Peter Morris, Founder and Managing Director, MCSPRO
Posted 12/7/2023
Introduction to Zero-Based Budgeting in SAP
Zero-based Budgeting in SAP
Asset Managers are expected to provide an annual budget and periodic cost reporting against that budget. Traditionally creating a budget has been mostly guesswork and is justified by previous year’s budgets with an inflation adjustment. There is no opportunity for improvement, and often senior management will request cost cutting due to economic conditions, making it difficult for the maintenance manager to argue a case for maintaining their budget.
A better approach that supports continuous improvement and enables the maintenance manager to control and justify costs is to create budgets each year from real maintenance activities they expect to perform. This is termed a Zero-Based Budget (ZBB).
In a ZBB methodology There are 4 categories of budget:
Planned Preventative/Predictive Equipment Work including Major Component Repairs/Replacements
Corrective Work
Department/Facility Fixed Cost
Capital Replacements/Projects
When setting up a budget, all the data can (and should) be contained in your ERP system so it can be compared to actual spend for ease of cost reporting.
Planned Preventative/Predictive Equipment Work
To use this effectively requires well-constructed work order templates (task lists in SAP) with BOMs attached and accurate estimates of labor requirements. The budget is created by understanding the intervals each task is performed with a utilization factor. For example, if a task is performed every 250 operating hours and the equipment utilization is 75%, the task is performed every 333 actual hours (approximately every 14 days or 26 times a year). If the cost of performing this task is $1,000 in parts and $500 in labor, the annual budget for this task is $1,500 X 26 = $39,000. Suppression of tasks should be allowed for, e.g., when a 250-hour task is suppressed by a 500-hour task.
By accumulating all the scheduled maintenance tasks by equipment, an accurate equipment-based preventative/predictive budget can be created. As part of the work management process, the planners should be reviewing actual average spend in both labor and materials for each task list and adjusting the task list estimates to ensure accuracy going forward. It is understood that when initiating a process for zero-based budgeting in SAP the information in the ERP will not be accurate and the work order templates will need to be built with proper estimates. There should be additional fields used on each task list to allow for an estimated cost for both labor and materials that will be overridden once accurate information can be obtained.
Major component changeouts/replacements are treated exactly the same way. Task Lists are set up for the jobs and are scheduled based on expected life. If the component fails early, the maintenance schedule should be triggered to perform the work. By doing this, the component life counters are reset to zero so the life of the new component is accurately tracked.
To support continuous improvement, the following report/dashboard should be provided to enable monitoring of progress in building the equipment budget:
Accuracy between predicted and actual spend. This should be a trend report so progress can be tracked from year to year.
Task lists using estimated parts/labor costs instead of predicted parts/labor costs. This should also be a trend report so progress can be tracked from year to year.
Corrective Work Budget
Corrective work cannot be avoided. As a general rule, best in class operations perform about 20% corrective work.
It is important to ensure that work orders are written for every corrective task and coded correctly. Best practice is to build a library of task lists for corrective work then search the library to use them as a template when creating the work order. As part of the closeout of work orders in the work management process, the maintenance planners should create task lists from the work orders if they don’t currently exist so they can be used the next time. This is also an opportunity to update any inaccurate information. By doing this, the planner’s job becomes easier as they only need to plan work never performed before. All previously performed work is now pre-planned and only requires confirming data is accurate before it is released for scheduling.
When building a corrective work budget, the previous year’s corrective work is reviewed and sorted by various criteria such as equipment, component, and failure type. The actual cost of labor and parts is then used as the basis for the next year’s corrective work budget. An analysis should be performed to look for high occurrence and/or high cost (production loss and maintenance cost) to determine where engineering resources should be applied to reduce the occurrence and cost of the worst corrective tasks by adding preventive/predictive tasks and/or designing out failures.
To support continuous improvement, the following report/dashboard should be provided to enable monitoring of progress in building the corrective work budget:
% spend of corrective vs preventative/predictive work. This should be a trend report so progress can be seen from year to year.
Pareto view of highest cost and/or occurrence items.
Department/Facility Fixed Cost
Every department within a company has fixed costs that are required to run their department. They include such costs as Staff Salaries, Utilities, Maintenance Equipment Costs, Office Supplies, etc. These costs should not be assigned to production equipment in an attempt to make them less obvious. Only by identifying each cost can they be justified and monitored. It is possible to accumulate these costs by work order, however they are often just assigned directly to a cost center and reported against budget as fixed costs.
Capital Replacements/Projects
As part of any continuous improvement program there will be a requirement to perform special projects, such as identifying an engineering project to improve a process or reduce the cost of corrective maintenance identified in the corrective work performed previously. These items should be planned and budgeted for within a project. You can use a project scheduling system such as SAP PS to create a project with multiple work orders and then capitalize the work. In addition, any major equipment purchases projected into the future can also be set up as task lists and maintenance schedules to trigger when it is expected they need to be purchased. An example would be when a vehicle is expected to reach end of life and needs to be replaced.
Once budgets are established, they then need to be coded into SAP so costs can be tracked against budgets. MCSPRO has a methodology for creating a system for zero-based budgeting in SAP that requires no 3rd party software.
Peter Morris
Peter Morris is founder and managing director of MCSPRO a practice that focuses on SAP PM and MM as well as developing software solutions that increase productivity for maintenance practitioners.
The key to realizing greater savings from more informed management decisions is to predetermine the "True" cost of downtime for each profit center category. True downtime cost is a methodology of analyzing all cost factors associated with downtime, and using this information for cost justification and day to day management decisions. Most likely, this data is already being collected in your facility, and need only be consolidated and organized according to the true downtime cost guidelines.
The key to realizing greater savings from more informed management decisions is to predetermine the "True" cost of downtime for each profit center category. True downtime cost is a methodology of analyzing all cost factors associated with downtime, and using this information for cost justification and day to day management decisions. Most likely, this data is already being collected in your facility, and need only be consolidated and organized according to the true downtime cost guidelines.
The cost of maintaining the status quo is enormous. The status quo affects each and every one of us every hour of every day, at work and at home. We have come to accept doing nothing as a safe and acceptable alternative. We even make it the default solution. Doing nothing is the management equivalent of a baby’s soother. It makes us feel safe and comfortable. But there is a cost to doing nothing.
The cost of maintaining the status quo is enormous. The status quo affects each and every one of us every hour of every day, at work and at home. We have come to accept doing nothing as a safe and acceptable alternative. We even make it the default solution. Doing nothing is the management equivalent of a baby’s soother. It makes us feel safe and comfortable. But there is a cost to doing nothing.
In May 1995, a company we will call ACME North America to protect its identity, began a focused effort to improve manufacturing performance at one of its major production facilities. Particular attention was given to improving plant reliability and its potential impact on increased uptime and lower maintenance costs.
In May 1995, a company we will call ACME North America to protect its identity, began a focused effort to improve manufacturing performance at one of its major production facilities. Particular attention was given to improving plant reliability and its potential impact on increased uptime and lower maintenance costs.
With today's limited internal resources, it's tough to transform machine maintenance from reactionary to preventive, and ultimately proactive, despite the obvious upsides in higher overall equipment efficiency (OEE), better process control and lower total cost. Outsourcing this requirement to a third-party specialist, however, is a cost-effective alternative, according to companies that have crunched the numbers.
With today's limited internal resources, it's tough to transform machine maintenance from reactionary to preventive, and ultimately proactive, despite the obvious upsides in higher overall equipment efficiency (OEE), better process control and lower total cost. Outsourcing this requirement to a third-party specialist, however, is a cost-effective alternative, according to companies that have crunched the numbers.
Results-oriented organizations focus first on the quality and volume of production throughput, followed closely by the cost to produce the required quality and volume. This approach will improve reliability performance, which will drive manufacturing costs down.
Results-oriented organizations focus first on the quality and volume of production throughput, followed closely by the cost to produce the required quality and volume. This approach will improve reliability performance, which will drive manufacturing costs down.
The current economic climate dictates that cost management is a critical activity for many companies and their managers. Maintenance is very often seen as an area where cost cutting targets can be easily and quickly achieved. Many maintenance managers take the view that this type of philosophy always ends up with increased costs in the future. This is not true in many cases. 15 years of analysis and review of maintenance programs by the author shows that most maintenance departments are more reactive than they should be and because of this, they over spend and underperform.
The current economic climate dictates that cost management is a critical activity for many companies and their managers. Maintenance is very often seen as an area where cost cutting targets can be easily and quickly achieved. Many maintenance managers take the view that this type of philosophy always ends up with increased costs in the future. This is not true in many cases. 15 years of analysis and review of maintenance programs by the author shows that most maintenance departments are more reactive than they should be and because of this, they over spend and underperform.
In most businesses, success is easily measured by looking at the bottom line; but what’s the bottom line in the maintenance business? To better understand how to evaluate maintenance business performance, it’s helpful to examine how businesses generate profits. Quite simply, businesses generate profits by providing goods and/or services at minimum cost and sold at a fair market price. Obviously, revenues generated from sales must exceed the costs. It is important to note that the customer determines the fair market price.
In most businesses, success is easily measured by looking at the bottom line; but what’s the bottom line in the maintenance business? To better understand how to evaluate maintenance business performance, it’s helpful to examine how businesses generate profits. Quite simply, businesses generate profits by providing goods and/or services at minimum cost and sold at a fair market price. Obviously, revenues generated from sales must exceed the costs. It is important to note that the customer determines the fair market price.
Regardless of the nature of the manufacturing process you maintain, the subject of your maintenance budget has doubtless come up in recent days—probably over and over. That's because most organizations still view the maintenance department as a cost center, and when it's difficult to locate the bottom line, senior managers have a tendency to look behind the maintenance budget to find it.
Regardless of the nature of the manufacturing process you maintain, the subject of your maintenance budget has doubtless come up in recent days—probably over and over. That's because most organizations still view the maintenance department as a cost center, and when it's difficult to locate the bottom line, senior managers have a tendency to look behind the maintenance budget to find it.
CMMS systems, as we have come to know them, come basically from two distinct families. These are ERP systems such as SAP, JDE and the PRONTO system and EAM systems such as Epac, MIMS and a plethora of other systems. When most maintenance practitioners refer to CMMS systems they are in reality talking about EAM systems.
CMMS systems, as we have come to know them, come basically from two distinct families. These are ERP systems such as SAP, JDE and the PRONTO system and EAM systems such as Epac, MIMS and a plethora of other systems. When most maintenance practitioners refer to CMMS systems they are in reality talking about EAM systems.
The cost per kWhr, the "cost of producing electricity", is the cost of the energy which is taken out of the steam by the turbine generator system and converted into electricity. The following paper discusses calculation methods for determining this cost -- a critical step in the process of evaluating cogeneration feasibility.
The cost per kWhr, the "cost of producing electricity", is the cost of the energy which is taken out of the steam by the turbine generator system and converted into electricity. The following paper discusses calculation methods for determining this cost -- a critical step in the process of evaluating cogeneration feasibility.
Planned maintenance is a maintenance concept developed over a span of time, and is made up of numerous functions, all designed to compliment each other. Planned maintenance, then, is a maintenance program designed to improve the effectiveness of maintenance through the use of systematic methods and plans. The primary objective of the maintenance effort is to keep equipment functioning in a safe and efficient manner. This allows production to meet production targets with minimum operating cost.
Planned maintenance is a maintenance concept developed over a span of time, and is made up of numerous functions, all designed to compliment each other. Planned maintenance, then, is a maintenance program designed to improve the effectiveness of maintenance through the use of systematic methods and plans. The primary objective of the maintenance effort is to keep equipment functioning in a safe and efficient manner. This allows production to meet production targets with minimum operating cost.
