Cost control has traditionally been viewed in the manufacturing realm as an activity that comes into focus only when profitability begins to drop. However, cost control is, indeed, proactive, and it requires only one discipline to do it: production posting.
Production posting involves capturing what happened on the shop floor in terms of labour input, materials usage, and units manufactured. The process can be seen as dry and bureaucratic, but it is the only thing that makes or breaks financial accuracy.
The Risk Involved with the “Close Enough” Mindset
Production posting may be a game of catch-up for many emerging manufacturers. The workers must write down their hours at the end of the week on a piece of paper. Otherwise they adjust the inventory when they discover a huge gap between the actual amount and the recorded amount. This “close enough” attitude leaves you in the dark about the state of your finances.
Failure to record production information leads to inaccurate COGS calculations. Failure to record the value of the waste produced from an error means that your inventory will have a higher value on the balance sheet than it should. Therefore your profit margin for that order will appear to be higher than what it really is.
Ripple Effects on Decision Making
Incorrect posting of production can corrupt the pool of decision making. Imagine the problem of determining prices. If your system shows that it will take four hours to manufacture a widget, and this is standard. But your workers takes six hours, which doesn’t post properly in the first place. Then you will be pricing your goods based on an incorrect assumption. This will result in winning many bids, making losses on each unit manufactured, and wondering why there are insufficient funds in the bank despite good sales figures.
On the other hand, if you are over posting material consumption, you might think that your efficiency levels are lower than they are and increase your prices needlessly. This results in chasing away customers to the detriment of market share held by more efficient competitors.
Importance of Inventory Accuracy and Cash Flow
In addition to margin accuracy, the posting of inventory levels is essential. Since even a slight difference between what the inventory says and reality in a Just-In-Time (JIT) production process may lead to stopping the assembly line.
When it comes to producing postings, if these posts are postponed, then the accounting system will believe that there is an abundance of raw materials, which may prevent the purchasing department from ordering new stocks and cause a shortage. On the other hand, delayed consumption postings may cause duplicate purchases, which may clog cash flow.
Closing the Loop
Accurate production posting can only be accomplished when there is a shift from manual data entry to the use of real-time data entry processes. It entails a change in culture wherein the shop floor recognizes that entering their data is just as important as running the machinery.
Once an automated system that ensures that the accurate, real-time posting of the work performed and the reduction of material used upon being picked is introduced, you will have closed the loop. This will take your company from making educated guesses to having full awareness.
Controlling cost is not about trying to save money by using poor materials; it is about awareness. It involves knowing precisely how much it takes each day to operate your business. This begins when there is accurate production posting.
