How to shed some light on your cost structures

Cost transparency is the biggest factor in simultaneous costing. If you ask business owners in the machinery and plant construction industry, they’ll tell you that a lack of transparency is often the reason why no definitive information is available on profit margins. Without cost transparency, deviations go unnoticed until it’s too late to react.

So what’s behind this lack of transparency in costing? Here are the three most common causes:

• There are different systems in use
• There is no consistent database
• There is no discipline in data collection.

At many companies, each department works with its own costing system. In Sales, it’s often Microsoft Excel. Design Engineering frequently uses CAD applications that don’t provide any data for costing. Production generally relies on the ERP system. And in Controlling, Excel reigns supreme, since it lets you easily consolidate and analyze data from different systems. Typically, these will be solutions that were introduced ages ago, that have grown immensely over time and that are precisely tailored to the operational needs of the company. Just think about the complex system of formulas you’d find in a sales costing spreadsheet for a machinery manufacturer. That’s how complicated it usually is to replace these systems.

The second problem is the lack of a consistent database. Since Sales only rarely works with article numbers and BOMs, it’s difficult to make a comparison with costing data from the ERP system. At best, you could compare data from Excel and the ERP system at the level of products or main assemblies. And the price basis is also different:

Estimated prices in Excel versus delivered prices in the ERP software.

Finally, data entry discipline also plays a decisive role in cost transparency. Outdated prices, incomplete BOMs and inaccurate feedback on materials and time are just a few of the issues. All this makes transparent final costing nearly impossible!

Let’s get one thing straight right off the bat – there is no magic bullet for this predicament!

The idea of having everyone working in the same system with the same data is oftentimes just not realistic. But it is possible to get departments like Sales more enthusiastic about working in the ERP system. Compiling costing BOMs for individual quotes or orders in the ERP system would be one step in the right direction. Having design data transferred quickly and automatically into the ERP system would be another. Then all the relevant departments would be represented in the system and able to use the same database. At the very least, it would be easier to consolidate data. The Controlling Department would then have just one data source to analyze and, ideally, controlling would be integrated right into cost accounting.

Another approach could be to use a business intelligence (BI) system! Many controllers find these systems very helpful because of they allow you to easily create dashboards and reports. A BI system accesses a wide variety of data sources in real time and compiles all the information in one place. Drilling down through the base data from the ERP system also helps with transparency.

To improve data entry discipline, you need to investigate the causes. Oftentimes, the problem is not the workers but the fact that the systems are not user-friendly. Modern solutions can go a long way to fix this.

The problem of cost transparency is an old one and no secret to anyone. But doing something about it is difficult, since many business units are not keen to give up hard-won tools specially tailored to their needs. Modern ERP systems – especially industry solutions – are able to meet these needs. One good alternative is BI systems. In any case, it pays to get informed and be aware that the implementation of transparent costing is a complex but very worthwhile project.

Be honest now... how well do you know your costs? Do you really know when they’re getting out of hand? Why not talk to one of our seasoned industry management consultants? Make an appointment with Michael Hering today to take a closer look at your cost planning processes.