In the third and final part of our 3-part series around Continuous Improvement, Jim Holman, Director and Strategy & Operations Leader, rejoins with Steve Holliday, Director of Digital Advisory. Together, they address how to foster and advance a continuous improvement culture and create focus on the best initiatives for your business impact.
Our Cherry Bekaert Digital Advisory practice is rolling up its sleeves to help organizations like yours to identify, analyze and implement ongoing incremental improvements to accelerate your overall success.
Listen to this episode to:
- Follow the frameworks and strategies for facilitating the continuous improvement process.
- Learn the philosophies behind continuous improvement − incremental and ongoing changes to your organization result in more efficient processes and better customer experiences.
- Discover ways for leadership to improve business processes, communication and collaboration amongst teams.
- Determine sustainable continuous improvement components to effectively drive transformation across your organization.
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Related Insights:
- Accelerating Your Business Growth Through Continuous Improvement: Part 1
- Improve Quality Using a Business Process Maturity Model: Part 2
- Digitalization and Continuous Improvement: A Recipe To Achieve Process Maturity
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BRENDAN HALLORAN: Welcome to Cherry Bekaert's GovCon podcast, where we discuss current government contracting trends, compliance matters, and best practices to guide federal contractors forward. I am Brendan Halloran, a senior manager with Cherry Bekaert, and with me today are John Bula, a manager, and Chris Morris, a senior associate in Cherry Bekaert's government contractor advisory services group.
BRENDAN HALLORAN: As part of our continuing series on contractor business systems, today we will be talking about material management and accounting, or MMAS, systems. Thanks for joining me today, John and Chris.
JOHN BULA: Good to be here, Brendan.
CHRIS MORRIS: Thank you. Good afternoon.
BRENDAN HALLORAN: First, we'll get into details around what a material management and accounting system is, its requirements, and the criteria. We are well into our business system series and have covered systems more commonly applied, such as accounting, estimating, and purchasing.
BRENDAN HALLORAN: One nuance with MMAS is that it is primarily applicable in manufacturing or production environments where materials are utilized. Contractors that are more services focused may not have MMAS applicability, but MMAS involves significant interplay between systems and functional areas across the organization.
JOHN BULA: A material management and accounting system is a system for planning, controlling, and accounting for the acquisition, use, issuance, and disposition of material. It is primarily geared toward manufacturing and production organizations.
JOHN BULA: An acceptable MMAS reasonably forecasts material requirements, ensures the cost of purchased material is charged or allocated to a contract based on time-phased requirements, and retains consistent, equitable costing of material. Contractors should have adequate policies, procedures, and operating instructions that describe their MMAS.
JOHN BULA: High-level MMAS elements include a system description within policies, procedures, and operating instructions, which must comply with the FAR and DFARS.
JOHN BULA: Certain performance goals help ensure requirements are valid and time-phased. For example, bill of material accuracy should be around 98 percent, and master production schedule accuracy should be around 95 percent.
JOHN BULA: From a system standpoint, criteria include mechanisms within the ERP to identify and resolve control weaknesses, strong audit trail compliance, and maintenance of records necessary to evaluate system logic and verify through transaction testing that the system operates as required.
JOHN BULA: Operational elements include physical inventories, transfers, material cost transactions, and commingled inventories. Contractors should establish and maintain adequate inventory levels and reconcile recorded inventory quantities to fiscal inventory counts by part number on a periodic basis.
JOHN BULA: Transfers should have detailed descriptions and result in system-generated transfers of parts. For material cost transactions, contractors should maintain consistent, equitable logic for costing.
JOHN BULA: Inventory allocation is not a part of the MMAS system. Inventory that includes material for which contracts or costs are allocated to cost-reimbursement, fixed-price, or commercial contracts must not compromise MMAS compliance criteria.
BRENDAN HALLORAN: MMAS obligations arise when a contractor maintains an adequate and acceptable system for cost-reimbursement or fixed-price progress payment contracts exceeding the simplified acquisition threshold. This obligation does not pertain to small businesses, educational institutions, or nonprofits.
BRENDAN HALLORAN: A contractor should consider MMAS when it had $40 million in sales in the preceding fiscal year and a government risk assessment establishes an MMAS review is needed. The review may be triggered by the $40 million threshold or by identified significant risk.
BRENDAN HALLORAN: Chris was leading into what an MMAS review or audit looks like if a company is selected after the risk assessment. Chris, can you share your experience?
CHRIS MORRIS: Once the decision is made to perform an MMAS audit, DCAA's goals include obtaining an understanding of the contractor's compliance with DFARS criteria and determining whether the contractor meets MMAS criteria listed in DFARS.
CHRIS MORRIS: DCAA will perform testing across the DFARS criteria, with the extent of testing based on the assessed risk for each criterion. The audit team will determine whether to use statistical or judgmental sample selections depending on the contractor's size.
CHRIS MORRIS: The report will identify any significant deficiencies and any less severe deficiencies in compliance with DFARS criteria.
CHRIS MORRIS: Prior to risk assessment, DCAA typically holds an initial planning meeting to notify the contractor's points of contact of the upcoming audit, identify locations of inventory and production facilities, schedule kickoff meetings, and assess significant processes and risks.
CHRIS MORRIS: DCAA will review permanent files for prior MMAS audit results, recommendations, or corrective action plans. For larger companies, DCAA may perform walkthroughs with affected functions such as finance, contracts, engineering, and program management to understand cross-functional MMAS interactions.
CHRIS MORRIS: DCAA develops a risk assessment to guide which attributes to test and the extent of testing. The risk assessment is based on prior audit experience, observations from the walkthrough, contractor-identified risk factors, and the audit team's understanding of relevant internal controls.
CHRIS MORRIS: Defined criteria include bill of material and master production schedule accuracy, inventory accuracy, material costing criteria such as loan paybacks, and periodic internal reviews.
CHRIS MORRIS: To prepare for a DCAA MMAS review, contractors should have an internal review process, pre-established points of contact for each relevant area, and historical testing data tracked internally for BOM accuracy, inventory accuracy, and cycle counts.
CHRIS MORRIS: Contractors should retain logs demonstrating periodic monitoring, training records for internal stakeholders who touch MMAS, and any reports submitted to management that show these metrics on a trend basis.
BRENDAN HALLORAN: Thanks, Chris. That's a solid overview of the process and key areas. DCAA audit activity on business systems, including MMAS, has increased. We are seeing clients undergo MMAS audits now even if they have not had intensive audits in years.
BRENDAN HALLORAN: MMAS touches many functions and can drive operational efficiencies, such as accurate material requirements and better definition of warehouse and production space needs. Cost Accounting Standards also apply to material and direct cost treatment, so there is crossover to ensure compliance.
BRENDAN HALLORAN: John, what are some typical issues contractors encounter during internal monitoring or government review?
JOHN BULA: Over the years, common issues include inaccurate bills of material from engineering, engineering revision control problems, and purchase order revisions and inaccuracies when no internal control process exists.
JOHN BULA: Shipping and receiving errors often cause inaccurate inventory levels, and inaccurate material inventory counts are common during reconciliations. Inventory adjustments frequently occur throughout the fiscal year.
JOHN BULA: Data integrity in the ERP system is very important for reporting. These are common pitfalls for contractors implementing MMAS.
BRENDAN HALLORAN: Those are good points and highlight documentation and internal control needs across systems. MMAS brings unique areas to address, and we have only scratched the surface today.
BRENDAN HALLORAN: If anyone has MMAS questions or needs, please reach out to Chris, John, or me. Thanks for joining us, and please join us again for our next podcast.
