7  The production process

How bad can it be if internal control procedures are not respected?

A 2021 aviation safety whistlerblower report, issued in connection to Boeing’s 737 MAX aircraft, contains the following: ‘On October 28, 2018, a brand new 737 MAX-8 aircraft certified less than two years prior by the U.S. Federal Aviation Administration (FAA), took off from Jakarta, Indonesia and within 13 minutes had plunged into the sea killing all 189 onboard Lion Air Flight 610. Just 133 days later, on March 10, 2019, another 737 MAX-8, Ethiopian Airlines Flight 302, crashed to the earth merely 6 minutes after takeoff from Addis Ababa, Ethiopia, leaving 157 dead.’

What does this have to do with controls in the production process? Among other things highlighted in the whistlerblower report, one problem with the 737 Max-8 production process was that materials used in the production of the plane were not compliant with internal Boeing requirements and FAA requirements. Moreover, more than 787 wing parts specified on the Engineering Bill of Materials, which lists materials that should be included in production, were not included in the actual wings of the plane. Deviating from internal control procedures can have catastrophic consequences.

7.1 Production process

I this chapter too, I draw up a diagram of a typical production process (see Figure 7.1 ). Is this the only way in which a production process can be modelled? No, but this digram has a base logic consistent with most production processes. So let’s have a look at it.

Figure 7.1: Process narrative: In our diagram, the production process starts when the design department designs a product with product specifications related to its components and information on how to assemble the product. The planning made by a planning department leads to a production schedule. The information in the product specifications and the production schedule is used to create a product order. The product order triggers the production of the goods and the tracking of the labour, materials and overhead (such as utilities) used in production. The overhead sheet, the time sheets and the materials requisition documents feed into a production report, which populates a product cost sheet.

Have you ever cooked a meal from a recipe? I hope you did, otherwise this example is not super useful. A recipe is a document that lists ingredients (e.g., 1 egg, 2 carrots) and instructions (e.g., boil the eggs, chop the carrots). Similarly, the product specification document, contains components of a product and instructions of how to put the components together into a product. You can sometimes find the components of the product in a separate document called Bill of materials, and the instructions for assembling the product in a document called Operations files. For simplicity, we’ll call these documents Product specifications documents. Our first goal (G1) would be to have correct product specifications. Here, we can think of using segregation of duties as control, making sure there is a separation between the design function and the production function. This way, the production function might temper the enthusiasm of the design function which might come up with a very innovative but very complex and inefficient design.

Planning the right production is an art in and of itself. Here, we want to make sure that we don’t produce too much, leading to waste, or we don’t produce too little, leading to dissatisfied customers (G2). The procedure of making a budget can help us avoid overproduction or underproduction. The creation of a budget is a very helpful exercise but a very challenging one which involves forecasts of product demand and estimations of costs. You usually learn about this part in management accounting courses.

It is also very important that only authorized goods are produced (G3). Let’s consider again the example of preparing a meal for friends. Once we decide on the dish, we need to determine the ingredients that we need (e.g., from product specifications) and how many portions we’ll make (e.g., from the production schedule). Once we ascertain that we have a sufficient inventory of the required ingredients (i.e., raw materials) and we have the time (i.e., available labour) and the instruments required such as knifes or other kitchen utensils needed (e.g., machinery), we can go ahead and prepare the meal. The control here would be a formal procedure of authorizing the product order, aka, meal preparation, only after we have checked the materials, the labour and the machinery requirements.

Whenever we have a process involving materials in inventory, we have a vulnerability for theft. As such, one of our goals can be to protect our goods (G4). We can do so with a segregation of duties between the production function and the inventory management function. So, the person producing the product is not able to take goods from the warehouse without the knowledge of the warehouse manager. Can you think how this would look like when you are preparing a meal? Do you need approval to take ingredients from the pantry? And if yes, who’s going to give this approval?

When we prepare a meal we have a recipe with standard information of ingredients to use, time to spent, and instruments to use. But the reality is different. With a health concern in mind, we might use only 50g of butter instead of the 85g indicated by the recipe. Or we might spend 30 minutes on preparing the meal, instead of the suggested 20 minutes. Or we might use a spoon instead of the mixer recommended in the recipe. In a production process, the actual use of materials, time and machinery and utilities (btw, I use the title overhead sheet to refer to anything other than direct materials and labour) is tracked such that the production report can show the correct, actual, use of materials, time and overhead (G5). Again, we’re interested in our control system providing us with reliable information, not information which is estimated or assumed. How can we achieve this goal? Ideally, we would have automatic procedures here which would track the consumption of materials, time and asset usage automatically. Do you think the Internet of Things movement can help here? I’ll leave this question unanswered, to increase the suspense!

Once we have a production report with actual numbers, we can use it to find out the cost per product. Here too, we have a goal of using correct information in our calculation (G6). What control can help here? How about an analytical review where we check values from the budget (e.g., standard units from the budget which indicate what-should-be) against the actual numbers from the production report which show the what-is situation. A variance, which is the difference between what-is and what-should-be, if too BIG, might be an indication that we made a mistake along the way.

7.2 Questions and application:

1. Can you describe an example of production process from real-life?
2. Can you think of other goals that are missing from our exercise related to the production process?
3. If you had to, how would you rank the goals related to the production process, from most important to least important?
4. Which control aspect of the production process is the most challenging and why?
5. How would we implement a quality control in the production process?
6. Discover how the production process works in odoo.