Financial Modeling of a Production Process

A production process is an economic process for converting inputs (raw materials, labor and other resources) into outputs (goods or services). Financial modeling of a production process helps illuminate the decisions regarding the process such as key dates, timing, capital asset purchases, and build or buy decisions. To illustrate, let's take a look at a wine production process. Figure 1 shows a basic wine making process including growing grapes, crushing, blending, aging, bottling and packaging.


Figure 1: Basic Wine Production Process


 

Each step of the process has considerable financial implications including capital assets, inventory, material and labor resources, as well as time.
Figure 2 shows some of these financial objects along with the basic process. Multiple financial objects are used to reflect different properties or terms of agreement. There are many other financial objects not shown in the figure such as expenses for maintenance and resources (materials and labor), revenue, and account receivables.

Figure 2: Basic Wine Production Process with other Financial Objects


 

Real world objects such as vineyards and grapes flow into and give life to financial objects such as capital assets and inventory. Attempting to model this complexity in a cell based spreadsheet is possible, but probably only the first time. Maintaining such a model in a spreadsheet is nearly impossible. Modeling real world objects as software objects rather than cells provides a solid, flexible and structured framework for modeling. Each object can be created and configured easily, and any number of such objects can be created. This is particularly important in production processes where many different, concurrent, and interacting processes are taking place. The basic wine production only shows one path. In actual practice, there are many different kinds of grapes, different blends, different aging requirements, and many different wines. Even the same wine may be packaged and sold in many different ways and sales channels. An object based approach can accommodate this diversity. Each process step may involve build/buy/sell type decisions. A vineyard may produce more grapes than the production facilities can use, so excess grapes may be sold. Or if an insufficient number of grapes are produced, additional grapes can be purchased. Likewise, the juice from crushed grapes may be sold to other customers or purchased from other suppliers depending on various limits on production capacity and business needs. Figure 3 shows some of the many different ways that multiple objects come into play in a wine production process.

Figure 3: Multiplicity of Wine Production Objects


 

Another element in the production process is time. The wine production process is a multi-year process, including developing vineyards, developing facilities, aging, and selling vintages. Figure 4 splits the process into 3 fundamental sub-processes, each one taking 1 or more years. Two general approaches to modeling this production process can be termed forward-driven and backward-driven computations. A forward-driven approach starts with a budgeting process and decisions about the current year to project anticipated inventories and available wines for sale. A backward-driven approach starts with sales predictions and operation planning and computes what resources are needed to produce the anticipated wine products. Whitebirch Software can provide both approaches in the same model by using Smart Scenario Technology.

Figure 4: Computational Direction of Wine Production Process