Sticking too long with commonly held assumptions and accepted ways of doing things can put even the biggest businesses at risk. For instance, during the 1980s, IBM stayed focused on mainframes while servers and PCs took over. More recently, Blockbuster clung to its retail outlets while new technologies were changing the ways people could access movies. Looking back, we are collectively astounded that such companies stuck with the status quo for so long. But that’s exactly what we do when we produce an annual budget by taking last year’s actuals and adding a few percentage points to account for wage rises and inflation.
Such incremental budgeting may appear harmless, but if it persists indefinitely, it can lead to inefficiencies and missed opportunities for cost savings. That is why an increasing number of global companies are challenging the status quo by adopting zero-based budgeting (ZBB), where everything in a budget must be justified as both relevant and cost effective.
Kellogg Company at the forefront of ZBB
Kellogg Co., the world’s largest cereal company, is on the front lines when it comes to adopting ZBB. In 2016, the company publicly announced an anticipated $150–$180 million in savings from zero-based budgeting, and noted that these savings will build in 2017 and 2018 to a run rate of $450–$500 million. These savings will allow the company to invest in its existing brands, acquire new ones, fund geographic expansion, and make significant progress towards its stated target of increasing its margin by 350 basis points.
Despite the prospect of realizing savings of a similar magnitude, many organizations still shy away from ZBB due to the misconception that it is expensive, time consuming to implement, and will disrupt their business. But Kellogg knows differently: Compared with the ERP system it replaced, the planning platform that supports the company’s ZBB program around the globe also saves the company $177,000 annually on support costs.
In a recent presentation, Kellogg discussed how organizations need top-down sponsorship in order to make a ZBB initiative a success. These are not empty words, as they know from personal experience just how important executive support is. Kellogg also knows that without an effective and easy-to-use planning platform in place, ZBB can be laborious and time-consuming. Thankfully, Kellogg Company selected Anaplan.
Having completed its first full fiscal cycle using ZBB, Kellogg has a plethora of best practices about ZBB and the type of platform needed to support it. To learn more, watch the video, “Creating value through cost savings with zero-based budgeting at Kellogg Company.”