Hey CFO, your machines are speaking $$ are you listening?

By Neeraj December 05, 2016

 

Enterprises grapple with inadequate Gross Margins due to leakages in manufacturing processes. Leakages due to unproductive machine utilization, undesired inventories, imbalance in production lines, low yields are few of the common reasons.

 

Cross functional interfaces are the most common constraints for higher efficiencies and effectiveness of Enterprises. Business processes which cuts across multi functions viz. Sales, Planning, Supply chain, Manufacturing, Quality and Maintenance integrated with Finance need strengthening to improve business performance.

 

Let’s look at a very common scenario:

 

CFO of a manufacturing company is struggling to know in reality what the cost of good being manufactured is. Typically she uses COGS (Cost of Goods Sold) as the cost and accordingly calculate margins. But COGS rarely provides insights to operations function as it does not take manufacturing costs (apart from raw materials) into account. For example, how much of the plant or machine time was utilized while manufacturing a batch or an item is mostly not considered while calculating costs. This results in wrong calculation of margins and CFOs end up taking wrong decisions based on the false insights like:

 

  • Which customer is providing most profitable business to me (for contract manufacturing companies)
  • Which product line is giving more margin than other?
  • Which product should be discontinued due to negative margins?
  • Should the company be investing in setting up a new plant? Is the existing plant really fully utilized?
  • Which manufactured batch was more profitable than other? Why cost variance between two batches especially when the machines, humans, raw material and processes were exactly the same for both?
  • What are the costs of products batch wise, model wise, category wise or plant wise?

 

Manufacturing and Plant guys generally claim a better yield and efficiency but it doesn’t get reflected on the numbers CFO is crunching. The manufacturing department’s claims and accounting department’s margin calculations are not in sync and often differ. This bridge is very difficult to be established. The reason being – The modern sensor based machines are speaking but the CFOs are not able to listen to them. What if Finance and Inventory data in ERP and the real-time data from machines is married? So far, in general, ERP and machine data integration has been done mostly for predictive maintenance cases but not to transform finance and manufacturing strategy.

 

One of our innovative startups in SAP Startup Focus Program, 1-enterprise provides a wonderful solution (Duuramatics) to solve this problem. It marries the two classes of data with proprietary algorithms running on top of it and crunching the data in SAP HANA to calculate Cost of Production Systems (CoPS). CoPS when combined with CoGS from ERP in real time gives the outstanding and accurate picture to the company and CFOs can take batter decisions. Based on the above report, a CFO can take a call on the matters like which product/customer/plant to continue or invest further in and which not to depending on the profit margins and the yield.  She can clearly define the focus areas.
Another advantage Duuramatics offers is that you could evaluate Activity Based Costings. Gross Margin analysis with ability to drill down to cost center level is available here. Usually Gross Margin analysis have limited insights as it is restricted with ability to drill down to few levels. Here, the algorithms enables to down till the product level. Let’s say in case of a car manufacturer, starting from a batch level analysis to product make wise costings, a CFO can plan out his strategy in a more logical and efficient manner.
Present day methods compute profitability analysis monthly. Duuramatics on SAP HANA allocates costs at transaction level and enables computation of gross margins in real time. The best part- data is directly extracted from the operational machines; thus enabling real time analysis.
The business benefits Duuramatics provides are –

 

  • Enables to produce more within the same infrastructure leading to better capacity utilization.
  • Improves synergy between Operations, Finance & Supply Chain functions.
  • Lead to Improved working capital management & improved cash reserves.
  • Effective management of the Cost of Production System.
  • Improves the ability of the Enterprise to deliver on time as promised to the Customers.
  • Adds vigor to the existing improvement initiatives like 6 Sigma, Kaizen and Lean Manufacturing
  • Connects a CFO to a machine level and whatever is happening on ground he can strategize accordingly and vice-versa

 

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