Production Control in Financial Operations

November 2015

No one would think of running a manufacturing operation without a production control process to control the flow of raw materials, coordinate operations of specialized fabrication and assembly

workstations, and efficiently load of manufacturing resources. But that is exactly what many financial operations attempt to do. It would be as if a manufacturing manager expected his lathe

operators, welders and assembly teams to plan their own work schedules, manage their own raw material queues, expedite supply chain issues that arise and provide for their own quality control, all

while efficiently performing complex operations in the production of a complicated product with exacting quality requirements. How can banks, insurance companies and other financial organizations expect all of that from their middle and back office analysts and

administrators?

Application of manufacturing production control techniques and technologies to financial operations can lead to improved productivity, quality and customer service.

© All rights reserved, 2015 Jon LaBerge 2

Production Control and Quality Control functions

have effectively been delegated to the analysts

and administrators who are performing the

required tasks. This is neither fair to the

employees nor an effective way to manage

an operation.

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Admittedly, the operations required to process information

in the middle and back offices of financial organizations do not generally require special-

ized equipment like those found on a manufacturing shop floor, but they do require

specialized knowledge, and the sequential steps required to assess data quality, manipulate data to produce analyses or

reports, reconcile accounts, or update accounting records are actually quite analogous to a

manufacturing process. Perhaps there are lessons to be learned from the transformation

in manufacturing controls and product quality that have taken place over the past three decades that can be applied to financial operations.

In some cases, typically large-scale operations like insurance claims processing, it could be argued that this has already

been done using sophisticated work flow tools, but not every financial operation can afford

the high overhead cost of implementing and maintaining these applications. And the

specific tool used is not as important as the organizational implications of the separation

of duties between those resources who perform the work and those who plan, control, monitor and record the

status of the work being done. Without this separation of duties, production control and

quality control functions have effectively been delegated to the analysts and administrators

who are performing the

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required tasks. This is neither fair to the employees nor an

effective way to manage an operation.

So how do the analysts and administrators cope? Most develop and maintain their

own ‘checklists’ of tasks to be done at the end of each day, week, month or quarter, and

other ‘checklists’ for event-driven procedures such as on-boarding of a new client,

opening of a new account, or the addition or removal of an employee. Problem is that the information contained in these

checklists could be a valuable resource to help management to set priorities, identify and

proactively respond to poten-tial bottlenecks, schedule selected key resources, and

avoid the seemingly inevitable last minute fire drills.

Production Control Requirements

The requirements to implement

a production control function within a financial operation are relatively straightforward and

consist of Informational Require-ments and Organizational Requirements.

Informational Requirements As described previously, the

primary informational requirement consists of the ‘checklists’ that might currently be maintained in some form by

each administrator or analyst. It is important that this infor-mation be collected and

standardized and that the

© All rights reserved, 2015 Jon LaBerge 3

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maintenance of these lists be

controlled centrally, but it is equally important that the users who will be responsible for

performing these tasks have the ability to add notes and submit changes to these checklists.

Otherwise the centralized checklists will simply become a bureaucratic headache and the users will continue to

maintain their own ‘unofficial’ checklists.

The minimum information required for each checklist should include:

• Checklist Code • Checklist Name • Checklist Owner • Checklist Type (routine or

event-driven) • Checklist Cycle and

Frequency The information required for

each task on a checklist should include: • Task Checklist Code • Task Code • Task Sequence • Task Responsibility • Task Backup Responsibility • Task Offset • Task Duration • Task Detailed Description • Task Precedent(s) • Task Reference(s) (to a

regulation, corporate policy and/or client requirement to facilitate audit support)

With this information, a Production Schedule can be generated with a detailed list of tasks, start dates, due dates

and responsibilities explicitly defined. As a functional area matures, additional data

elements can be defined to facilitate additional automated

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analytic and reporting

capabilities. Organizational Requirements As described previously, it is important to organizationally separate the performance of

the tasks that make up a checklist from the oversight and control to schedule and ensure that tasks are being

accomplished on a timely basis. The organizational group tasked with the oversight

function will: • Maintain procedural

checklists to incorporate incremental improvements, eliminate redundancies, incorporate new require-ments, etc.

• Periodically schedule tasks from checklist templates and update the Master Produc-tion Schedule.

• Identify and monitor past due tasks on the Master Produc-tion Schedule

• Monitor potential upcoming production bottlenecks (i.e., large numbers of tasks currently in-process or with the same due date and with the same ‘responsibility’)

• Expedite past due tasks or anticipated bottlenecks to proactively maximize on-time delivery

• Provide periodic updates to operations management regarding status of operations and recommendations for rescheduling or reassignment of tasks or temporary expan-sion of production capacity to maximize on-time delivery

• Notify downstream consumers of any schedule slippage to proactively manage expectations

• Periodically meet with downstream consumers to ensure that all deliverables

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are still required and that those deliverables still efficiently satisfy the consum-ers’ requirements

• Work with operations to incorporate new tasks required by new regulations, corporate policies, client requirements or new technologies

• Interface with audit resources at the time of an audit to provide procedural documentation and evidence of compliance for every instance of every relevant task within the audit scope and timeframe.

Although the staffing require-ments for this production control function will vary based

on the nature and maturity of the operational processes and staff, a rough estimate is that

one full-time production control resource is required for every ten production resources, with

a minimum of two production control resources. For operations with fewer than twenty production resources, a

company could consider out-sourcing this function to a vendor or to a shared

corporate resource, but it is not recommended that this function be performed on a

part-time or fractional basis.

Applications

A centralized set of checklists

and dedicated resources to administer and monitor a Master Production Schedule

create an opportunity to improve a number of related activities that support

© All rights reserved, 2015 Jon LaBerge 4

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operations, namely reporting, training, reengineering,

incremental improvements, and audit support. Reporting – By maintaining and

monitoring a centralized Master Production Schedule, a wealth of statistics will be available

that would have otherwise been very difficult to collect and track. These statistics can be tabulated and displayed on

concise “dashboard” displays to provide near-real-time visibil-ity into an operation and allow

management to drill into de-tails, anticipate issues, and proactively balance their

operations to maximize on-time delivery. Figure 1 shows a sam-ple format tracking on-time

delivery and Figure 2 shows a sample format to identify potential future bottlenecks or capacity constraints of key re-

sources. (The next two weeks look pretty bad, by the way.)

Training – All organizations need to train and cross-train their employees in order to effi-

ciently assimilate new employees, accommodate employee transfers and organizational changes, imple-

ment new technology and provide for business continuity. By using the same set of check-

lists to schedule the operation and train the staff, training will be directly relevant to the train-

ees’ eventual responsibilities, and the checklists will be continually reviewed and enhanced to make them more

complete, more accurate and easier to understand.

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In addition, once the checklists

and the Master Production Schedule become established as the accepted way to

communicate procedural information within an organization, implementing new or enhanced technology,

making organizational changes, and outsourcing or insourcing functions can all be

communicated by revising the checklists and allowing new task assignments, sequencing

and procedural details to flow through the Master Production Schedule.

Reengineering – The checklists provide a valuable tool in the reengineering of an operation

by facilitating the identification of similar tasks performed in dif-ferent parts of an operation.

Common functions like Reference Data Management, Data Quality Assessment,

Account Reconciliation, and Regulatory Compliance (which in many organizations are cur-rently accomplished through a

hodgepodge of spreadsheets, homegrown databases and manual processes) can be

identified, standardized and automated to improve both the productivity and quality of

the product (data) produced by an organization. Continuous Improvements Continuous improvement is acknowledged to be an effective approach to improve

employee engagement and incorporate incremental im-provements, which, in

Figure 1 – Sample On-Time Delivery Dashboard

Current Period Start: Current Period End:

Tasks Delivered

Tasks Delivered Past Due

On-Time Delivery Percent

Tasks Delivered

Tasks Delivered Past Due

On-Time Delivery Percent

Trade Settlement & Cash Transfers 12 1 8% 60 3 5% 1,380 8 1%

Data Quality 40 4 10% 200 16 8% 4,600 307 7%

Account Reconciliations 58 6 10% 290 12 4% 6,670 505 8%

Journal Entries 15 2 13% 25 2 8% 150 5 3%

Regulatory Compliance 25 1 4% 103 4 4% 2,369 12 1%

Performance Measurement 65 2 3% 87 8 9% 2,001 57 3%

Client Reporting 123 3 2% 25 1 4% 566 2 0%

Totals 338 19 6% 790 46 6% 17,736 897 5%

Monday, November 09, 2015Monday, November 16, 2015

Current Period Year-to-Date

Team Tasks In Process

Tasks Past Due

Past Due

Percent

Current Period Start: Current Period End:

11/9 11/16 11/23 11/30 12/7 12/14 12/21 12/28 1/4

Trade Settlement & Cash Transfers 32 39 19 24 21 16 16 13 28

Data Quality 60 21 40 29 12 36 35 37 22

Account Reconciliations 68 93 57 82 71 27 55 71 59

Journal Entries 16 20 16 12 12 12 14 15 15

Regulatory Compliance 83 54 52 76 57 84 53 74 21

Performance Measurement 86 84 48 51 43 64 74 79 59

Client Reporting 64 103 69 83 96 76 76 54 31

Totals 409 415 300 358 314 315 322 343 235

Tasks in Process - Week of

Monday, November 09, 2015Sunday, November 15, 2015

Team

Figure 2 – Sample Potential Bottleneck Dashboard

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aggregate, can add up to sig-nificant savings in cycle time, productivity and product

(data) quality. Currently, an organization might be ignoring some opportunities for

incremental change because it is simply to much effort to rewrite procedures, gain

approvals, and communicate with and retrain employees; all for a simple little change. But with a coherent and concise

set of checklists and an organizational unit responsible for maintenance of those

checklists, the cost of making an incremental change goes way down, thereby

encouraging continuous, incremental improvement and allowing employees take ownership for their areas of

responsibility. Audit Support Audits of all sorts are a cost of doing business in this day and age. Whether driven by

regulatory or financial reporting requirements, corporate policies and ethics guidelines,

or client mandated reporting and controls, support for audit activity is a necessary but increasingly time-consuming

function. Each task on the production

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control checklists described in this article should be the result

of one or more audit requirements, even if the requirement is simply “good

practice” (i.e., a corporate policy). If a task cannot be linked to an audit requirement, then operations management

should really ask the question “Should we be doing this task at all?”

While it is not necessary to explicitly define relationships

between tasks and causal audit requirements in order to use the checklists as a production-scheduling tool,

addition of this information to the checklist database helps to clearly define the scope of an

audit. If, at the audit kick-off meeting, the scope can be clearly defined in terms of a

date range and the regulations, client requirements and/or corporate policies to be

audited, then the checklist database can define every instance of every relevant task and possibly even link to a

document that provides evidence of compliance for each task. Furthermore, the

production control function should have followed up on each task to be sure that it was

completed (and documented)

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on a timely basis. In effect, the production control function will be performing a comprehen-sive, self-assessment audit in

real-time, making periodic external audits much more efficient processes.

Concluding Remarks

A production control function and production control tools

like a checklist database and master production schedule require a commitment from

management, but can provide a number of tangible benefits to a financial operation. It

might seem overwhelming to try to develop and maintain a comprehensive blueprint for your operations, but the

concept can be phased-in (e.g., start with month-end closing cycles and add other

functions over time), and the resources shared (either through outsourcing or use of a

shared corporate resource, possibly internal audit?) to reduce the start-up costs.

The end result of a successful implementation of these

concepts should be a better-controlled and more efficient operation and higher quality deliverables.

Jon LaBerge is a consultant and operations executive with over 20

years of experience applying process engineering and

production control concepts to financial operations.

1223 Westover Road Stamford, CT 06902 Phone: 203-524-8487 Email: jon.j.laberge@gmail.com