Excess inventory and cost overruns plague companies large and small. While searching for large global solutions don’t overlook solutions that are quick and easy. One continually overlooked issue is review of your assumption prior to production.
After receipt of a substantial purchase orders take a look at the makeup of your pre-production meeting. Attendees usually include Production Manager, Material Control Manager, Quality Representative and possibly someone from the Supply Chain group. The discussion will usually center on the following.
Do we have the necessary capacity available to run the product?
Has the supplier lead-time changed?
Which supplier should we use?
What is a good lot size?
Is manpower trained and ready?
If your company has all these questions answered up front then consider yourself world class and stop reading. However if you’re like most of us and recognize this meeting read on. Then asked yourself.
Who is absent from meeting and what should be the first question that is rarely ever asked?
Absent is the Cost Accountant!
The first question should be … “What were the assumptions of the quote to the customer based?”
First the cost accountant, exactly where can we find that elusive character? Frequently we must venture deep into the cubicle world to find him or her. It’s usually that friendly loner who helps people with their pivot table issues on their spreadsheets otherwise their only connection to the outside world is the sales department.
The person that everyone recognizes but rarely knows them personally and wonders exactly what they do. This person is worth finding because practically every measure and target you’re tasked to hit is generated from their assumptions. You put 20 unit loads in the furnace the assumption at quote was 50, did you know that? Probably would beneficial to know this person and understand how they think.
Seriously this is where the conversation should begin. Costing assumptions and execution of plan in production is what drive the business. There is so much at stake even minor deviations from assumptions can cause major costs and drive excess inventory.
Typical issues include.
Customer order quantity can be deceptive; a 5000 piece order might span three years delivery not uniform. For instance year one 500pcs, year two 3500pcs and 1000pcs in the final year of contract
Supplier agreement doesn’t match your agreement with customer. You signed a five year agreement with customer but quotes from your supplier only good for 90 days.
Quoting using equipment that is no longer in service.
Quote running part through your most modern equipment even though those machines are way over capacity.
Using quotes from suppliers that are currently full or out of favor (not likely to use even if capable).
Recommendation
Get cost accountants actively involved in activities regarding production. Invite them to weekly production meetings keeping them up to date with the actual operation of the facility. They will also become aware of many “hidden factory activities” that happen consistently but are not in cost model.
Cost accountants active involvement in the operational activities of your organization is one way to keep their cubical neighbor the Finance department from visiting you at the end of the production run.
