Variance analysis has been a staple of the accounting world for decades. Actual to budget analysis is how all organizations get to a bottom line assessment of performance. Usually this occurs at month end, after the books are closed. Actual to Standard Costs are analyzed to understand how well manufacturing performed, often at the end of a job, the end of a shift or sometimes not until the end of a month.  Armed with variances, organizations typically drilled into what went wrong and put processes into place to make sure the same mistakes did not reoccur.  There are inherant problems with this approach.

First is the lack of detail captured related to the causes of the variance. Second is the timeliness of the information. In a manufacturing plant after the fact data is good for visibility into how to improve a process but does nothing to help increase productivity and profitability while the job is still on the shop floor.

Getting to the root cause

Manufacturing variance analysis has dealt with data from a costing viewpoint inside of the framework of an ERP, Enterprise Resource Planning, application. Inside of any ERP application the focus is not on determining the root cause for a failure on the shop floor. It is on recording the correct distribution of effort and costs to provide accurate financial information. ERP systems do not record why something went wrong, just that more labor, more machinery time or more materials were used. These overages are compared to standard and variances calculated for booking into the General Ledger.

At no time are the real problems examined. There is no way in ERP to record speed loss, when a machine is slowing down but not stopping. ERP can’t differentiate between a stoppage from a tool break versus a stoppage from a tool not being part of the set up package delivered to the work station. This inability to capture the root cause of down time limits the real impact of traditional manufacturing variance analysis. If variance analysis does not make the root cause visible how will manufacturers progress?

Real-time visibility

The second issue of timeliness is just as critical. Manufacturers have one chance to get things right, when the work is in process. What operators, supervisors and plant management needs is visibility when work is starting to trend towards a variance while it is on a machine. This is the only time that the human capital in the plant can be effectively deployed to preserve productivity and profitability of work.

As organizations work to trim costs, reduce the cost of quotations, they need to rely on the fact that while the job is running, or when the plant is an hour into a shift, the managers can have visibility into the current trends. Are we running to spec or quoted time for a particular job? Where do we need to refocus our efforts? In today’s economy, most organizations, if given the right level of visibility, will make the correct decisions.

Variance analysis has proven a useful tool for accountants to analyze past performance but in order to be an effective manufacturing weapon it must be deployed as a real time barometer of potential problems on the shop floor.