Bluefield Round Table: Zero-Based Budgeting - Waste of Time or Greatest Thing Since Sliced Bread?

One of the most common areas that Bluefield is asked to assist clients with is in preparing budgets. Whether a site is looking to reduce/optimise their costs, or simply prevent the month-to-month sawtooth in budget compliance, a quality maintenance budget is one of the most important aspects of the asset management planning process.

But…. what’s the best way to prepare a budget? Do you need to go back to first principles, the so-called “Zero-Based Budget”? There are a surprising number of views on this topic, including within Bluefield, so we asked our team the following question:

Zero-Based Budgeting: is it a complete waste of time, effort and money, or is it a valuable tool to help managers get control of their business?  Or.... is it somewhere in between?  Why do you think that, and are there tricks to make the exercise more valuable?

Wade Konotopsky

I would say zero based budgeting is a good thing for new fleets, or prospective fleets and strategy development, but after a mine has been running for a few years, it will basically go out the window... premature failures, condition / risk / financial based decisions to deviate from the strategy and push components basically makes the initial zero-based budget void.

Zero-based is the ideal scenario, but in real operation, it is time consuming. I think it is more practical to use the 'present state' of the equipment, history, and current pricing for year-on-year budgets.

Watch Wade’s introductory video, where he describes his approach to creating value for clients, here.

Gerard Wood

ZBB is a bit like LCC model development. The usefulness/benefit of ZBB is not defined by the numbers themselves but by the clarity around the assumptions that the process can bring, the ability to get broad alignment by agreeing on the assumptions, and the ability to continually improve it over time.

Like any budgeting process though… they do not show the losses and waste. You have to go out and see these in order to improve and control the costs in a sustainable manner. Any site that really understands what drives their costs also understand where the waste is generated and if these are controlled then either budgeting system will work for the business to achieve its outcomes. 

 

Stefan Van Der Linde

ZBB can be a very long and arduous process once equipment has been running for some time as it assumes the data you're using is clean and accurate. This is often where it falls over; in order to perform this task, task list costings need to be accurate, which includes material master data cost projections, labour rates, and hours on job etc.

It's a great tool if you're willing to put in the effort and discipline.

Read Stefan’s article on project readiness here.

Tom Houston

As others have said, ZBB can be complex and take some time to set up initially, and will not be 100% accurate because of parts price changes etc. But the real value is understanding all the work you are planning to do based on task lists, projects, and allowances for corrective and breakdown work.

How can a decision be made on cutting costs in hard times, or pushing out major work in good times if we don't know what to cut or push? If we have all the work laid out for each asset, we can present a case based on risks for key assets, and let senior leaders make decisions on what we have presented.

Don't forget, ZBB is not a full labour / component-based budget, it will have at least 20% allowances and needs to have those unless you know a person with a crystal ball!!

Watch Tom’s introductory video here.