Hilton Maher Selto

Activity-Based Management

McGraw-Hill/Irwin

2003 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Activity-Based Management (ABM)

Evaluates the costs and values of process activities . . .

. . . To identify opportunities to improve efficiency.

Activity-Based Costing

Valued-Added Analysis

Process Improvements, Customer Value, & Reduced Costs

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Activity-Based Management
ABM adds:
4 Basic Steps
Identify & classify the activities related to the companys products or services. Estimate the costs associated with each activity. Calculate a cost-driver rate for each activity. Assign activity costs to products using the costdriver rate.

Identification of value-added and non-value-added activities Identifies the customer perceived value of each activity Identifies opportunities to enhance value-added activities and reduce or eliminate non-value-added activities

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The Steps Of ABC

5. Analyze the profitability of products using ABC unit-level and full costing. 4. Use cost-driver rates to assign activity costs to products, jobs, services, and projects by multiplying the use of cost driver base(s) by the cost driver rates 3. Identify cost-driver bases and measure activity cost-driver rates 2. Measure the costs of individual activities 1. Identify and measure the different levels of resource spending

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The Importance Of Customer Value

Activities
Create outcomes and consume resources

VALUE-ADDED ACTIVITIES enhance the value of products and services in the eyes of the customer while meeting the goals of the organization

NON-VALUE-ADDED ACTIVITIES do not contribute to customer perceived value

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Non-value Added Activities

Why do organizations have incentives to eliminate non-value added activities?

Competitors are constantly striving to create more value for customers at lower cost

Competition can appear quickly

The organization can apply the freed- up resources to valueadded activities or distribute them to the employees of the organization.

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Most Likely Sources of NonValue-Added Activities

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Identifying Value-Added Activities

The test for value added activities
Would an external customer encourage the organization to do more of the activity? Would the organization be more likely to reach its goal by performing that activity?

YES NO

If the answer If the answer is no to is yes to both or either both it is it is nonvalue-added. value-added.

YES NO

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How Should An Organization Measure Value-Added?

5
VALUEADDED

3
Rate on a scale of 1 to 5

1
NONVALUEADDED

Necessary Activities

Neither value-added nor non-value-added

Technological Requirements Policy Requirements Regulatory Requirements

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Who Should Perform The Measurement Activity?

Use a team approach

Everyones knowledge is limited Everyone is potentially biased in his or her response

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Tasks Required by ActivityBased Management

Twin objectives of ABM

Identify non-value-added activities to be eliminated or reduced

Identify value-added activities to be enhanced

Redesign processes to eliminate wasteful spending on non-value-added activities

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Sorting Activities By Cost And Value

By comparing the cost to the value of the task, we can identify oversupplied non-value-added activities and undersupplied valueadded activities. By focusing on those low-value tasks with high resource allocation, we can improve efficiency.

5 (highest) 4 3 2 1 (lowest) Total

Oversupplied non-value-added activities

$100 0 1,200 700 1,000 $3,000

3.3% 0.0% 40.0% 23.3% 33.3% 100.0%

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Identifying Opportunities For Process Improvement

Before Process Improvements Elapsed Time: 83 min. 60 min. 25 min.

Sub-Activity Trim excess plastic Recycle trimmings Put piece in box Log out completed order Move order to warehouse Register order in inventory Total elapsed time

Ask Why? for each Before Process Improvements in the process. step Elapsed Time:

Why do employees need to trim excess plastic from molded 0 min. products?

30 min. 60 min. 28 min. 286 min.

0 min. Why#1: Appearance and product function requires removal of the excess 25 high-injection pressure, plastic Why#2: Undermin. leaks from the edges of the mold Why#3: High pressure is required to mold the 15.1 min. products properly Why#4: The design of the molds permits leakage 30 min. Why#5: The molds are based on old designs

SOLUTION: Rework or replace old molds with improved molds to eliminate 82.2 min. the need for trimming and recycling.

12.1 min.

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Identifying Opportunities For Process Improvement

Before Process Improvements Elapsed Time: 83 min. 60 min. 25 min.

Sub-Activity Trim excess plastic Recycle trimmings Put piece in box Log out completed order Move order to warehouse Register order in inventory Total elapsed time

Ask Why? for each Before Process Improvements in the process. step Elapsed Time:
0 we spending so much time on Why aremin. non-value-added record keeping and the 0 min. of recording errors? correction

30 min. 60 min. 28 min. 286 min.

SOLUTION: Install a bar-coding system to mark and track all 15.1 min. orders electronically A bar-coding system creates a unique bar 12.1 min. code for each order and allows the company to mark and min. 82.2 track all orders electronically
30 min.

25 min.

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Identifying Opportunities For Process Improvement

Before Process Improvements Elapsed Time: 83 min. 60 min. 25 min. Before Process Improvements Elapsed Time: 0 min. 0 min. 25 min.

Sub-Activity Trim excess plastic Recycle trimmings Put piece in box Log out completed order Move order to warehouse Register order in inventory Total elapsed time

After process improvements, total elapsed time has been reduced to 82.2 minutes. If we assume a cost of $10 per hour, what is the cost savings?

30 min. 60 min. 28 min. 286 min.

15.1 min. 30 min. 12.1 min. 82.2 min.

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Identifying Opportunities For Process Improvement

Before Process Improvements Elapsed Time: 83 min. 60 min. 25 min. Before Process Improvements Elapsed Time: 0 min. 0 min. 25 min.

Sub-Activity Trim excess plastic Recycle trimmings Put piece in box Log out completed order Move order to warehouse Register order in inventory Total elapsed time

30 min. 60 min. 28 min. 286 min.

15.1 min. 30 min. 12.1 min. 82.2 min.

Time Saved: 286 min. - 82.2 min. 203.8 min. 60 min/hr 3.397 hrs. Cost Savings: 3.397 hrs. $10/hr. $33.97

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Implementation Of ActivityBased Costing & Management

The Focus of ABC The Focus of ABM

Developing improved product or service costs given current processes

Identifying opportunities for improving processes

Consider cost-benefits

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Implementation Of ActivityBased Costing And Management

What Organizations Adopt ABC and ABM?

Companies facing price competition

Companies producing many different, complex products from common facilities

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Can You Be Sure That ABC And ABM Will Be Successful?

What is the scope of the ABC or ABM project?

Pilot Project What is a pilot project?

A project of limited scope that is intended to be a small-scale model of an organizational system.

Organizationwide System
Why use a pilot project?
Anticipate the linkages across departments, groups and processes. Anticipate the data gathering and reporting requirements.

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Can You Be Sure That ABC And ABM Will Be Successful?

What resources are necessary?
Management Commitment Personnel and Time Significant projects will require a threeto four-person, cross-functional team at least four to six months of full-time effort

Technology

Educate top management as to cost/benefits

Begin with existing commercial software

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Can You Be Sure That ABC And ABM Will Be Successful?

How can you anticipate and overcome resistance to change?
Education and Training

Prevent or Minimize Resistance by:

Incentives that Encourage and Reward Change

Widespread Sponsorship and Participation

Effects of Culture Be Sensitive to Differences in National Cultures

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Can You Be Sure That ABC And ABM Will Be Successful?

How do you gather information?
ABC and ABM require information that is not normally available from an organizations information systems This information can be generated by:

Observation

Survey

Interview

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END