Objectives

To illustrate how financial profitability measures can be used by workers to manage day-to-day operating decisions.

Understand how to push down profitability information to empower employees.

Know the design and information-processing prerequisites for daily profitability analysis.

Appreciate the role of finance staff experts in preparing profitability analysis.

Case Background

The Texas Eastman case provides an excellent opportunity to discuss how financial measurements can support a company's Total Quality Management program. Occasionally, industrial engineering and operations management types denigrate financial measurements and encourage companies to cut all ties between their direct physical and operational measurements and their company's financial system. In effect, they are saying that quality improvement efforts can only be inhibited by financial measurements. The Texas Eastman case provides a vivid counter-example to such claims. First, the financial measurement system is devised by a chemical engineer department manager, not a finance or accounting person. Second, and more important, the financial system he develops plays a vital role in the success of the quality program.

Discussion

Q: What kind of financial reporting system is being used to provide feedback on operations?

The Period Report is actually a well-designed system. Building from projections and commitments made in the budgeting process, as encapsulated in the Annual Operating Plan, the report is a sensible summary of period operations. It is flexed with respect to the volume and mix of actual output. The five variances help to identify the principal sources of variation of actual from budget, such as volume, mix, and external price changes. I particularly like how promised improvements from capital expenditures are linked into the standards.

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