Financial information often confuses operating managers. Typical accounting information from company financial systems is geared toward financial reporting standards and audit, not supporting operating decisions. Often it is so generalized and convoluted that it simply isn’t fit for any other purpose.
Operating managers in the age of Industry 4.0 are increasingly digitalizing processes and systems and pursuing process improvements based on the metrics they design, typically to optimize resource use. This has been very successful, even in the absence of relevant and corresponding monetary information. But how much better would things be if monetary information was available?
A platinum mine had invested in digitalization and advanced operating systems. It had developed a dashboard of metrics to control a complex ore conversion process. The core of the innovations was to create a stretch goal for the operating metrics based on optimal process capabilities. Supervisors were challenged to meet the stretch goal during their shifts. The stretch goal was extremely difficult, and supervisors developed a number of different strategies to get as close as possible. A problem arose because there was no way to assess which of the various strategies was most successful. Several were equally effective at closing in on the stretch goal, but the strategies differed significantly. The company needed to know which strategy was most cost effective.
The solution was to use Resource Consumption Accounting to create a causal monetary model of the operations, one that reflected the resources and processes the supervisors and employees knew at the same level of granularity they managed the work. The monetary information also had to be simultaneously with the operational information, every 15 minutes.
The result: Operating managers now have all the operating metrics to pursue the operating stretch goal, AND they have an Opportunity Cost metric which shows how much they operating above the operating stretch goal cost. They can compare their various operating strategies using the Opportunity Cost metric to see which strategies are most cost efficient. Furthermore, then can experiment within a shift to continuously improve their cost performance.