Achieve Budgetary Control of Unplanned Service Procurement and Projects Using Value Limit Strategies

  • by Patrick Imhen, Business Analyst and Senior SAP MM/SD/PM Functional Consultant, ZOCODE Limited
  • October 30, 2017
Learn how to use different value limit strategies to control spending on unplanned service procurement and budgetary allocation for projects.
Learning Objectives

By reading this article, you will learn:

  • How value limit can be used to control overspending on unplanned service procurement
  • About the unplanned service procurement ordering process
  • Step-by-step application of a value limit in unplanned service procurement
Key Concept
Value limit is a functionality within purchase requisition and purchase order (PO) documents that can be applied to set a benchmark value for a project or service procurement if the cost and possibly the service are not known at the initial stage of ordering the service (unplanned service).

Recently, I was on an implementation project that included a client requirement to properly manage the cost of its unplanned services and projects as well as unforeseen expenses during service delivery. The company wanted to use the SAP system to reduce wasteful spending and enforce vendor compliance to designated unplanned services in existing contracts. I share the several control strategies I used with value limit in the purchase order (PO) to realize the client’s requirement in the SAP system.

Unplanned services are services for which the cost or service specifications are unknown at the time they are ordered. The cost or other specifications are only known after the service or services are completed. For example, the cost of electrical repair service may not be known until the cause of the electrical issue, the estimated damage, and the required repairs are determined.

Note
The ordering of the planned and an unplanned service can be done in the same PO. In this case, while there are full specifications of the planned service, the value limit is used to set a budget for the unplanned service or services. This step allows the planned service to be performed in addition to other unspecified services, but with a cost limit.

How a Value Limit Can Be Used to Control Overspending on Unplanned Service Procurement

Unplanned service procurement can be for a project such as outsourcing when the cost of procuring services cannot be quantified at the stage of ordering. At times the specification, cost, and duration cannot be ascertained during the creation of the PO until the service is delivered. Unforeseen services may be delivered during the execution of a project. In these scenarios, vendors sometime bring inflated invoices; they may include services that were not relevant. It’s even possible for vendors to connive with staff to inflate the invoice for unplanned services. In the SAP system, with the value limit functionality, all these challenges can be properly managed.

Value limit provides a feature in the service purchase requisition and PO that can be used to stipulate the amount up to which a project can consume unplanned or unexpected services.

Business Scenario

A company’s factory electrical power supply is faulty and has blown up some of the electrical gadgets installed in the factory. A vendor that provides electrical engineering services is selected to fix the problem. The vendor will diagnose what caused the electrical problem and fix it, then check for the gadgets that have been affected and fix them. This project may also require the replacement of some parts. To raise a service PO for this service, the buyer may not be able to ascertain the number of days, the level of work, or the electrical parts that may need to be replaced and so would not be able quote a specific price for the service. In this case, the service is treated as an unplanned service.

To ensure that the cost of such service is managed properly, the purchasing department based on its estimation would set a value limit in the service PO. For example, the value limit for the electrical service could be $3,500. This indicates that if the vendor brings a cost higher than $3,500, the user or process owner will not be able to accept the job. It cannot be processed for invoice verification and eventual payment unless the buyer adjusts the limit, which can only be done after a proper probe of the service rendered. On the other hand, if the company’s policy is not to adjust the value limit, then a vendor is compelled to work within the value limit or budget.

With this control measure wastage is prevented and the cost is reduced.

In the above scenario, the buyer from the purchasing department can set a price limit beyond which the cost of the electrical service must not go, using the value limit functionality in the SAP system.

In another case, an organization requires a vendor for a cleanup service and wants to specify the scope of the cleanup to avoid the vendor taking the cleanup beyond what is required even though the cost of service cannot be planned (unplanned service). To achieve this with the SAP system, a contract is used with the combination of a value limit to ensure that the vendor complies with the specified contract item of the unplanned service in the PO.

From the above scenarios, you can see that the cost of unplanned services can be managed using a value limit and contract by preventing wastage and overspending.

Patrick Imhen

Patrick Imhen is a business analyst and a certified SAP ERP consultant with proficient knowledge, skills, and experience in Materials Management (MM), Sales and Distribution (SD) and Plant Maintenance (PM) gathered from successful SAP implementations projects, support, training, business process analysis, modeling, unit testing, and integration testing. He has profound understanding of the supply chain process across industries and helps organizations cut the cost of operation and improve process optimization. He has more than 10 years’ experience in the business environment and six years’ experience in the SAP domain.

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