Global Positioning System

There is a definite link between Retail & Infrastructure sector but there is one more link, i.e. their customer strategy. Associating cement to supermarkets is about how a company can learn from the companies from other industries. In this era of high competition chance favors a prepared mind. Competition favors a prepared company. Therefore, those companies that can improve their relative position during hard times gain a clear edge. This is the time to stress differentiation over productivity. The focus is required on value-added differentiation and not just price competition as it is a business assumption than a strategy.

Mr. Sampat, Commercial Head with a cement company was performing data analysis on the customer data of his company using his newly learnt data analysis skills. He soon realized that customers kept on changing their orders most of the times. The price of cement is largely determined by the transportation costs involved in delivering the cement. Due to such frequent changes in the orders by the customers, the delivery time and transportation costs were higher.

On further analyzing customer behavior, he thought that if he could know the exact location of the trucks carrying the cement bags by any means he could resort to a redeployment strategy that can reduce the over all transportation cost and delivery time. He called up his friend who was working with a courier and freight company to know how his company tracked merchandising and how it predicted demands for picking deliveries from various locations.

He thought for a Global Positioning System and then contacted a telecom company to put Global Positioning System (GPS) in their trucks. He then devised a central tracking and redeployment system. And, with this new system even if the order changed, the company could deliver more quickly than its competitor. It reduced its delivery cycle from 120 hours to 15 Hours, reduced its truck fleet by 4% and improved reliability from 24% to 78%.

The company thus learnt to correctly identify its crucial IT and business priorities. The analysis was typical of most businesses in that it learnt that, left to their own resources, projects would multiply and profits would decline. Instead the company analyzed its 30+ current IT projects in terms of value to the customer, resource utilization and possible productivity improvements. The company stopped 25 projects, slowed down 8, maintained 5, accelerated 3 and added 2.

Similarly, the winners in the supermarket industry will be those that will use new digital tools to create a customer-responsive way of doing business. Retailers, distributors and manufacturers will have to share data efficiently and effectively in a manner so that they communicate fully. Transactional data is just a subset of what you really want to know.

Root Cause Analysis

Do you believe that unwanted situations within an organizations are about 95% related to process problems and only 5% related to personnel problems? In my views, they are 100% related to personnel problems. :) We always assume that everyone in the organization doing their best to do the right things, but everything ends up screwed up. Actually, the root cause of these situations is local optimization with no global thought involved. When we are working 'in' the process we are not working 'on' it. The person managing or owning the business process should have reasonable knowledge of the process he owns, the technology and the people involved therein.

The Plant Manager walked into the plant and found oil on the floor. He called the foreman over and instructed him to have maintenance clean up the oil. On the next day he again found oil on the floor in the same area of the plant. He thought it must be a process problem. To find the root cause of the problem, he asked the foreman why there was oil on the floor. The foreman indicated that it was due to a leaky gasket in the pipe joint above. The Plant Manager then asked when the gasket had been replaced and the foreman replied that maintenance had installed three gaskets over the past few weeks and all were seemed to leak.

The Plant Manager immediately approached the Maintenance and understood from them that they were all bad and Purchasing had already been informed about the faulty gaskets. The Plant Manager then went to talk with Purchasing about the situation with the gaskets. The Purchasing Manager indicated that they had in fact received a bad batch of gaskets from the supplier. The Purchasing Manager also informed that they had been trying continuously for past two months to get the supplier make good on the last order of gaskets that were all seemed to be bad.

The Plant Manager then asked the Purchasing Manager why they were purchasing from this supplier when they were so disreputable. The Purchasing Manager said because they were the lowest bidder when quotes were received from various suppliers and as a process they always purchase from the lowest bidder. The Plant Manager then asked the Purchasing Manager why they are continuing with this lowest bidder and he indicated that he had received the direction from the VP Finance.

The Plant Manager then went to talk to the VP Finance about the situation. When the Plant Manager asked the VP Finance why Purchasing had been directed to always purchase from the lowest bidder, the VP Finance said, "Because you indicated that we had to be as cost conscious as possible!" and purchasing from the lowest bidder saves us lots of money. The Plant Manger was horrified to find that he was held the reason there was oil on the plant floor.

One may find this scenario somewhat funny, and laugh at the situation but it is often all so true in numerous variations when you reach the last Why? doing Root Cause Analysis.

Elephant of ERM

Like every year, this year too, the ERM meeting by Chief Risk Officer was not very interactive. The external consultants who were present at this year's meeting with their vibrant presentation even could not engage the senior managers present to contribute to 'to be' Enterprise wide Risk Management System (ERMS). The senior managers at the meeting didn't ask searching questions and they didn't debate but were just sitting passively watching the nicely made power point presentation. The meeting soon got over before the lunch hour and the managers left with no commitments whatsoever.

Two weeks later, when annual budget and operating plan for the next year was on the table of CEO; inherent conflicts of interests were visible. All the line managers had strongly presented their cases for granting excess budgets for their activities. They had confirming information for their decisions which they had already committed of making. All had justified their future action plans without any sort of critical evaluation in light of any disconfirming information.

The Production Head wanted to have full capacity utilization with stable production schedules for bringing major cost saving for the assembly unit whereas Sales Head was pressing for having wide range of products with different sizes so as to increase chances of making a sale. Unlike others, CFO had envisaged lower economic growth ahead and was worried about inventory built-up and additional cash outflow on account of discounts and promotional activities. Many managers have tendency to be over optimistic or unnecessarily pessimistic when their incentives are linked to their specific functional achievements and thus they tend to discount the information that might lead to conclude that their plans were biased and not in synchronization with other functions.

Something was definitely missing. A moaning Risk Management System which critically validates assumptions. If you want to reduce risk in your business, you have to seek both confirming and non-confirming information before you take action. This helps the firm to make intelligent trade-offs based on reality. But most of the time the problem is lack of platform that encourages open debating of the assumptions made by the managers and their by challenging of each assumption by cross functional leaders at granular level with penetrating questions.

Is Chief Risk Officer responsible for seeking disconfirming information or decision makers themselves are to seek such information compulsorily while making any decisions as a process? Who will conduct a meeting for challenging their own assumptions openly? Who will make correct trade-offs? Who will see the entire Elephant of Enterprise wide Risks? Audit Committee!!! I don't think so. Debating in group will only construct and share a comprehensive picture of enterprise wide risks. Only open and guided discussions will encourage commitment to execute with accountability and develop respect for each other.

Yes. Respect and unity within a business team are the missing elements. No one can claim, not even any sort of Committee, of having a vision of the entire Elephant of Enterprise wide Risks. Yes. ERMS too needs integration with the entire body/soul of knowledge system, the biggest of elephant ever known to business kinds.

Fiction or Reality : IA Failure

Arvind, a young Internal Auditor had reached the internal audit location on time at 9:00 AM. He had the entire day at his disposal to spend on the audit area as planned. Mr. Swami, the Functional Head who had not been able to find time to see the email from the corporate office about the internal audit, exclaimed seeing Arvind. He asked him to wait for some time saying that the corporate office has not forewarned him about the Internal Audit. After some time he called up the corporate office in front of Arvind asking for sending the email again.

At 10.00 AM, Mr. Swami called Arvind in his office. Mr. Swami started with a waffler and took about an hour speaking unnecessary things without answering the Arvind's main questions on the audit area. Arvind broke in between to ask questions differently but Mr. Swami started with his Dog & Pony Show giving a long elaborate presentation to impress Arvind so that it may become difficult for Arvind to see the main issues. It was almost 12 PM then. He took Arvind for a round of the factory, which proved to be a very long round consuming one more hour. Mr. Swami suggested Arvind a good place for lunch. His idea seemed apparently to be to form a good working relationship with Arvind. The place suggested by Mr. Swami was miles away from the factory and after heavy lunch both returned at around 3.00 PM.

After coming from lunch, Mr. Swami left Arvind saying that he will be back in 30 minutes as he has a meeting with local excise officer. When Mr. Swami finally arrived after 1.5 hours, he saw Arvind, who had spilt some tea from his cup on the table. He then started lecturing Arvind for ensuring that he abides by complex hygiene and safety regulation. This was again a delaying mechanism by Mr. Swami. At around 5:00 PM Arvind started making some probing questions and asked for some documents and invoices. He told Arvind that he is not supposed to answer those questions as it is not making any business sense. He insisted to stop audit in lack of clarity about the scope. Unluckily Arvind had forgotten to bring the scope document and it wasted another half an hour. Mr. Swami then started suggesting areas which Arvind should look into. At around 5:30 PM and after some struggle, Arvind convinced Mr. Swami to give him the sample documents for his review as listed by him.

Mr. Swami came to Arvind at 5:45 PM without any documents. On asking for the documents again Mr. Swami exclaimed which documents he is talking about. Then he said Oh yes, I will just bring those to your table. At Around 6:15 PM, Mr. Swami came with few documents saying that he was unable to bring all the samples as requested as some documents are in processing with other departments and thus he picked up some other samples instead which were available with him but not listed on Arvind's list.

Arvind, the smart internal auditor picked up a serious problem from the given samples and asked about it to Mr. Swami. Mr. Swami suggested that this is a special one of case. He started abusing Arvind indirectly for his lack of knowledge about the business. When Arvind asked for more details about the said transaction, Mr. Swami told him that the accounting personnel who has the needed documents is on leave and he has no access to his drawers. He started then admiring and flattering Arvind for becoming over familiar with him. He won Arvind's mercy very soon when he spoke about a major deadline approaching that weekend and about his wife's illness.

This all took around half an hour more and around 6:45 PM; Mr. Chauhan, the Engineering head, who also lived near Mr. Swami's house, came there to offer him lift in his car. Mr. Swami looked at Arvind and said that he has provided him with all the data and now he has to call off the day as it takes about one hour to reach his house in the evening traffic and he has to cook food due to illness of his wife.

Mr. Swami suggested speaking to Mr. Ayengar in case he needs any documents or clarification. Mr. Ayenger did not know a single word in English or Hindi and he could only speak native language. After struggling a bit with Mr. Ayenger, Arvind given up and started enjoying the expensive chocolates which Mr. Swami had brought for him that evening.

At around 7:30 PM Arvind decided to pack up to catch the train of 8:30 PM to Mumbai as there were chances of heavy traffic as suggested by Mr. Swami.

After a week Mr. Swami received a report from Arvind which suggested that every thing was found to be in order.

Death Spiral: 360 Feedback

The key employees started disobeying orders of CEO and this clearly implied leadership failure for one of the Japanese Multinational. There is a saying that employees don't quit companies, they quit bosses!

When leadership failure is at the CEO level, it is common for various senior executives to try to fill the vacuum. Without a clear decision on direction by the CEO, the Japanese Organization was facing protracted power struggles and a further deterioration in competitive market position as the senior executives blocked or undermined each other's initiatives.

Key employees got frustrated with this lack of proper, needed action and left the company, degrading its strengths even more. Also, various incorrect habits were formed in the organization which made it much harder to lead in the future.

The leadership at this Japanese Multinational in India always failed to provide proper direction, inspiration and vision for their company from the start. The Controlling Management at Japan just kept on changing its strategy and the leadership except the consulting firm with which it had entered into a long term contract. Continuous consulting interventions by the Japan were faulty and unwarranted, which made the local leaders to think that inaction is a viable choice.

Unfortunately, they believed that they can continue to do what they like. They were comfortable with status-quo irrespective of what market conditions demanded. They did implement some changes, but at a rate or time that was convenient.

The Controlling Management at Japan then thought of carrying a 360 Review just to find a death spiral.

Implementing a 360 degree review process can either be a destructive and devastating experience, or a developmental epiphany for those involved, depending entirely on how the process is structured and the level of preparedness.

Although it is required that leaders should seek-out candid feedback from colleagues and subordinates using a 360-degree review in order to discover blind spots that reduced the performance but success lies in taking stock of their personal strengths and weaknesses and the commitment to take necessary steps to achieve personal as well as organizational change.

The 360, is only a tool that provides quantitative and qualitative evidence of the causal link between management behavior and business outcomes. If any one agrees that managerial behavior significantly impacts productivity, employee attitudes, morale, retention, teaming, and therefore the quality of customer interaction and overall business results, then one must exert the same level of scrutiny upon behavior as is traditionally imposed upon the functions. Unless and until top management is willing to exert that level of scrutiny, the impact of management behaviors on organizational performance will not be measurable, and will therefore remain invisible, free to impede business results with impunity.

More people would learn from their mistakes if they weren't busy denying they made them.

Not-So-Significant Variance

The Purchase Manager of a manufacturing plant was very unhappy with the unfavorable price variance although not very significant. He then expressed his uneasiness to VP-Operations saying that price variance does not measure the purchasing department's performance any longer. He said that his department has worked hard to obtain price concessions and purchase discount from the suppliers. He pointed out that engineering changes have been made in several parts, increasing their prices whereas part identification remaining same.

Similarly, the Manufacturing Manager also had approached VP-Operations saying that responsibility for unfavorable quantity variance should be shared. He was of the opinion that his department should not be made liable for quality problems associated with the use of obsolete or less expensive parts. He said that they had to use substitute materials of low quality to make up with engineering changes and to use up obsolete stock. In spite of all these problems he has reduced his other assembly costs and improved efficiency of the department.

The VP-Operation then approached Accounts Manager worried about the cost of investigating these not-so-significant variances to understand the problems more clearly. The Accounts Manager was smart Management Accounting Graduate; he first wanted to review the standards before investigating these not-so-significant variances. He was clear that the problems are due to incorrect management accounting practices.

He found out that the evaluation of the purchase manager was based on direct materials price variances. This created incentive for him to build inventory. Price discounts were granted for large purchases. Thus, one way to generate favorable variance was to purchase raw materials in lot sizes larger than necessary for production and to hold these inventories until they are needed. However, it was proving costly to hold inventory due to warehousing, material handling, and obsolescence etc.

Accounts Manager found that firm is purchasing in excess of production requirement to get a huge price discounts and the Purchase Manager had taken necessary permission from VP-Operations for this. He thought that to curb these practices, the purchase department should be charged with the hidden cost of holding inventories.

He thought that instead of sharing the quantity variance as suggested by the Manufacturing Manager, to offset the purchasing manager's incentive to purchase low quality raw materials, purchases should be inspected when received thus purchasing should not be allowed to buy materials that deviate from the engineering specifications.

Frequent engineering design changes should properly be incorporated in the variance analysis to identify the actual performances.

He thought that new Key Performance Indicators and Standards will recognize the existence of all these problems, so the managers will no longer be responsible for the variance that is considered too costly to fix or investigate.

Standard costing method although traditional is still used by many organizations. One needs to understand the issues pertaining to the system in its entirety to discover any cost saving advantage.

Accounts Manager then calculated the impact of changes in the management accounting system and found out that the organization can save up to Rs. 20 Million in each period.

Happy Transfer Pricing

A newly appointed Managing Director of a Biotech Company, who believed in participative leadership, wanted to increase organizational efficiency of his organization and save costs. So, he invited all the departmental managers for generating ideas but the brain storming session turned into a heated debate and counter firing. Disappointed Managing Director was puzzled as to how all the negative interactions and other hidden ego issues between these managers should be solved or otherwise the work environment and the business will suffer hugely.

He shared his worries with his old friend who was a risk consultant and he immediately spotted the role of management accounting which plays a powerful role in encouraging or discouraging such interactions. The management accounting system recognizes the interactions of different responsibility centers through Transfer Pricing, a system of pricing product or services transferred within the same organization.

The Managing Director said that Transfer Pricing is not a big issue as he has appointed a renowned tax advisory firm. His friend told him that Transfer Prices are much more rooted than this and are prevalent in organization than most managers realize. Consider the charge which the advertisement department receives from maintenance department for janitorial services or a monthly charge for telephones, security services, data processing, or legal and personnel services. This cost distribution is internal Transfer Prices. There are three main reasons for Transfer Pricing within the firm. These are control purpose i.e. setting incentives and performance measures, decentralized planning decisions and international tax etc reasons. All these factors should be considered in setting Transfer Prices.

"What does that mean?" asked immediately the Managing Director as he had thought that Transfer Pricing issue was already taken care of in his organization. His friend then told him that Transfer Pricing is used for control and planning purposes in a decentralized organization. To determine performance of a manager and his profit and investment centre requires use of Transfer Pricing when goods or services are transferred within the organization.

Transfer Pricing should lead to performance measures that discriminate between good and bad managers. In other words, manager's responsibility centre should not be penalized by Transfer Prices that are affected by the performance of the manager of other responsibility centre. For e.g. manager of engineering department should not be able to charge the manager of production department for cost overrun due mistake the engineering department made.

Similarly, in case of planning decisions, the managers of a responsibility centre make certain input and output decisions. But many a times he is not allowed to go outside the organization for sourcing or selling. In such a situation manager can resort to such decisions or maintain same level of efficiency in absence of any competitive pressure which are not consistent with the entire organization's goal. Thus Transfer Price should be less subject to managerial discretion to encourage operational efficiency and organizational harmony.

He immediately asked his friend to look into the controls related to performance measures and existing transfer pricing practices within his organization.

Optimum Process Improvement

A pharmaceutical company was engaged in a process improvement program but unfortunately the processes have not been identified following the principles of execution based organizational structure and value chain analysis, moreover they have been identified without a performance context. This means they were not connected to the business systems or business results.

The pharmaceutical company mapped processes based on its functional view of the organization and the process improvement efforts (mostly Six Sigma) were conducted within its few functions over the past two years. These projects had been initiated because there was a willing functional VP sponsor who was a Six Sigma believer. And, the outputs of the processes in question were relatively easy to measure. Also, there had been customer complaints emanating from some of these processes. Some of the improvement projects were defined by the Company personnel seeking certification.

At the same time when these process improvement projects were initiated, a strategy review by the executive management team concluded that the very survival of the company rested on new product development and a redirected and reenergized sales organization.

Looking from the horizontal or value chain view of the Company on top of the functional view of the Company, one could see that the process improvement efforts executed over the past two years were buried in the 'Delivered' segment of the value chain, while, at the same time, there were lost strategic opportunities for process improvement in areas of new product launching and new sales organization.

Identifying processes within a major functional silo can give the illusion of being linked to business results, but the potential for sub-optimization still looms large. Given this fundamental flaw of processes not being linked to business results via the value chain and organization structure as primary processing system, the following are some of the predictable problems with subsequent process improvement efforts:

First, the criterion for selecting processes for improvement is based on staff's particular interest which might be conflicting with specific business priorities. This will cause three unfortunate results: The first result will be that every improvement effort will have the potential to sub-optimize the business. The second result will be missed opportunity. The third result is the waste of time and money resulting from the projects that were being initiated primarily because there was a willing sponsor or just to demonstrate the power of new management concept by experimenting on a safe, but insignificant operation or someone can get his or her Black Belt accreditation due to such projects. The accumulation of a few projects initiated for reasons such as those mentioned above will soon begin to undermine the process improvement efforts.

In the absence of a connection to business results, the process improvement effort gravitates toward irrelevant process improvement goals. The improvement projects tend to get identified, defined, and shaped so as to best apply and demonstrate a particular methodology. It becomes a methodology in search of a project rather than a Critical Business Issue in search of a solution.

Vice president in the pharmaceutical company believed that the procedural level workflow documentation required by various certification efforts, such as ISO and SOX, is what process is all about. Whereas some in the organization thought that process documentations is similar to IT requirements documentation. Although software made it easier to manage documentation required for SOX and other certification, but this led to the delegation of process documentation to techies and clerks. TQM focused on processes as a tool, taking application of the process notion to the sub-process level within the functions and many staff resources were made process owners in silos increasing organizational conflicts and sub-optimisation. The Six Sigma movement proved to be a rigorous, precise, but costly analysis just to address some unimportant problems buried deep in the organization.

In contrast to the issues identified above, if the processes in a process improvement project to be linked to business requirements, process improvement should work as follows:

A process improvement team identifies an emerging or potential process performance problem. This problem is shared upward with the appropriate level of executive management team or perhaps directly with the value chain management team. The executive management team at the appropriate level assesses the significance of the problem identified by the process improvement team, does a preliminary analysis to determine likely causes and the scope of the problem, and, if merited, initiates an improvement project with a higher ROI. The executive management team uses the cross-functional value chain map to track the location and progress of all such performance improvement initiatives, ever vigilant for possible sub-optimization.

Performance Measurement

A Japanese multinational agro chemical company had launched its premium product in India. It could not perform well on account of incorrect strategy and management accounting system.

At first, the sales & marketing team was given a target to increase the sales and distributorship on a pan India basis. Business Managers entered into a big sales contract with other company for selling its premium product to them after packaging in their brand name. Distributorships were increased without proper background checking. Amount of expenses incurred on all distributorship a like without considering performance levels. Production was based on faulty sales forecasts to accumulate inventory and it was not based on confirmed orders in spite of possibility of less throughput time.

The Company started to increase its sales but incurred a huge amount on sales commissions and sales schemes to the distributors. Later on the company was facing huge sales returns from these distributors as product was not proving successful in the market. There were also dispute within the business heads and there were various schemes of misappropriation involved.

Consultants had been called from all renowned accounting companies who mainly reported on the accumulation of inventory and expired inventory, lack of approvals for sales returns, incorrect commission or scheme benefit paid, lack of approval for cash transactions, non calling of proper quotations etc. They suggested change in authorization levels and new standard operating procedures etc.

With top management pressure, the business managers now had been given a target to reduce inventory. The business managers now were devoting their huge time in selling near expiry stocks instead of fresh stocks. The product was sold in various sizes. Few big sizes which were over produced, the business managers had decided repack these into smaller sizes to reduced inventory although which only added to cost of re-packaging.

Also, there was incorrect decision with respect to product positioning and product pricing. The Company was competing with its own product on many occasions. The premium product was not successful and they had to change usage method instructions several times. There was problem with product costing and cost allocations too.

Management accounting must adapt to dynamic environments and organizations. Warning signals indicate that the management accounting system is not working and needs a change. It is clear that the consultants were not able to reach to the correct root causes to give solutions to the problems due to faulty frame of mind and approach.

One sign of management accounting system not working is dysfunctional behavior of the on part of the business managers due to inappropriate performance measures. Managers make decision to influence performance measure. If these performance measures are not consistent with the organisation's goals, management might make decisions that do not coincide with organizational goals. When organizational mangers are acting at cross-purposes with each other, the management accounting system is not working and should be changed.

Organisations must think about changing its management accounting system based on organization's non-ability to correctly forecast or to win a bid or gain competitive advantage in terms of effectiveness, efficiency and value chain benefit.

Organization should not look necessarily to the latest management accounting buzzwords to give them direction for changing their management accounting system. TQM, Six Sigma, JIT and activity based costing ( ABC) for example are appropriate to certain type of organizations and in particular environments. Some features of these concepts might be beneficial, while other might not contribute for creating value for the organization.

The Forgotten Chapter

Independence and Objectivity of Internal Audit is on top priority list of the new Corporate Governance requirements. Reporting to Audit Committee Internal Audit has achieved the so called glare of Independence. Although now we have new definition for Internal Audit, something has been deliberately missed out due to global business trends.

The new definition of Internal Audit has two objectives in very simple words.

• To add value by improving organization's operations.
• To evaluate & improve the effectiveness of Internal Controls.

For second objective the global businesses are following COSO Internal Control framework. Either it be Sarbanes Oxley or Clause 49 in India, efforts are to improve the effectiveness of Risk Management & Internal Controls with respect to financial reporting objective of the COSO.

Now the question is how Internal Auditors are achieving the first objective? What frameworks or methodologies Internal Auditors are to pursue to achieve it? Do Audit Committees are concerned about the Operations or they finite themselves with financial reporting objective? Internal Auditor are facing disadvantage of not reporting to the Management as they are taking advantage of reporting to the Audit committees. Independence gained at the cost of objectivity.

No doubt Internal Auditors needs to work in their domain area and audit charter should define clearly scope and responsibilities, I see following four areas for Internal Audit to focus on in addition to risk management with respect to financial reporting to achieve the first objective of the new IA definition. The management should define the role of the Internal Audit to make it responsible and accountable to add value in the following.

• Management Accounting
• Resource Management
• Financial Management
• Knowledge Management

Above is nothing but the components of an Operational Audit and Value for Money Audit with assertions Economy, the measure of Input, Efficiency, the measure of relationship between input and output and the Effectiveness, the measure of output.

Steam engine describes the operational cycle, each component contributing towards the locomotion, the whole system being composed of interrelated parts, failure of one causing failure of the system. Risk Management is needed to be better understood holistically as it is not just internal control management of financial reporting or strategic/ operations risk in isolation.

Just In Time

Best practices are like benchmarks. They are very personal and contextual. Applied incorrectly, best practices can become handcuffs. People say let's apply best practices to help improve the processes. We always look at what has worked for others and try to repurpose it for our requirements. Does that make it "best practices," though?

Best practice like Just In Time (JIT) inventory system is not just an attempt to maintain minimum or zero inventory. The JIT process involves fine tuning production and supplier scheduling systems, where inventories are supplied when needed in production and monitoring the entire value chain closely to reduce wastage and minimize inventory buffers.

An US company had known about JIT used by its Japanese counterparts with assembling cost below 20 % of its own. In an attempt to replicate the success, US Company too then implemented JIT. Although it was successful in reducing its assembly cost noticeably, it experienced dramatic problems with its major suppliers at the same time. They begun to demand price increase that more than offset the assembly plant cost saving. The company blamed its suppliers for not using JIT concept for their own operations. However, the problem was different and not realized by the US Company initially.

While the US Company reduced its need for buffer stocks, it placed major strains on the manufacturing responsiveness of its suppliers. The reason was very simple. The assembly plant of the US Company was experiencing huge and uncertain variability in their production schedules which made the manufacturing for its suppliers a nightmare. Management had ignored the idea that JIT involves partnering with suppliers down the value chain. It did not realize that the key in the success of JIT for Japanese assembly plants was schedule stability for its supplier firms.

A knowledgeable risk consultant can play important role in implementing and maintaining innovative management accounting systems like JIT, ABC & Six Sigma. The risk involved is of making incorrect planning decisions and control decisions.

Nowadays activity-based costing (ABC) is being adopted as an alternative cost accounting system that supposedly overcomes the deficiencies of the traditional cost accounting system. However, ABC has been abused by its users. It is now clear that one should understand it from Activity Based Management and strategic perspective and should not use it as an accounting system by bringing it in the general ledger system.

Proper Risk Consulting may contribute to the success of new management accounting concepts through several types of involvement: (1) audit of cost drivers, (2) audit of non-financial performance metrics, (3) Value Chain Analysis, and (4) audit of value added by ABC.

This is the future area where maximum value addition can be achieved and requires different approach in risk consulting.

Risk exists if you are not aware and not implementing a new management tool and technique when your competition is. Risk exists if you are implementing it incorrectly and your benchmarking analysis is flawed and not showing you the key factors causing the performance difference between you and your competitor.