Accounting needs will renew industrial technology investments

Technology and accounting trends are blending and driving business decisions, says Peter Martin, vp, Invensys Automation (Foxboro, Mass.), said in a session at ISA 2001 on Sept. 10. Today, it's not only technology that matters. If you can prove to the company that you're delivering $4 million to the bottom line, you're not going to get laid off.

By Mark T. Hoske, editor-in-chief October 10, 2001

Houston, Tex. – Technology and accounting trends are blending and driving business decisions, says Peter Martin, vp, Invensys Automation (Foxboro, Mass.), said in a session at ISA 2001 on Sept. 10. Today, it’s not only technology that matters. If you can prove to the company that you’re delivering $4 million to the bottom line, you’re not going to get laid off.

In the past, within automation companies, the analog group and digital group used to be separate and didn’t communicate. In 1979, for instance, ads touted color screens and pixel resolution. Technologies used to compete on attributes such as chip sets, bandwidth, protocol, and pixels. Now we can color every pixel in the display a different color.

Buzz words used to sell the technologies, Mr. Martin says. CIM, computer integrated manufacturing, said if you connected all the computers in the plant together, something good would happen. Unfortunately, most current models are still connection-based, rather than based on business solutions.

It’s simpler now, despite complexities; we need to strengthen the margin between costs and revenues, increasing economic benefits, expanding return on investment, measured over the product lifecycle. As we surveyed customers, zero out of a 1,000 measured the benefits. ‘Costs without benefits are downsized,’ he warns. BASF, Dow, DuPont, Eli Lilly, and others found that 23.2% is the cost of system over first five years. System engineering is 28%. Most projects showed a continuous degredation of economic benefits.

When cost of maintaining the asset gets higher than a new project, then people spend. As a vendor, if you’re a penny higher than the specs, replacing old with new delivers almost no added value. Most users know added features are there. Most say they will get to those features after start-up. But the project team goes away, so there’s no continuous improvement. ‘Shame on us,’ he chides.

If there’s no ongoing measurement system in place, we don’t know how we’re doing. ‘As an industry, we’re doing ourselves a disservice. If we measure, the actual value can be realized – beyond what we ever thought it could be,’ Mr. Martin says.

We need real-time activity-based accounting, he maintains. Cost accounting, a disaster as applied to manufacturing, was set in the 1850s, which is hard to believe. Activity-based costing, applied in real time, exceeds the information lean, 150-year-old, ledger-based cost accounting, which can’t see the benefits over time and space of today’s control technologies.

Now, if the finance department doesn’t agree and see that you created value, you didn’t. Most benefits are allocated to other areas. Old view: cost per unit = direct costs + allocated costs/ quantity of product produced. Most couldn’t influence the numerator, so we made more product to look good. Now, with just-in-time manufacturing, the denominator has gotten small.

Activity-based costing, which started to assign overhead across products, began to recognize the deficiencies. Thomas E. Vollmann said strategy leads to action, then leads to measurements, which should redesign strategies. This is the ‘Vollmann Triangle.’ Most of his work studied discrete plants. Strategies at top need to carry down into mid and line levels in the organization. Measures at each level need to support the strategies. On the floor, there was a disconnect with upper economics. We need to connect manufacturing with upper-level measures. Instrumentation needs to provide adequate measures.

A performance dashboard in front of the operators can create real-time cost accounting influences on operations. Then the information needs to go back up the line from the unit to the area, to the plant, to the division, and beyond, he says.

These dynamic performance measures, DPMs, can feed the historian, and resolve to the accounting systems, Mr. Martin says, closing the loop with higher-level systems. Some measures suggest as few as 5% of plants are fully interconnected with their accounting. Strategic measures are a level higher, yet, beyond just connecting the numbers in accounting.

With this bottom-line automation, the accountants can see and be very pleased about the value automation brings.

To apply this, you need a bit of accounting expertise, Mr. Martin advises. Bring an accountant onto the project team, he suggests. Accountants can be the biggest proponent. You can’t have an outside consultant do it for you; you have to be involved. When it’s in place, the operators feel good about what they did, to make the plant run better.

‘When you do this, automation technology spending will turn around again,’

Mr. Martin concludes. Mr. Martin’s just-published book is called ‘Bottom-Line Automation,’ published by ISA press.

In a separate, concurrent session at ISA, Tom Mueller, ABB Automation, and other panelists spoke of similar issues, looking at how quality, performance, and availability losses show opportunities of asset optimization strategies.