to price deals more profitability, drop unprofitable products from their mix and cause competitors to make the most troublesome and costly products at a loss. 

You can’t really embark on an Industry 4.0 effort if you don’t rethink: 

• The time increments that really matter
• The precision you want in your costs
• The integrations, calculations and formulas that will support a more precise accounting of your goods
• Your cost accounting reports
• The additional readers, sensors, etc. you will need to capture these time slices and activities
• How you will assess production & product profitability
• How you will value inventory 
• How your cost accounting/ERP solution is configured

Inventory Accounting – Minimally, firms have raw material, work-in-progress (WIP), and, finished goods inventory. How they account for each may be impacted by time. Average costing is often used to establish a value for these different inventory types but more precise (and current) values may be possible if your firm can know with greater certainty the exact costs involved in every inventory item. 

Raw material costs may not be as affected by timing issues as much as the other types of inventory. Once inventory is placed into the production process, companies must attribute or allocate a number of production costs to this material. In the past, without the technology to accurately capture these costs, many cost factors were simply averaged throughout the month. This causes some WIP and finished goods inventories to be materially over/under-valued. If you move to real-time costing, your firm can get far better inventory values. 

Overhead – Overhead costs usually encompass all other costs incurred at a production facility (and could also include most Headquarters and executive compensation costs, too). Most firms allocate these costs to specific products or product lines based on a factor they can determine. This factor could be total units produced, machine hours utilized, etc. 

Overhead can be a hefty cost factor and how it gets applied to products and product lines can have a profound effect on a product’s profitability. More precise data re: machine utilization, manufacturing process routing, etc. can help firms get better visibility into overhead and into product profitability. Better, time-based data can help mitigate the distortion from less exact methods. 

The end of month-end – The move to continuous close is gaining momentum in accounting circles. To do it well and efficiently, companies will want to have more precise data and move away from lots of interim allocations, reconciliations, accruals and reversals.  

Variances – It’s really hard to understand how well you’re making something if you can’t determine your variances. At one level, you should know how you are doing between actual and standard costs. Those variances should all have explanations, too. But, in too many operations, the lack of timely data means that people won’t necessarily spot many variances until after the month or the variances in one batch got all averaged or blended into those of other batches. That’s too late. 

Worse, there will be many disagreements as to whether a variance actually means anything. For example, if the production mix this month included a number of more complex products but the cost accounting standard used is based on a average of all kinds of products, you’ll get bad variance data. I’ve personally lived through this problem at an old employer. Nothing was actually awry - it was simply that the product mix was really different that month. 

Shorter time slices and better data sources mean that companies can get real-time actual costs and compare them to more precise standard costs. 

The goal of this is to spot anomalous production issues (e.g., too much machine setup time, excess scrap being generated, unexpected machine down time) in as close to real-time as possible. You can’t have a successful total quality management program if you can’t spot and deal with production issues asap. 

My take

This piece started off with a daily Payroll anecdote. To take that one time change to its logical conclusion, consider this. Once people start getting paid daily, then companies will have accurate pay cost data every day. Actual pay data can go into cost accounting, service management and other systems to improve the operations and profitability assessments of all manner of goods and services. That one change in timing frequency can trigger a cascade of new insights if a company enables it.

Likewise, saying your firm wants to have a Factory of the Future is a great goal but it is not that simple. Businesses will likely need to do a lot of work in their ERP system to make it more of a real-time system instead of a monthly catch-all. 

You’ll likely need teams to:

• Develop global data standards that reflect the kinds of data you’ll now be seeing, the new metrics you will want to capture, the new reports/dashboards/analytics you’ll require, etc.  There’s a good chance your old ERP was never setup for this. 
• Review the chart of accounts (chances are you have several in use across all facilities) to ensure that you have statistical accounts where needed and needed unit of measure conversions are enabled.
• Create new master data standards. Each plant probably has different kinds of capital equipment, different machine/human interface, SCADA, MES and other systems. Will you have a common management and control language for the entire enterprise?
• Dramatically revamp accounting modules to handle new cost accounting, inter-company accounting, inventory accounting and more.
• Determine how new cost information will become of use to Sales so that better deal pricing and profits are possible.
• Develop an IT plan that can phase all of this in without disrupting the business and avoiding re-work.
• Deal with the real, consequential people issues that will occur as you shift to more automated, rapid decision making. I guarantee there will be resistance to change. 

My German Shepherd still won’t accept the Fall time zone change for Daylight Savings. The world changed and she won’t. I offer that as a reminder that altering the time parameters of business, can hit resistance. Good luck….