Follow the Money: Putting the E in Enterprise Resource Planning Systems

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Courtesy of Richard MacLean & Associates, LLC

“Deep Throat,” the government insider who guided the two Washington Post reporters to uncover the truth behind the botched Watergate burglary, gave a key piece of advice: “Follow the money.” Environment, Health, and Safety (EH&S) managers must have a well-developed understanding of their company’s management information systems and accounting—the money trail. Armed with knowledge of information systems and reports, EH&S managers can see how decisions are made, who participates, what the major objectives are, and how best to influence management. Finally, if they can point out in common financial terms how EH&S programs add value to the business, EH&S managers are also better prepared to justify new programs or maintain essential resource levels when costs are being cut. This article points out a two-stage revolution in management thinking and the management information systems that support it. The march toward enterprise resource planning (ERP) is on. Unfortunately, EH&S issues have been for the most part left on the sidelines, given little consideration in the perspectives and information systems that are shaping this revolution. If your company has adopted or is in the process of adopting an ERP system such as software companies SAP or J.D. Edwards, it is important to fully understand the long-term implications for EH&S. The most immediate impact will be on the design of the environmental management information systems (EMIS).

WHAT GETS MEASURED GETS ATTENTION

Accounting reports have been around for thousands of years, and the doubleentry bookkeeping systems still in use appeared about 500 years ago. By 1925, the basic framework for accounting had formed. In companies with single products, it functioned well. From the 1930s until the late 1980s, management information systems changed very little. Meanwhile, the nature of corporations, competition, and environmental impacts changed dramatically. Today there is a
revolution underway, and within the next six months nearly all of the Fortune 500 companies will have completed fundamental changes to their management information systems. The Fortune 1000 and mid-size corporations are not far behind.

Accounting systems evolved since the 1930s to support decision-making by investors, not by line management, and certainly not by EH&S managers. Manual systems could support only one level of cost reporting, so external financial statements, required by the Securities and Exchange Commission, were chosen. Those reports were then jury-rigged for internal use as well. Rules on what gets measured and how it is counted were focused on financial statements, not process optimization or product pricing in complex contexts. The net results were that (1) business
managers first decided how they would run the company; (2) working separately, the accountants designed systems and
reports that satisfied external reporting requirements; and (3) managers made do with what information they could derive from the accounting systems that fed the external reporting system. By the 1980s, the disadvantages of a single cost reporting system were widely recognized. For example, because available accounting information focused  only on broad categories such as labor, raw materials, inventory, and overhead by department, products were incorrectly costed and priced relative to one another. EH&S professionals could see this distorted costing structure when, for example, wastewater facility “overhead costs” were equally distributed among process areas, even though one product from one process may have contributed 90% of the waste load. The information was perfectly acceptable for financial reporting purposes, but terrible for management decision-making support.

Managers needed to determine the real costs of activities and decision alternatives to better control operations and implement strategies. With the advent of powerful computer systems and the growing awareness of the potential benefits from improved costing of products and processes, information systems designers and accountants responded by revolutionizing the way costs were analyzed.

By the end of the 1980s, the revolution was well underway. Activity-based costing (ABC) systems were designed to
support a clear understanding of product and customer profitability and help prioritize areas for process improvement.
Operational control systems were designed to enable process efficiencies.

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