Development of a financial management system in a CIMS environment

This research is based on the Anshan Project, a cool strip millwork computer integrated manufacturing system (LZ-CIMS). The study describes the design and completion of a LZ-CIMS financial management system that was developed using an Oracle database with client/server architecture and Developer/2000. During the development of the system, the study explores the use of both software engineering and database theory and Oracle RDBMS to discuss the integrating methods of financial information.

Keywords: Computer integrated manufacturing system; Financial information systems; ERP; Enterprise information systems

The Anshan Project has been implemented in a Chinese enterprise that produces cool strips and thin plates in more than 2000 varieties for the manufacturing of automobile and mechanical products. The mill work uses a batch processing mode in the metallurgical industry. The primary feature of a financial management system is that large fixed assets and cash flows, the costs of materials and depreciation of equipment make up the high rate of total cost. Financial management requires the ability to review this type of integrated information that provides the majority of data, i.e. 70%, for the company. In a study of Chinese manufacturers, Li suggested that financial performance is vital to a company's existence in today's Chinese business environment. In general, above average financial performance was associated with above average emphasis on a wide variety of operational competencies (Li [6], [7]). Thus, financial information is very important to reflect supply, products and sales, as well as manufacturing information from other reporting departments in the company. Overall, all of the various departments of the enterprise were required to participate in this project of data collection for all financial transactions. In addition, all managers within the different departments were expected to access the financial information within the available domain for the purpose of decision-making.

A brief literature review is presented next to shed some light on the importance of the development and use of financial systems in manufacturing organisations. Information systems make it possible to improve organisational efficiency and effectiveness that can lead to a competitive advantage in the market place (Xu [11]). In an empirical study by Ragowsky ([9]) it was found that for those senior managers of manufacturing organisations who use information systems and are authorised to make business decisions, the most beneficial application in making operational decisions were those having financial reporting, product costing and inventory management systems within their organisations. Furthermore, the study found that the financial reporting system was the most frequently used module (99% of the surveyed organisations) with the highest perceived benefits among all the applications and an application that managers can not work without it.

Many researchers have studied the implementation of manufacturing planning and control information systems, which is essentially the development and implementation of a computerised information system that integrates all business functions of an organisation (Li and Li, [5]). For example, Duchessi et al. ([1]) argues that financial information and functions are essential components of the manufacturing planning and control information system and assists in the effective method for planning and controlling all company resources. A recent study reports the development of MRPII implementation in China. The study gives some benefits of implementing MRPII system, that include assisting managers to develop production plans, monitoring cash flows, and integrating financial information and sales information that can help managers to recognize sales objectives (Li et al.[8]).

In an exploratory study, Fry et al. ([2]) found that some operations managers were using financial reporting metrics only to link that information with other economic measures such as cost accounting. The study concluded that decision-making tools should include both financial reporting and cost accounting measures to provide better managerial decision-making tools in the production process.

It is clear from previous research studies that financial management systems must be developed to provide synergy between both financial reporting and cost accounting measures within the firm. This type of reporting system was developed for the Anshan Project for a metallurgical industry enterprise in China due to the inadequacies of the existing system as noted below.

The need to develop a new financial management system grew out of the fact that the original system was inadequate to meet the needs of the managers in the various areas of the manufacturing firm. The main problems were:

• 1. The accounts were processed slowly by employees.
• 2. The fundamental concepts of cost accounting were not employed in the company.
• 3. The system did not allow managers to access timely feedback of financial information.
• 4. The managers were unable to discern the profitability of the enterprise using the old financial management system.

The Anshan cool strip mill work computer integrating management system (LZ-CIMS) is a key application project within the National 863 Research Program in the Chinese metallurgical industry. The LZ-CIMS financial management system is a sub-system of a production business system (PBS). This system is based on using computers to manage financial accounting according to the primary problems of financial management, and thus plays an important role in helping Chinese managers to improve the profitability of the company. The development and implementation of the LZ-CIMS financial management system is accomplished through financial information integration that promotes real-time accurate financial data. Overall, the system is crucial for the Chinese manager to supervise and control all financial activities that will lead to his/her future decision making regarding the production process.

The design objective of LZ-CIMS financial management system is to employ an Oracle database to implement computer management of a financial system and to integrate this program with other systems using CIMS (Li [4], Sun [10], Zhang [13], Institute of Automation [3], Xue [12]). Thus, the main objective is to significantly improve the current financial management system that will allow instant access to crucial accounting information in the company.

Figure 1 depicts the five distinct second-level sub-systems that have been developed as the first step of the LZ-CIMS financial management system: Account processing, fixed asset management, human resource management, cost accounting and financial analysis. Figure 1 reveals the module structures in terms of the function tree that includes 28 independent functions that need to be integrated into the financial management system. A succinct description of each part of the model is portrayed in figure 1:

• 1. Account Processing: There are seven main functions in this module that include: Processing of vouchers, verifying data, data query, account printing, vouchers collection, system maintenance, and accounting reports forms.
• 2. Fixed Asset Management: There are six main functions in this module that include: Card catalogue management, review of fixed assets, assessment of depreciation, data query, reports, and system maintenance.
• 3. Cost Accounting: There are five main functions in this module that include: Data management, data query, expense allocation, reports, and system maintenance.
• 4. Human Resource Management: There are five main functions in this module that include: Data management, processing of payroll, data query, reports, and system maintenance.
• 5. Financial Analysis: There are five main functions in this module that include: Data management, comprehensive summary, comprehensive data query, reports, and system maintenance.

Graph: Figure 1. Model of five key sub-systems for financial management system.

We examine two of these key areas, cost accounting and financial analysis in greater detail in the following sections.

By definition, cost accounting is the method of accounting which provides for the accumulation and recording of all the elements of cost incurred to accomplish a purpose, to carry on an activity or operation, or to complete a unit of work or a specific job. In general, cost accounting is a tedious and complex method of data collection for the firm. However, the development of a good cost accounting procedure is critical for managers to better understand the financial concerns of the firm and to assist in their decision-making capabilities. Overall, making cost-effective and informed decisions about the manufacture of cool strip and thin plates requires access to a broad spectrum of information. The managers of the Anshan Project need to know what the production of components in the metallurgical industry actually costs. Cost accounting provides a common-sense approach to identifying and assessing the cost of managing this type of industry. It offers a framework to aid decision-makers with short and long-term program planning and it can help identify measures for streamlining and improving operations.

The procedure of cost accounting is the collection of varied production expenses during the manufacturing process and to allow access to this information in a real-time environment. Some of the key problem areas in the current system were the following:

• 1. Overestimation of the final cost of the product.
• 2. High expenditures on materials, energy and power in the production process.
• 3. High maintenance costs on equipment.
• 4. Poor inventory management in terms of costs associated to a lack of spare parts.
• 5. Inferior logistics management in terms of costs related to transporting the products.
• 6. Exorbitant packaging costs.
• 7. Lack of real-time information regarding the cost accounting system.

Based on these key factors, it was crucial to strengthen the current cost accounting system to accurately reflect the production costs of the firm. According to the unique features of production in a steel rolling enterprise, we have designed a flow diagram of cost accounting as shown in figure 2.

Graph: Figure 2. The flow diagram of cost accounting.

The customer order enters the production business system in which a contract is signed. The customer order is then placed into the master production schedule and then the order is planned into the production system. From an accounting perspective, the process is best summarised by the following steps:

• 1. Sign contracts with customers and place the order;
• 2. Add customer orders to the master production schedule;
• 3. Transmit the job plan to working groups (this includes acid pickling, steel rolling, heat treating, finishing, packing, working procedures);
• 4. Assess the direct expenses (material expenses, spare parts and tools expenses, rollers expenses, waste products expenses, and the like);
• 5. Assess the indirect expenses (wages, equipments depreciation, fuel and power expenses, financial affairs expenses, selling expenses, management expenses, and the like);
• 6. Input all data into cost accounting system in order to summarise, distribute, and provide initial cost reports; and
• 7. Transmit information to other sub-systems.

For the development and implementation of an effective cost management procedure using the CIMS technologies, the following steps were undertaken at the manufacturing facility:

• 1. Obtaining the financial cost data in time. This involves the automatic retrieval of the metal and materials balance lists; the various products reports from the production tracking system; the routine assessment of various indirect costs (e.g. wage expense, fixed asset depreciation, overhead expenses, and the like) from the account processing sub-system; and the regular assessment of various direct expenses from the other sub-systems.
• 2. According to the production features of Anshan cool strip mill work, each product is an accounting object and the cost of each product must be checked.
• 3. Implementing several functions that include: cost data management; cost collection and distribution; cost calculations; comprehensive data collection and reports. The primary data collection includes: metal balance-finished products; metal balance sum; stocked material processing; steel rolling expenses; products cost; merchandise products cost; steel products cost, and products cost reduce tasks. In addition, the cost analysis includes charging fixed expenses that include raw material, waste retrieval, material quota, energy resources quota, job shop funds, and employee wages.
• 4. Interfacing data with other sub-systems was established and thus access to various cost data was instantaneous. Therefore, to implement information integration with the account processing system, the production management system, the business decision-making system and the like. The raw material expenses, material cost difference, steel rolling expenses, job shop expenses, waste loss expenses, business management expenses, reserved funds to be apportioned to expenses, and the product data that are generated by the financial system are all transmitted to the accounting processing sub-system. This provides various internal cost data for the managers of the Anshan Project to make pertinent decisions related to effectively managing the financial choices for the company.
• 5. Implementing a complete cycle for the assessment of costs for each order. The object of cost control is to design a complete process for the company. According to the standards established in advance to guide, limit and supervise varied production expenses and to take advantage of effective measures to correct any deviations in time.

The manufacturing company performs a financial analysis once a month according to three financial targets regarding funds, costs, and profit.

• 1. Analysis of final revenues. The Anshan Project assesses revenue in terms of analysing the finished condition of circulating assets, existing stock in trade, and accounts receivable, and the like.
• 2. Analysis of final costs. The Anshan Project assesses costs in terms of the actual average unit cost, material average unit cost, average rolled expenses per ton of steel, and the like.
• 3. Analysis of final profits. The Anshan Project comparatively assesses revenue targets with the actual profits.

Through the development and implementation of the LZ-CIMS, the strategic role of cost accounting and subsequent financial analysis was to play an important role in terms of increasing the profits as well as decreasing the costs of this project. The main benefits derived from executing this financial management system are that the system improved the accuracy of the accounts receivable and final profit margins. The accurate assessment of the costs in the production process has increased the profits by one percent and reduced the cost of manufacturing the product by 200 Yuan (RMB) per tonne (approximately $24.00 using 9/17/2004 exchange rate of Yuan 8.26767/US$, 17 September 2004). If we assume that the Anshan Project will manufacture 800 000 tonnes per year, the profits of the company will increase 1.6 million Yuan per annum (approximately $193,313 using the exchange rate of Yuan 8.2767/US$, 17 September 2004). In addition, the system:

• 1. Provides an optimal production schedule to increase productivity and outputs.
• 2. Enables active job management through strict cost control and the per unit rolling cost have been reduced.
• 3. Delivers the ability to track a product through the entire production process. Thus, the manager can assess quality control problems by way of various feedback and analysis in the sub-systems. For example, if defective products could be reduced by 0.5%, the profits could be increased to 4.4 million Yuan per annum (approximately $531,613 using the exchange rate of Yuan 8.2767/US$, 17 September 2004).
• 4. Reduces the product cycle by two days and thus positively affects the job plan through the reduction of mid-products and circulating funds.
• 5. Provides accurate tracking for spare parts and thus reduces the reserved parts and tools.
• 6. Allows dynamic inventory management of the rollers in the production process and thus reduces the proportion of damaged rollers to stocked funds.

An integrated financial management system can transmit information among the external systems effectively and reliably, thereby providing the necessary tool for managers to consolidate and share important data (Xu [11]). The LZ-CIMS financial management system implements and integrates the external systems that include: production management, decision support, banking, financial reports, employee management, job shop automation, supply management, equipment management, energy management and security. Figure 3 depicts the flow diagram below:

Graph: Figure 3. Integration of financial system and other external systems.

The study used accounting procedures as the centre of the financial management system in order to implement the integration of internal information regarding fixed asset management, cost accounting, wage management and the like. This method was designed to provide an information interface for each system in order to access the various external systems in the database in order to share data. As shown in figure 3, this allowed the managers of the Anshan Project access to a myriad of information ranging from employee wages to energy consumption. Obviously, this type of amalgamation of information allows much better decision-making skills for the effective management of the company.

The advantages of using client/server structures to implement this data interconnection and inter-operation in the network are that the new system:

• 1. Increases the efficiency of the firm by shortening the production cycle.
• 2. Provides simple maintenance in order to adapt to changing managerial decision making tools and the system is easy to reconfigure, simplify or expand.
• 3. Allows effective distribution of information to the database management system.
• 4. Creates an ideal open system that integrates various operating systems and application software into one comprehensive system.

In order to develop the platform of the system, the study used an Oracle database as the developing platform and the Oracle Developer 2000 as the developing tool. This provides an object-based developing platform with the following features:

• 1. Enables integration to create comprehensive applications.
• 2. Provides common design interfaces, including object guider, canvas editor, PL/SQL language and attribute adjustment.
• 3. Integrates both the SQL and PL/SQL languages.
• 4. Enables access to Oracle and non-Oracle data resources.
• 5. Easily transplants developing application software to other platforms.

In order to incorporate both safety and security measures, a password was set to limit authorities of files; take advantage of authorities that are provided by Oracle to manage the database; set the different operating authorities for different areas, including user, table, column and resources authorities; and to copy files and data at regular intervals.

To standardise the design, a practical and effective coding system was developed for the Financial Management System to effectively classify the principle and coding structures. In general, in order to meet the demands of the financial management system the coding should:

• 1. Reduce storage space as much as possible and reflect the features of the financial information.
• 2. Adapt to the future change and development of financial reform.
• 3. Indicate the unique features and attributes of the system since accounting data includes accounting subject code, accounting classification code, control code, fixed assets code, department code and employee code, and the like.

The study structured the design of the system using the following principles:

• 1. The system was divided into individual function modules, according to tree structures that are designed in top down approach.
• 2. Under the controls of a master module, each sub-system would complete the corresponding works independently. The compact system structures make the program easy to expand in the future and convenient for program maintenance.

The user interface employed object-based programming and image display technologies that are provided by Windows Oracle in terms of utilising pull-down menus, rolling bar, dialogue frame, stack-up canvas, and push buttons for programming. In addition, the mouse and keyboard are compatible and very convenient for users of the system.

The LZ-CIMS financial management system was completed with major success for the Anshan Project. Overall, the system provides a reasonable structural design, complete functions and distinct information interface. The system accurately reflects the actual information environment of the Anshan cool strip mill work and thus successfully provided an effective management decision-making tool by way of integrating the financial information of the firm. This software application will have a great impact on the steel rolling enterprises in China. As mentioned in the previous analysis, this new financial management system will improve the accuracy of the accounts receivables and payables and final profits; provide accurate assessment of the costs in the production process that may increase profits by an estimated 1.6 million Yuan per annum (approximately $193,313 using the exchange rate of Yuan 8.2767/US$, 17 September 2004). In addition, the system provides an optimal production schedule to increase productivity and outputs and enables active job management through strict cost control measures. Overall, the ability to track a product through the entire production process will allow the Chinese manager to assess quality control problems by way of various feedback and analysis in the sub-systems. The system can reduce the product cycle by two days and will provide accurate tracking for spare parts and thus reduce inventory required for reserved parts and tools. Finally, the system allows dynamic inventory management of the rollers in the production process and thus reduces the proportion of damaged rollers to stocked funds.

In summary, this research provides the managers of the Anshan Project the necessary decision-making software tool to determine the production costs of components in the metallurgical industry. Through a combination of cost accounting and financial management methods, this research has provided a good framework to aid decision-makers with both short- and long-term program planning and can help identify measures for streamlining and improving operations.

The research was supported by National 863 Research Program on CIMS in China (Grant No 863-511-9601-J301).