How to restrain margin decreases with SAP PS Claim Management
The key challenges project managers in the machinery and equipment industry face
In order to ensure a smooth and successful project conclusion, project managers need to face multiple and diverse challenges, arising during each project phase up to and even after the project closure. These include among other things, activities, such as planning and defining the project scope, planning the activities and resources, defining a timeline, performing risk analyses, etc.
A different, yet important project management responsibility is managing the project budget. In some cases, the project manager is responsible for defining the budget, while in other cases, the project manager gets handed over a cost estimate from the sales department that may be updated during the project execution phase. This might for example be the case when a customer has officially placed an order. The offer phase will then be closed and the previously created cost estimate will be handed over from the sales department to the project management. However, in both cases it is the responsibility of the project manager to keep control over the project budget to ensure a profitable outcome.
Especially in the project-based machinery and equipment industry, controlling the budget implies to tackle falling profit margins and therefore to keep Non-Conformance Costs under control as well. But what exactly are these Non-Conformance Costs and why is it so important to keep them under control? Can’t you just eliminate them? You will find out the answers to these questions in the next paragraphs of my blog post.
Click here to download our E-Book and learn how to keep your Non-Conformance Costs under control and improve your profit margins.
How Non-Conformance Costs decrease your profit margins
We at PIKON define Non-Conformance Costs as every deviation of the incurred project costs compared to the preliminary cost estimate of the project. Creating a detailed and well-founded cost estimate can be a hard job in project-based businesses, especially in the machinery and equipment industry. In this industry, it is common practice that customer projects are highly complex, have a very low degree of standardization, have a long duration and on top of that are ultimately invoiced at a fixed price that was agreed upon at an early stage. Therefore, it is important to calculate the cost estimate, on which the fixed price is based, as accurate as possible. If not, Non-Conformance Costs will arise during different project stages and will unavoidably erode your profit margins.
Typical customer project aspects, such as the high complexity and the very low degree of standardization make Non-Conformance Costs unavoidable in the machinery and equipment industry. It is therefore unrealistic targeting them to eliminate completely. More important is to keep NCC’s and the profit margin decrease under control. In his blog post “How to prevent profit margins slipping through your fingers” my colleague, Tommy Beckers, explains the consequences and risks of profit margin erosion and how to keep this under control.
Click here to watch our webinar recording “Getting to grips with Non-Conformance Costs” and learn how to keep these costs under control and improve your profit margins.
Why you should learn lessons from past project successes and mistakes.
Although it is unrealistic to eliminate Non-Conformance Costs completely in project-based businesses, this does not mean that project managers just need to hope for the best during a customer project. Instead, they should take the measures as explained in our E-Book and as you can learn in our webinar recording to keep decreasing profit margins under control. These include among others creating a detailed cost deviation analysis and adopting a structured lessons-learned strategy. As often, taking measures is not enough, it is also important to follow up and adjust them where needed. For the SAP users among you, we have good news: based on my experiences, SAP PS Claim Management as part of the SAP PS (Project System) module is an excellent tool for analysing cost deviations and following up your measures against falling profit margins.
SAP PS Claim Management does more than submitting claims!
In my opinion, the tool name of SAP PS Claim Management is very misleading because it only covers a restricted part of its features. As such, SAP PS Claim Management has different goals and is the perfect tool to support you with documenting deviations, occurring during and after the project life cycle and leading to Non-Conformance Costs. But as its name already suggests, you can also use this tool for preparing a real claim to external parties that are responsible for occurred Non-Conformance Costs, but also from external parties.
I emphasise on explaining the different goals of this tool because I already experienced future users stumbling multiple times over the naming of SAP PS Claim Management during the implementation of this tool at one of my customers. Quite often, they assumed the features of SAP PS Claim Management being too narrow to cover their goals and needed extra explanations and demonstrations before being convinced of all possibilities.
Because I believe the naming of the tool does not credit all of its features, it is an important note to be made: the goal of SAP PS Claim Management includes more than the preparation of claims to other parties only.
How SAP PS Claim Management works
If we take a deeper look in how to work with the tool, it becomes clearer and easier to understand why we at PIKON believe that SAP PS Claim management is a perfect tool that assists in keeping Non-Conformance Costs under control. I like to divide the general approach in the system into 3 steps: entering, processing and evaluating.
Step 1: Entering a deviation
In a first phase, the person who gets notified of the deviation in a project enters all the received information in the system in the form of a SAP PS claim. In my latest project, we called this person the “Entry Person”. While entering, he classifies the project deviation according to the following possible criteria:
- Root causes
- Defect locations
In addition, it is also possible to add information in text format or by attaching files to the project deviation. Next to keeping track of who entered the information in the tool, in this phase it is also needed to assign persons that are responsible for the further processing of the SAP PS claim.
Step 2: Processing the deviation
By means of workflow notifications, the system notifies the processors automatically, so they can take the next steps to process the deviation. At this stage, the existing deviation data can be extended with the following information:
- Expected costs
- Possible negotiated and accepted claim values to or from external parties
- Create tasks/activities for taking measures to evaluate and solve the problem
Step 3: Evaluation
In order to adopt a strategy, based on lessons-learned from past projects, it is important to use all the valuable information, recorded in the system and draw lessons both from successes and mistakes. In practice, successful projects are often not discussed and analysed. This is unfortunate because often very valuable information can be extracted from successes and provides input for measures to be applied in other projects.
With standard SAP reports, SAP PS Claim Management offers various analytics features, for example on costs, on root causes, etc.
Why you should implement SAP PS Claim Management
In the system approach explained above, it became clear that SAP PS Claim Management provides many project controlling advantages. As such, you can analyse and derive insights into past projects in order to draw lessons and to take measures, based on past successes and mistakes. From my experiences, this tool has already helped many organisations to keep Non-Conformance Costs under control and therefore has a high Return On Investment (ROI). I believe the main advantages of SAP PS Claim Management are:
- Structured communication infrastructure
SAP PS Claim Management improves the communication on the occurred project deviations and makes this process well-structured. As such, all information is available for all involved parties and through system workflows, the responsible persons are automatically notified if required. Furthermore, all tasks and activities to be executed for processing the deviations are listed in a structured and clear way.
- Interesting insights and a clear overview at all time
The system reports provide very interesting insights into all available information and offer a clear overview of the deviations that occurred in a project. As such, these reports are used to analyse a project in detail or to discover possible trends over different projects, based on root causes analyses, costs analyses, etc.
- Integration of costs
With SAP PS Claim Management, you can automatically transfer the extra planned costs of an incurred deviation to the project cost planning.
As you may know, SAP also has SAP Commercial Project Management with its Project Issue and Change Management component in its product portfolio as an alternative for SAP PS Claim Management. Please fill out our contact form to get more information on this.