compatible units/operational level costing

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Orange County Convention CenterOrlando, Florida | May 15-18, 2011

Compatible Units/Operational Level Costing –

Reaping The Benefits

Greg Harby–WM/FI/CO Business Analyst

Session 3302

Real Experience. Real Advantage.

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Introduction

� Greg Harby� SAP FI/CO/FERC Business Analyst/Configurer – IT

• Since original SAP implementation – 2000� FI/CO Team Member/Leader – Initial Implementation & Upgrades� Change Management Lead – CU/OLC Project�NWE employee for 28 years

� [email protected]

� This Presentation� Third on CU/OLC presented by NWE

�2009 - Compatible Units and Operational Level Costing –The NWE Approach

�2010 - Compatible Units/Operational Level Costing – The NWE Experience

� I can provide you with these upon request


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Learning Points

� BEWARE THE DATA DEMON

� DON’T SETTLE – MAKE OLC WORK THE WAY YOU WANT IT TO

� ESTABLISH & ENFORCE ACCOUNTABILITY


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Talking Points:

�NWE Background

� Project Overview

�Capturing the Data?

�Using what we’ve captured?


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About NorthWestern Energy (NWE)

• Corp. Headquarters – Sioux Falls, SD

• IT operations located primarily in Butte, MT

• Regional Electric & Gas Dist. & Trans. Utility

• 400K electric & 250K natural gas customers in Montana, S. Dakota, Nebraska

• Montana operations previously know as The Montana Power Co. (MPC) until purchase by NorthWestern Corp. (NWE) in 2002.

• MPC HQ has been in Butte since 1912.

• Approx. 1,380 employees


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NorthWestern Energy (NWE) Service Area


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SAP at NWE

� MPC live on 4.5b in May 2000

� NWE – SD/Neb operations live June 2002

� Upgrade to 4.6c in Nov 2002

� Upgrade to ECC 5.0 Oct 2006

� Upgrade to ECC 6.0 – SP12 EP2 June 2008

� CU/OLC Go-Live Feb. 19 2009

� Currently at APPL level 60206

� FI, HR, MM, Assets, PM, CS/SD, PS, WM, BW, CU/OLC, CLM


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The CU/OLC Project

Common Terms/Abbreviations

“SAP’eze”“SAP’eze”“SAP’eze”“SAP’eze”

�� OLCOLC = Operation Level Costing= Operation Level Costing

•• AS OF EHP5 SAP CALLS THIS OPERATION AS OF EHP5 SAP CALLS THIS OPERATION ACCOUNT ASSIGNMENT (OAA)ACCOUNT ASSIGNMENT (OAA)

�� OP ACTOP ACT = Operation Activity= Operation Activity

�� CUCU = Compatible Unit= Compatible Unit

�� LDProLDPro = Electric & Gas distribution line design software tool= Electric & Gas distribution line design software tool


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What is CU/OLC?• SAP tool that delivers:

�Compatible Units (CU)

� A Compatible Unit (CU) - a defined combination of material(s) and associated labor hours to install or remove those materials

�Operation Level Costing (OLC)

� Used in conjunction with Compatible Units

But use of CU’s is not required

� Available with ECC 6.0 EP2

� Delivers estimated, planned & actual project costs in terms of defined activities (Operation Activities)

� Lower level of detail than order

� Includes Statistics & Settlement Rules at Oper Act level

� Allows Electric & Gas work on single order


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Why Did We Need CU/OLC?

� Need to capture more detailed construction data to:

� Provide more accurate customer estimates

� Evaluate customer collections for construction

� Manage costs at appropriate levels across large geographic area

� Provide comparative construction data for industry benchmarking

� Request tariff adjustments from PSC


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CU/OLC Project Objectives� E & G Distribution Construction activities only

�Create interface between LDPRO and SAP

� To maintain consistency between the systems

�Materials Quantities; Labor Hours

�Standards changes occur in SAP - automatic update of LDPro

� Create CU’s sufficient to cover all line & service designs

� Combine common-use materials where possible

� Develop operational level activities

�Build reports for effective management of activities

�Implement with minimal changes to current process

� KEEP # OF ACTIVITIES AT WORKABLE & USEFUL LEVEL


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Cross arm

Conductor

Transformer

Guy WirePole

What are Compatible Units?Example – Primary OH 3 Phase + Transformers

CU’s would be:

• CPOL-045-1-WRC = POLE, WRC, CL 1, 45 FT, BUTT TRTD

• COARM-T-09S-38B = XARM, TAN,SGL,9FTX3.75 X 4.75, 38IN BRC

• COCND-BR-1/0AS = COND, 1/0ACSR BARE (RAVEN)

• COGUY-WIR-10M = WIRE, GUY, 10M (50 FEET)

• COXF-1P-4604310 = 1PH 25kVA 7200/12470Y 120/240 NO TAPS

• + Each set of hardware and all other asst. parts for the above CU’s would be a separate CU’s

• EACH CU CONFIGURATION INCLUDES THE LABOR TO INSTALL EACH PART PLUS ALL MATERIALS REQUIRED


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Operation Activities

�� Need reporting at higher level than Need reporting at higher level than individual CU’s (for NWE application)individual CU’s (for NWE application)

�� Each Operation Activity will include:Each Operation Activity will include:�� RollRoll--up of all applicable CU’s based on designup of all applicable CU’s based on design

�� All Labor, Materials, Contractor Costs, Fleet & OH All Labor, Materials, Contractor Costs, Fleet & OH Loading, Customer Payments, etc. recorded at this levelLoading, Customer Payments, etc. recorded at this level

�� Materials RequisitionsMaterials Requisitions

�� Overhead Costing SheetsOverhead Costing Sheets

�� Includes Statistics (Plant Additions) and PRU’s (Property Includes Statistics (Plant Additions) and PRU’s (Property Retirement Units)Retirement Units)

�� Settlement RulesSettlement Rules

�� Can have several Op Acts on one Can have several Op Acts on one order order


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Capturing The Data – HOW?

�� Order TypeOrder Type

�� Order NumberOrder Number

�� Budget CategoryBudget Category

�� Operation ActivityOperation Activity


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Capturing The Data – The Orders?

�� Order TypeOrder Type

��Created unique order type for OLC ordersCreated unique order type for OLC orders

��CU20CU20

•• Can be used for combined Electric & GasCan be used for combined Electric & Gas

•• Used ED20 (Electric) an GD20 (Gas) previouslyUsed ED20 (Electric) an GD20 (Gas) previously

�� Order NumberOrder Number

��Created unique order numbers for OLC ordersCreated unique order numbers for OLC orders

��24xxxxxx24xxxxxx•• Used 23xxxxxx for ED/GD20 ordersUsed 23xxxxxx for ED/GD20 orders


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�� Order Header Order Header ((GuiXtGuiXt customized screen)customized screen)

Capturing The Data – The Orders? (cont.)


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• Broad classifications of budgeted capital dollars

• Defined by Priority number input by user on the notification

• One Budget Category per OLC Order

• These will be the highest level of reporting by Operation Activities

Budget Category Priority

Damages 0

Substation 1

Reactive 2

DOT GOV Relocate 3

Growth 4

Customer Requested Relocate 5

Townsend Propane Growth 6

SI Proactive 7

Capacity 8

Proactive Blanket 9

DSIP (Dist.System Infrastructure Proj.) I

Capturing The Data – Budget Category?


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Capturing The Data – Operation Activity?

�� OperOper Act is a 4Act is a 4--digit # added to our 8digit # added to our 8--digit digit order #order #

�� Provide for unit cost reporting and analysisProvide for unit cost reporting and analysis��Cost per footCost per foot

��Overhead 3 Phase Primary InstallOverhead 3 Phase Primary Install��Underground Single Phase Primary InstallUnderground Single Phase Primary Install��2” Gas Main Install2” Gas Main Install

��Cost per unitCost per unit��Transformer InstalledTransformer Installed��Electric Overhead ServiceElectric Overhead Service��Gas Service from MainGas Service from Main

•• Directive to keep number of activities at Directive to keep number of activities at manageable and useful numbermanageable and useful number

�� Critical to expectation of capturing Critical to expectation of capturing actualactual labor hours from crews labor hours from crews and coding of Contractor invoicesand coding of Contractor invoices

�� Ended up with 52 Operation ActivitiesEnded up with 52 Operation Activities


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Capturing The Data – Operation Activity? (cont.)

O P E R # D E S C R IP T IO N

E L E C T R IC A D D IT IO N S

1 0 0 0 P r im a ry U G S in g le P h a s e1 0 1 0 P r im a ry U G 2 P h a s e

1 0 2 0 P r im a ry U G 3 P h a s e

1 0 3 0 U G C a b le R e p l S in g le P h a s e1 0 4 0 U G C a b le R e p l 2 P h a s e1 0 5 0 U G C a b le R e p l 3 P h a s e1 1 0 0 P r im a ry O H S in g le P h a s e1 1 1 0 P r im a ry O H 2 P h a s e1 1 2 0 P r im a ry O H 3 P h a s e1 1 3 0 P o le R e p la c e m e n t - In s ta ll1 1 4 0 T ra n s fo rm e r S in g le P h a s e O H1 1 5 0 T ra n s fo rm e r M u lt i P h a s e O H1 1 6 0 T ra n s fo rm e r S in g le P h a s e U G1 1 7 0 T ra n s fo rm e r M u lt i P h a s e U G

1 2 0 0 S e c o n d a ry - O H & U G

1 3 0 0 E le c t S v c - O H R e s1 3 1 0 E le c t S v c - O H C o m m e rc ia l1 3 2 0 E le c t S v c - U G fro m O H R e s1 3 3 0 E le c t S v c - U G fro m S tu b R e s1 3 4 0 E le c t S v c - U G fro m X fm r R e s1 3 5 0 E le c t S v c - U G fro m O H C o m1 3 6 0 E le c t S v c - U G fro m S tu b C o m1 3 7 0 E le c t S v c - U G fro m X fm r C o m1 4 0 0 L ig h t in g - S tre e t L ig h t1 4 1 0 L ig h t in g - Y a rd /A re a1 4 2 0 L ig h t in g - P o s t T o p /D e c o ra t iv e1 5 0 0 S u b s ta tio n

O P E R # D E S C R IP T IO N

E L E C T R IC R E M O V A L /R E T IR E M E N T

1 9 0 0 U G P rim a ry R e m o v a l1 9 1 0 O H P rim a ry R e m o v a l

1 9 2 0 P o le R e p la c e m e n t - R e m o v a l

1 9 3 0 U G E le c tr ic S e rv ic e R e m o v a l1 9 4 0 O H E le c tr ic S e rv ic e R e m o v a l1 9 5 0 L ig h tin g R e m o v a l1 9 6 0 S u b s ta tio n R e m o v a l

G A S A D D IT IO N S

2 0 0 0 G a s L e s s th a n 2 - In c h M a in2 0 1 0 G a s 2 - In c h M a in2 0 2 0 G a s 3 - In c h M a in2 0 3 0 G a s 4 - In c h M a in2 0 4 0 G a s 6 - In c h M a in

2 0 5 0 G a s 8 - In c h M a in

2 0 6 0 G a s L a rg e r th a n 8 - In c h M a in2 3 1 0 G a s S v c R e s - f ro m S tu b2 3 2 0 G a s S v c R e s l - f ro m M a in2 3 3 0 G a s S v c C o m - f ro m S tu b2 3 4 0 G a s S v c C o m - f ro m M a in2 4 1 0 G a s R e g u la to r S ta tio n s

G A S R E M O V A L /R E T IR E M E N T

2 91 0 G a s S e rv ic e R e m o va l2 92 0 G a s M a in R e m o va l

O T H E R4 0 0 0 E L P e r m its /E a s e m e n ts /O th e r4 0 1 0 N G P e r m its /E a s e m e n ts /O th e r4 4 0 0 E le c t E n g in e e r L a b o r G o v R e lo c4 4 1 0 G a s E n g in e e r L a b o r G o v R e lo c


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Capturing The Data – Operation Activity? (cont.)

OLC Order Example


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Bundling Program for Order Creation

�Upon Creation of Order from Notification:

�CU’s are bundled based on Operation Activity identified in the design

• Based on Custom CU’s (SpanLength; TrenchLength) and/or planned materials (Poles, Conductor) and user defined fields for each operation

�Settlement rules determined by combination of Location (Sales Office), Budget Category and Operation Activity

�Statistics automatically populated

• Appropriate WBS assigned from custom table

• Labor & Materials for individual CU’s are totaled for each Operation Activity


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Without Bundling Program

� OLC Order created with each CU as Oper Act�31 Individual Operations


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With Bundling Program

� OLC Order created with CU’s rolled up into applicable Oper Act�5 Operation Activities


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What do Operation Activities Give Us?

Project to Install 1000 ft Single Phase UG Primary with padmount transformer and 80 ft UG Service

Before OLC:Project cost = $3,690

After OLC:Project cost = $3,690

�1 PH UG Primary = $2,340 �� 2.34/ft

�Padmount xfmr = $610 �� $610/xfmr

�UG Service = $740


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Capturing The Data – WHAT?

�� Estimated CostsEstimated Costs

�� Stats Stats –– Additions/RetirementsAdditions/Retirements

�� Actual CostsActual Costs

All by Op Act, Order & Budget All by Op Act, Order & Budget All by Op Act, Order & Budget All by Op Act, Order & Budget All by Op Act, Order & Budget All by Op Act, Order & Budget All by Op Act, Order & Budget All by Op Act, Order & Budget CategoryCategoryCategoryCategoryCategoryCategoryCategoryCategory


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�� Estimated Material Cost = Est. Qty. X Prices from MMEstimated Material Cost = Est. Qty. X Prices from MM

Capturing The Data – Estimated Costs

�� Estimated Labor Cost = Est. Hours X Std. Act. RateEstimated Labor Cost = Est. Hours X Std. Act. Rate�� For Internal & External For Internal & External –– Based on Activity Rate selectedBased on Activity Rate selected

�� Estimated Hours & Quantities from designEstimated Hours & Quantities from design�� Based on CU’s includedBased on CU’s included

�� Estimated OH Loading = Labor & Mats X Loading Estimated OH Loading = Labor & Mats X Loading RatesRates�� Per OH Costing Sheets assigned to Op ActsPer OH Costing Sheets assigned to Op Acts

Can be revised by Engineer after order Can be revised by Engineer after order Created and before ReleasedCreated and before Released


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Capturing The Data – Actual Costs

�� Internal Labor Internal Labor –– Reg. & OTReg. & OT

Same as any other SAP objectSame as any other SAP object

ALL AT THE OPERATION ACTIVITY LEVELALL AT THE OPERATION ACTIVITY LEVEL

�� External (Contract) Labor External (Contract) Labor –– Based on invoice codingBased on invoice coding

�� Materials Materials –– Issued from stores & direct purchaseIssued from stores & direct purchase

�� Customer Payments Customer Payments –– CIAC’s; Advances; Damages, CIAC’s; Advances; Damages, etc.etc.

�� Loading Loading –– Labor; Fleet; StoresLabor; Fleet; Stores�� Based on OH Costing Sheet on each Based on OH Costing Sheet on each OperOper ActAct

WROTE ABOUT 8,000 OLC ORDERS WITH OVER WROTE ABOUT 8,000 OLC ORDERS WITH OVER WROTE ABOUT 8,000 OLC ORDERS WITH OVER WROTE ABOUT 8,000 OLC ORDERS WITH OVER WROTE ABOUT 8,000 OLC ORDERS WITH OVER WROTE ABOUT 8,000 OLC ORDERS WITH OVER WROTE ABOUT 8,000 OLC ORDERS WITH OVER WROTE ABOUT 8,000 OLC ORDERS WITH OVER 17,000 OPER ACTS IN 201017,000 OPER ACTS IN 201017,000 OPER ACTS IN 201017,000 OPER ACTS IN 201017,000 OPER ACTS IN 201017,000 OPER ACTS IN 201017,000 OPER ACTS IN 201017,000 OPER ACTS IN 2010


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How It Looks

�� Estimated Hours by Op ActEstimated Hours by Op Act

Planned Hrs –Revised by Engineer


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How It Looks

�� Estimated & Actual Costs Estimated & Actual Costs –– Total OrderTotal Order


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How It Looks

�� Estimated & Actual Costs Estimated & Actual Costs –– OperOper ActAct

TOTAL FOR ORDER


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Capturing The Data – Stats

�� # of E & G Services# of E & G Services

�� # of Poles# of Poles

�� Feet of PrimaryFeet of Primary

�� Feet of ConduitFeet of Conduit

�� Feet of MainFeet of Main

�� Property Units Property Units -- Additions & RemovalsAdditions & Removals

AGAIN AGAIN -- ALL AT THE OPERATION ACTIVITY ALL AT THE OPERATION ACTIVITY LEVELLEVEL


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Capturing The Data – Stats

�� Addition Stats ExampleAddition Stats Example


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1. Cost Per Unit Reporting� Primary purpose of OLC

� BW Reports

• Now we have almost 2 years of data accumulated

• Reports have been refined to meet users requirements

� Reports provided directly to users monthly by:

• Budget Category

� Growth, System Integ., Cust Relocates, etc.

• Operation Activity; OLC order

• Current YTD; 12-Month; Prior Yr

• Total System; Division/District

• Overhead vs. Underground

� Based on Closed OLC orders only

How Are We Using The Data


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1. Cost Per Unit Reporting (cont.)

� Used to evaluate :

• Number and average length of E & G services installed by type

• Cost per service by type (PSC filing requests)

• Primary & Main cost per foot

• Number of pole replacements performed and assoc. cost each

• Compare work practices between areas

� Identify large fluctuations in costs/unit

� Identify inconsistent procedures

� Contractor coding

� Labor all charged to single activity

How Are We Using The Data


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Cost Per Unit Example #1 – E & G Tariff Changes

MPSC Approved Tariff Changes:MPSC Approved Tariff Changes:-- Approved MidApproved Mid--December December �� Effective 1/1/2011Effective 1/1/2011

�� Electric ServicesElectric Services

�� No Longer FreeNo Longer Free

•• Previously allowed up to 150’ OH (100’ UG) freePreviously allowed up to 150’ OH (100’ UG) free

•• Plus Plus �� Per foot rate charged above limitsPer foot rate charged above limits

�� Needed to come up with new base price and revised cost/ft over Needed to come up with new base price and revised cost/ft over limits to be charged for each service typelimits to be charged for each service type

�� Gas ServicesGas Services

�� Were allowed to charge before but:Were allowed to charge before but:

�� Still needed to come up with new base price and revised cost/ft Still needed to come up with new base price and revised cost/ft over limits (100’) to be charged for each service typeover limits (100’) to be charged for each service type

AS QUICKLY AS POSSIBLEAS QUICKLY AS POSSIBLE


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Cost Per Unit Report � Summary� Budget Category


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Cost Per Unit Report � Growth � By Operation Activity


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Cost Per Unit Report� Growth � Operation Activity � Division/Dist


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Cost Per Unit Report� Growth � Oper Activity � Div/Dist � OLC Order


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Cost Per Unit Example #1 – E & G Tariff Changes (cont.)

CalculationCalculation�� Ran Report for 12 mos ended 12/31/2010Ran Report for 12 mos ended 12/31/2010

�� Expanded entire report for Growth Expanded entire report for Growth –– All E & G All E & G service Oper Actsservice Oper Acts

�� Separated each service Op Act Separated each service Op Act –– combined all combined all locations (Div/District) for eachlocations (Div/District) for each

�� Wanted single systemWanted single system--wide ave base price for each service wide ave base price for each service typetype

�� Separated service lengths for under or over base Separated service lengths for under or over base price length limitsprice length limits

�� 150’ for OH EL 150’ for OH EL –– 100’ for UG EL & Gas100’ for UG EL & Gas

�� Calculated new ave cost/service for under limitCalculated new ave cost/service for under limit

�� For each service typeFor each service type

�� Calculated new cost/ft for over limitCalculated new cost/ft for over limit


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Cost Per Unit Example #1 – E & G Tariff Changes (cont.)


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Cost Per Unit Example #2 – Pole Replacements

Distribution System Infrastructure Project (DSIP)Distribution System Infrastructure Project (DSIP)

�� Major New Capital & Expense InitiativeMajor New Capital & Expense Initiative

�� New Budget Category (Priority)New Budget Category (Priority)

�� 7 Years 7 Years –– est. $380Mest. $380M

�� Primarily Pole, UG Cable & Gas Main ReplacementsPrimarily Pole, UG Cable & Gas Main Replacements

�� Final approval in late November 2010Final approval in late November 2010

�� Kicking off January 2011 Kicking off January 2011 –– “Soft Start”“Soft Start”

The ChallengeThe Challenge

�� Approved budget amount for each programApproved budget amount for each program

�� Needed to develop estimated # of units that Needed to develop estimated # of units that could be replaced for eachcould be replaced for each


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Cost Per Unit Example – Pole Replacements

The Solution The Solution –– Pole ReplacementsPole Replacements

�� Pole Replacement Pole Replacement –– Installs & Removals tracked in Installs & Removals tracked in separate Oper Actsseparate Oper Acts

�� Reviewed detail by OLC order to identify any Reviewed detail by OLC order to identify any “anomalies” and remove if appropriate“anomalies” and remove if appropriate

�� Ran Cost/Unit Report for 12 Ran Cost/Unit Report for 12 mosmos ended 12/31/2010ended 12/31/2010

�� Segregated Pole Replacement Segregated Pole Replacement –– Install Install (1130)(1130) and and Pole Replacement Pole Replacement –– Removal Removal (1920)(1920) OperOper ActsActs

�� Used SI Proactive Budget CategoryUsed SI Proactive Budget Category

�� Recalculated Ave Cost/Pole to remove & replaceRecalculated Ave Cost/Pole to remove & replace

�� Used results to estimate number of poles we could Used results to estimate number of poles we could reasonably expect to replace given $’s budgetedreasonably expect to replace given $’s budgeted

�� Repeated for UG Cable & Gas MainRepeated for UG Cable & Gas Main


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Cost Per Unit Report � SI Proactive� By Operation Activity


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Cost Per Unit Report � SI Proactive� By Oper Activity � OLC Order

REVIEW EXTREMES TO DETERMINE IF THEY

SHOULD BE EXCLUDED


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How Are We Using The Data (cont)

2. Engineer’s Estimates vs. Actual Cost Report

� Custom ABAP report

• Can be run by Eng/Est, Constr. Mgrs & Dir. of Const.

� Closed orders ONLY

• Growth & Customer Req. Relocate Budget Categories

� Those where we had customer collections

� To evaluate accuracy of estimated costs

• CU configuration

� Hours, Materials

• Engineer/Estimator’s ability to prepare accurate designs

� Identify scope; circumstances; contractor needs; etc.


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2. Engineer’s Estimates vs. Actual Cost Report (cont.)

� Estimated Costs drive customer quotes

• Need to be sure we are covering costs where appropriate

• Or – that we are not over-collecting from customers

� Variances by individual E/E currently used as factors in their performance appraisals as of 2010.

• Must be <> 5%

FINALLY FINALLY FINALLY FINALLY –––– SOME ACCOUNTABILITYSOME ACCOUNTABILITYSOME ACCOUNTABILITYSOME ACCOUNTABILITY

� Had a significant impact on the accuracy of estimates from 2009 to 2010


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Engineer’s Estimated Vs. Actual Report – Summary Comparison

2009 DATA

2010 DATA2010 VARIANCE

$ 245,768 1.76%

2009 VARIANCE- $ 2,267,849

-14.11%


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Engineer’s Estimate vs Actual Cost Report – Summary by Engineer/Estimator

57% Over Estimate


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Engineer’s Est vs Actual Cost Report – Drilldown to Value Category

Planned for Internal LaborUsed Contractor


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3. Customer Quotes

� Significant improvements in accuracy & consistency

� Detailed support for quote amounts is more accessible

� Translates to improved applicant satisfaction

4. Data & Process Visibility

� CU/OLC brings business & work processes and data details to the surface

� Better able to identify problem areas we had no clue about before

• CU’s - Materials, Hours, Quantities, Design Issues

• OLC – Breaks work activities down further


[ Questions?


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