Zero-Based Budgeting in SAP
Peter Morris, Founder and Managing Director, MCSPRO
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.
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.