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Hot Topic: Zero-based budgeting in the supply chain
The latest issue of the Council of Supply Chain Management Professionals' (CSCMP's) Hot Topics publication takes an in-depth look at zero-based budgeting (ZBB) for supply chain information technology (IT). According to Hot Topics author Nathaniel D. Lewis, ZBB is a decision-making approach requiring every line item of the budget to be approved. The ZBB method, he writes in "Zero-Based Budgeting for Supply Chain Information Technology: Creating a Highly Efficient IT Budget Aligned With Business Goals," opens with no assumptions about what level of funding it will take to run and grow the business for the next 12 months.
Traditionally, budgeting takes more of an accounting approach that merely adds funds on the prior year's budget for undetermined uses. The supply chain IT group is then left to rank both business and internal needs against the allotted funds. The traditional approach requires justification only for variances versus results from the preceding year because it assumes that a "business-as-usual" budget is automatically approved.
With the ZBB method, however, the budgeting process is entirely independent of whether the budget or specific line items are increasing or decreasing. Adopting a ZBB approach for your supply chain may seem like a daunting task, but when weighed against the strategic value of having supply chain IT fully integrated with business objectives, the effort is justified, says Lewis, who is a principal at the business and technology consulting firm Liberty Advisor Group.
Lewis lays out the following advantages to zero-based budgeting:
- It drives managers to identify and find alternative means to success. ZBB forces the organization to develop alternative ways to perform each activity, which can help managers find cost-effective ways to improve operations.
- It removes budget waste. Because ZBB ties expenditures to activities, it makes an artificially inflated budget easy to spot.
- It increases business communication. ZBB should start a debate among the business and management teams about the mission of the supply chain and how that mission can be achieved.
- It eliminates nonessential activities. ZBB identifies and eliminates wasteful infrastructure, applications, and suppliers.
- It improves resource allocation. Because it is based on needs and benefits rather than past budget cycles, ZBB makes allocation of resources more efficient.
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