Cost transparency is the biggest success factor in interdepartmental costing. Project-based manufacturers often give lack of transparency as the reason they have no definitive information on their profit margins. Without a complete overview of the costs, deviations can only be identified when it's too late to do much about them.
So what is the deficit behind this lack of transparency in costing? The three most common reasons are:
There are different systems in use.
The is no uniform database available.
The conditions are not in place for seamless data logging.
At many companies, each department works with its own program. For example, Sales often relies on Microsoft Excel. Design Engineering mostly uses CAD applications, which don’t provide any data for costing. Project managers do their planning with Excel or a project management tool. Production generally relies on the ERP system. Project Control prefers Excel, because it lets you easily consolidate and analyze data come from multiple systems. These are usually solutions that were introduced ages ago, that have grown immensely over time and are precisely tailored to the operational needs of the company. Just think of the complex system of formulas you’d find in a sales costing spreadsheet for a plant engineering company or other type of project-based manufacturer. That's why phasing these systems out is a difficult process.
The second problem is the lack of a consistent database. Comparing data with the costing data from the ERP system is difficult, since Sales seldom works with article numbers and BOMs. At best, you could compare data from Excel and the ERP system at the level of products or main assemblies. Moreover, the price basis is not identical:
Estimated prices in Excel versus delivered prices in the ERP software.
Finally, staff's unwillingness to input data also plays a decisive role in cost transparency: Outdated prices, incomplete BOMs and inaccurate material confirmations as well as inaccurate or late reporting of project times are just a few of the things that tend to get neglected. All these issues make transparent simultaneous costing and final costing practically impossible!
Let’s get one thing straight right off the bat – there is no magic bullet for this predicament!
The expectation of having everyone working in the same system with the same data is oftentimes just not realistic. But departments such as Sales can be easily persuaded to work with 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 step. 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. Project Control would only need to refer to one data source to perform an analysis. Ideally, the next step would be direct integration into cost accounting.
Another method could be to use a business intelligence (BI) system! Many project controllers find these systems very helpful because of they allow you to easily create user interfaces and reports. This makes it possible to generate dynamic reports that are easy to filter by various criteria. A BI system accesses a wide variety of data sources in real time and compiles all the information in one place. The detailed analysis of the basic data also reveals detailed information.
In order to improve poor data entry practices, it helps to take a closer look at 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. Sometimes, people are not aware of what significance the data holds for the company and how the data could be useful for the staff, too.
The problem of cost transparency is an old one and no secret to anyone. But doing something about it is difficult, since many departments are not keen to give up old habits they've long relied upon and tools that are specially tailored to their needs. Modern ERP systems – especially industry solutions – are able to meet these needs. One tool you might want to add is BI systems. In any case, managers should 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 your costs are getting out of hand?
Why not talk to one of our seasoned industry management consultants?