How to Achieve Greater Visibility of Manufacturing Costs

Inaccurate manufacturing costs can impact a manufacturer’s margins and revenue more than their strongest competitor ever could. Reducing that risk needs to start with greater control and visibility of manufacturing costs across the shop floor. It is time to take a more rigorous approach to capture and act on cost data.

ERP systems with integrated accounting, financial reporting, and MES systems that support real-time production and process monitoring have proven effective in tracking actual costs and variances. Although ERP systems provide greater visibility and control over actual costs, they also help improve pricing and quoting revenue results in the process. The more competitors a manufacturer faces, the more important it is to get actual costing, cost variances, and pricing right on every new quote and proposal. ERP systems with real-time production and process monitoring help make that happen.

Visibility of Manufacturing Costs Needs To Be a Priority  

Manufacturers need to close the gaps or blind spots in how every production run impacts actual costs, cost variances, and indirectly, quoting accuracy and profits. Closing those gaps starts with an ERP system that shares financial and production data in real-time in the same database. Having production, finance, accounting, MES, and quoting available from a common database improves pricing, costing, and quoting accuracy while reducing time-to-market and improving customer responsiveness.

Capturing real-time production and process monitoring data makes knowing actual costs possible. David Carty, chief executive officer at Trademark Plastics, says that their ERP system “can tell you if you’re scheduled to produce 100 million components per day and your costs, and it’s going to let you know in real-time; whether or not you’re hitting your goals.” David continued, “also, when you see a red light pop up, possibly with some audio, you can go to a technician right then to troubleshoot the issue; whereas in the past, it might have been left alone for a couple of hours, increasing the scrap ratio.”

Finance, accounting, MES, ERP, and real-time monitoring on the same database help to isolate cost variances. The table below is based on data from real-time production monitoring that is a core part of an integrated ERP system, DELMIAWorks. Note how real-time monitoring immediately identified the Upper Bracket and Lower Bracket cost variances. Production, Accounting, Finance, and Supply Chain teams will get an alert on their phones or mobile devices showing the variance, so the teams can work together to eliminate the difference.

How Manufacturing Cost Visibility Protect Margins

The answer to winning more sales and driving revenues needs to start by discovering and closing gaps in actual costs, actual cost variances, and up-to-date pricing models. Unfortunately, uncontrolled and often unknown cost variances are costing manufacturers more margin than any competitor could ever take on their own. By improving cost visibility and control at the production and process level, manufacturers do not have to rely on price alone to win deals. Instead, they can sell higher performance and have greater visibility and control to deliver it.

Capitalizing on what makes each manufacturer’s revenue cycle unique, ERP systems that include real-time production and process monitoring look for how each production process can be streamlined, more efficient, and more transparent. Retaining and growing margins in highly competitive manufacturing markets takes speed, that manual costing systems cannot deliver.

The following are three areas are where manufacturers can improve actual cost visibility and variance analysis to improve the more margin-intensive areas of their operations:

• Using an ERP systems’ financial reporting to find disconnects across distribution, channel partners, and direct sales. For example, it is common to find manufacturers with multiple quoting, pricing, sell-side contract management, and product configuration systems across the divisions of their companies. ERP systems’ financial reporting can help identify the disconnects between sell-side contract management, quoting, and pricing methods and show which systems can be consolidated into more scalable, configurable quoting and pricing systems. For example, a recent Gartner survey of manufacturers using CPQ systems found that manufacturers who are the first to deliver a complete quote win 70% of the deals.
• Unlock hidden opportunities to improve margins by finding cost and time leaks between product costings, sales, and marketing standard or actual costs and variances. The minor variances that are not tracked accurately in large-scale ERP systems gradually drain margins from cost structures and, over time, lead to significant gaps in profitability. Knowing where those leaks are, what is causing them, and how to redefine processes to alleviate them is essential to staying profitable and growing. For manufacturers grappling with their costing to the Bill of Materials level and its relation to their QTC process, real-time production and process monitoring can uncover areas in processes that are causing excess cash to be wasted.
• Not leaving money on the table in deals by using real-time production and process monitoring combined with margin analysis to identify if and why Special Pricing Request (SPR)-based production runs are working or not. Instead of giving away margin, manufacturers have relied on bundling, extended terms, and warranties to keep customers paying the same or higher prices. Relying on these proven strategies to sell more and preserve margins helps. However, gaining more insights and contextual intelligence is better. Uncovering why and how a given Sales Operation or broader actual costing, pricing, and quotes can be made more efficient and deliver more margin is the future of smart manufacturing. An integrated ERP system with financial reporting, quoting, and the ability to gain real-time production and process insights can identify where and how process gaps drain margins on pricing deals and show how to close them while increasing sales.

Conclusion

Real-time data captured using production and process monitoring provide the guard rails needed to stay on top of actual costs and cost variances in real-time. Manufacturers using these techniques say real-time data can act as a “shock absorber” when there are unpredicted supply chain disruptions, shortages, and allocations. Knowing actual costs and their impact on margins helps absorb shocks from suppliers, customers, and channel partners. As a result, ERP systems with real-time data have turned into the digital compass manufacturers need to navigate uncertain, unpredictable times.