Data-rich, information-poor: Leverage your data to improve costing

Are your customers’ expectations adding complexity and lowering margins with smaller — but more frequent — orders, tighter shipping windows, or pressure for lower pricing? How much do you spend on maintenance, defects, and lost production? Most companies have been running their ERP systems for many years now and have amassed a wealth of data. Nevertheless, simply collecting data won’t deliver the information you need to support good business decisions. Here’s how to gain a competitive edge by leveraging your data to make strategic decisions.

Start with the end in mind: Data design leads to faster insights.

Data on its own isn’t very powerful, and when that data is incomplete or inaccurate, it can dramatically impact your bottom line. Understanding what data to collect, how to manage it, and how to act based on the story it’s telling helps you bridge the information gap and deliver results quickly.

Data on its own isn’t very powerful, and when that data is incomplete or inaccurate, it can dramatically impact your bottom line.

If determining what data is most important sounds daunting, don’t overcomplicate it. Focus your efforts on where you’re going to get the most return. Since 80 percent of your costs likely come from 20 percent of your accounts, focus on the biggest dollars and key drivers.

Next, set up your overhead pools at a reasonable level. Avoid trying to cost out every single work center, but be careful not to oversimplify with plantwide or departmentwide labor and overhead rates. Group work centers that are similar in function and cost structure into overhead pools and processes. Think about how these processes consume resource costs, and select an appropriate cost driver (labor hours, machine hours, units produced, etc.). Then, direct-assign as much cost as you comfortably can while using logical allocations for the rest.

• Don’t forget to address common cost influencers, such as:
• Crewing & crew variation
• Throughput & change-over assumptions
• Utility consumption
• Asset repair & replacement cost
• Tooling & supplies expense

Finally, take an evolutionary approach — you can refine it later. Missing information? Put a plan in place to start collecting it and use it in the next iteration.

Now that you have your design in place, it’s time to implement.

The most important costing data and drivers boil down to accounting (detailed reporting and actual versus expected expenses) and production information, such as labor and machine hours, set-up information, and scrap. Design and implement data analytics tools that can leverage the data and provide critical business performance information to management. These include dashboards, drill-down reporting, and query and analysis tools.

When implementing your costing system, keep these seven important considerations in mind:

1. Ensure financial and production information are accurate, clean, and simplified to a level of detail that aligns with your overhead cost groupings. For example, expense detail and overhead cost groupings should align 1:1 where possible. If you have a large machining overhead pool, you should have a large machining supply or labor expense account to match. Also, bill of materials, production routing, and work center master files must be structured to fit the business and contain accurate, complete information.
2. Implementing a new cost system requires companywide involvement. Review currently available reporting with a diverse, cross-functional team of users. Document what looks right, what looks wrong, and what’s missing. Bring in others when appropriate. The best insights can come from those with different or fresh perspectives which could lead to implementing a new cost system like a center-led purchasing model.   
3. Leverage your test system. Don’t have a test system? Now is the time to set one up.
   IT processes and systems should be in place to easily refresh the test system for another round of validation without impacting live production. Where significant master data changes are being made, see if an upload process can be used to streamline the process.
4. Validate your results across a representative sample, including parts with high/low volume, high/low complexity, and those that travel through unique processes. Review results from the updated data and modified reporting again with the cross-functional team.
5. Get sign-off from all stakeholders. Costing is where operations and finance intersect, and all related departments must be aligned.
6. Make sure everyone is working from the same set of books. User acceptance is key. Otherwise, incomplete or inaccurate master data (bills of materials and routings) or costs, will leave you in disarray, or employees will create workarounds to your systems — or both. If changes are made in production systems, provide training and documentation to all users so they can understand and accept the new costing system.
7. Update your cost system at least annually to reflect revised financials and production information. Put a team in place, and schedule recurring meetings to address and correct issues. Your organization is a living and breathing entity, and the goal is to model it as best you can.

One more thing to remember: Implement process discipline and accountability to minimize the use of spreadsheets and other offline systems. This will ensure data is reported and maintained in a timely, accurate manner. Once everyone is working within the same system, you can develop dashboards to give users real-time information. (Hint: Spreadsheets and similar tools are great for the occasional one-off analysis, but build system reports and other analytics tools for ongoing review to save everyone time and prevent mistakes.)

Maintain good costing data: Keep it relevant. Keep it clean.

All too often, companies that undergo a costing restructuring neglect to put a process in place to maintain their data. Over time, they end up right back where they started. That’s why it’s critical to implement tools and processes to maintain quality data and manage the volume of data you’re collecting. Exception reports alert businesses to information and data that fall outside the norm, so staff can respond and correct any issues. Exception reports should consist of both simple logic checks and unique issues you’re trying to track.

Some simple examples include:

• Purchased parts with a $0 value
• Inventory items or locations with negative quantity
• Phantom parts that have a non-$0 value
• Production efficiencies exceeding preset thresholds 

Tell a story with data.

Now you’re ready to transform the power of your data into sound business decision-making by telling the story behind the numbers. Having quick access to deep insights into your business helps you know which products and customers are and aren’t profitable, adapt to changing customer demands, and control costs. Put simply: Proper costing and data can be your competitive edge. Contact us to learn how you can use cost and margin information to drive your competitive advantage.

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