Auditing ALL the Systems

by Dave Garwood

Every company has a financial system. For a small company, that system may be a cigar box. Other times it's an integrated computer-based system. The specific techniques for maintaining the financial data may vary, LIFO vs. FIFO; Standard Costing vs. Job Costing, for example, but the basic financial functions, such as inventory evaluations, depreciation schedules, general ledger, accounts payable, etc. are always done.

So why should we audit the financial system if we already have one in place? Well, the SEC demands it for publicly-held companies, but even privately-held companies have financial audits. These audits are performed to determine how well the financial system functions and to verify the reliability and credibility of the data. A certified statement i.e., a clean audit, gives investors, the Board of Directors and executive management more confidence that their decisions are made with accurate, reliable financial data. A certified statement does not mean that a company is profitable or that it has a rosy future. It simply says that the financial system operates consistent with a set of standards established by the accounting profession. These may not be the only standards, or even the best standards. But they are the standards established by a professional group, the standards used by professional auditors and, as the "certified" statement implies, the generally accepted standards. And findings in the audits are used to focus efforts for financial process improvements.

Supply Chain Processes
Now let's look at the Operations side of the business. A key element of an effective supply chain is balancing supply to meet demand without spending a bundle of money. Business processes to maintain the data for people to use in managing the supply/demand process is critical. For example, processes to plan customer demands (i.e. forecast and customer orders) to establish master schedules to make products, to create material plans (i.e. detailed item schedules) and capacity plans (head counts and equipment hours needed) are required. Execution processes to turn the plans into reality are also needed. Every company usually performs all of these functions. But the same question applies: how well are these plans integrated, maintained and how reliable is the information? When not done well, the results are predictable ... late customer deliveries, long lead times, defective products, excessive costs, and many financial surprises!

In the past two decades, manufacturing enterprises have developed, and somewhat standardized, the business functions to improve the quality of data to manage the supply/demand process -- a set of Generally Accepted Business Management Functions -- to help maintain and execute these various plans. Sales and Operations Planning (SOP) is used to manage aggregate demands and to integrate financial, manufacturing and new product launch plans. Master scheduling is used to plan detail, deliverable product schedules and make intelligent customer delivery promises. Material planning and capacity planning functions translate the product plans into detail, material and capacity plans for people to act on. Again, the specific techniques to carry out these activities may vary, but the activities always take place. ERP (Enterprise Resource Planning) and MRPII (Manufacturing Resource Planning) are umbrella terms often used to identify these integrated processes. Every company, regardless of size or type of manufacturing, performs these functions. But the question is, how well? How well are the activities functioning? How accurate is the data? How effective are the tools? How well do people understand what needs to be done and how to do it?

In view of the impact of how well these functions are done on customer satisfaction and profits, doesn't it make sense to audit these processes also? Shouldn't the Board of Directors and executive management insist on evaluations from an independent audit of these processes? Shouldn't the findings from the audit be reported to the Audit Committee? We think so. In fact, we have recently been working with the Internal Auditors Association to document and use a set of Generally Accepted Business Process Standards.

Over the past two decades, we have collected Best Practices for performing these vital functions. (If you would like a copy of our Best Practices for Effective Supply Chain Management, email us and we will email you a free copy.) These standards are used to evaluate current practices. The assessment helps determine whether people really have a thorough understanding of the concepts and tools. It helps to determine how well people are using the tools available to manage the business and to highlight areas that are working properly. Weak areas are identified and, through techniques such as Root Cause Analysis, steps are taken to strengthen them. The assessment also helps get everyone in the company to focus on the areas necessary to improve company performance. Progress can be charted and used to reward improvements, motivating people to continuously improve.

Inventory reductions, lead time reductions, cost reductions, customer service improvements, productivity increases and faster response to customer needs, in addition to increased morale are all a result of making changes to comply with these standards.

After meeting these high standards of performance, John Paxton, formerly Chairman of Intermec and Monarch Marking and now Chairman of Telxon Corporation, said "Our reward was worth over $1 million a year in savings to the company!"

New Product Development Process
The ability to quickly bring new defect-free products within development and costs targets is essential to survival and profitable growth. Yet new product development processes are notoriously weak. Late to market, development costs over budget and missing costs targets are a few of the typical symptoms.

Are products developed to meet customer needs or wants? How complete are product definitions before design begins? Who manages "gates" to decide to proceed with the new idea or stop proceeding? What measurements are used? Are effective launch plans developed prior to launch? These are just a few key questions that help indicate the health of a new product development process and identify areas in need of improvement.

Expanding Fiduciary Responsibility
The stakes are high for effective supply chain management and new product development. Survival in today's global marketplace demands a higher level of performance. Unfortunately, the business profession has not yet established standards -- "Generally Accepted Professional Standards." But widely-used standards exist and can be used. We believe responsible corporate leadership should insist on raising audits of these two processes to the same level of visibility and importance as financial systems. After all, the company's financial performance is a direct result of the effectiveness of these two processes!