Hilton Maher Selto

Activity-Based Management

McGraw-Hill/Irwin

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

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Activity-Based Management (ABM)

Evaluates the costs and values of process activities . . .

. . . To identify opportunities to improve efficiency. Process Process Improvements, Improvements, Customer CustomerValue, Value,& & Reduced ReducedCosts Costs

Activity-Based Activity-Based Costing Costing

Valued-Added Valued-Added Analysis Analysis

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Activity-Based Management
ABM adds:
4 4 Basic Basic Steps Steps
Identification Identificationof of value-added value-added and andnon-value-added non-value-added activities activities Identifies Identifies the the customer customer perceived perceivedvalue valueof of each each activity activity Identifies Identifiesopportunities opportunitiesto to enhance enhancevalue-added value-added activities activities and and reduce reduceor or eliminate eliminatenon-value-added non-value-added activities activities

Identify Identify& &classify classifythe the activities activitiesrelated relatedto tothe the companys companysproducts productsor or services. services. Estimate Estimatethe thecosts costs associated associatedwith witheach each activity. activity. Calculate Calculatea acost-driver cost-driverrate rate for foreach eachactivity. activity. Assign Assignactivity activitycosts coststo to products productsusing usingthe thecostcostdriver driverrate. rate.

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The Steps Of ABC

5. 5. Analyze Analyzethe theprofitability profitabilityof ofproducts productsusing using ABC ABCunit-level unit-leveland andfull fullcosting. costing. 4. 4. Use Usecost-driver cost-driverrates ratesto toassign assignactivity activitycosts coststo to products, products,jobs, jobs,services, services,and andprojects projectsby bymultiplying multiplyingthe the use useof ofcost costdriver driverbase(s) base(s)by bythe thecost costdriver driverrates rates 3. 3. Identify Identifycost-driver cost-driverbases basesand andmeasure measureactivity activity cost-driver cost-driverrates rates 2. 2. Measure Measurethe thecosts costsof ofindividual individualactivities activities 1. 1. Identify Identifyand andmeasure measurethe thedifferent differentlevels levelsof ofresource resourcespending spending

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The Importance Of Customer Value

Activities Activities
Create Createoutcomes outcomes and andconsume consumeresources resources VALUE-ADDED VALUE-ADDEDACTIVITIES ACTIVITIES enhance enhancethe thevalue valueof ofproducts products and andservices servicesin inthe theeyes eyesof of the thecustomer customerwhile whilemeeting meeting the thegoals goalsof ofthe theorganization organization

NON-VALUE-ADDED NON-VALUE-ADDED ACTIVITIES ACTIVITIES do donot notcontribute contributeto tocustomer customer perceived perceivedvalue value

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Non-value Added Activities

Why Whydo do organizations organizationshave haveincentives incentives to toeliminate eliminatenon-value non-valueadded addedactivities? activities?

Competitors Competitorsare are constantly constantlystriving striving to tocreate createmore morevalue value for forcustomers customersat at lower lowercost cost

Competition Competitioncan can appear appearquickly quickly

The Theorganization organizationcan can apply applythe thefreedfreed-up up resources resourcesto tovaluevalueadded addedactivities activitiesor or distribute distributethem themto tothe the employees employeesof ofthe the organization. organization.

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Most Likely Sources of NonValue-Added Activities

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Identifying Value-Added Activities

The The test test for forvalue value added addedactivities activities
Would Wouldan anexternal external customer customerencourage encourage the theorganization organizationto todo do more moreof ofthe theactivity? activity? Would Wouldthe theorganization organization be bemore morelikely likelyto to reach reachits itsgoal goalby by performing performingthat thatactivity? activity?

YES NO YES NO

If the answer If the answer If If the theanswer answer is no to is no is yes is yesto to both or either both orit either both is both it is it it is is nonnonvalue-added. value-added. value-added. value-added.

YES NO YES NO

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How Should An Organization Measure Value-Added?

5
VALUEVALUEADDED ADDED

3
Rate Rateon ona ascale scaleof of1 1to to5 5

1
NONNONVALUEVALUEADDED ADDED

Necessary NecessaryActivities Activities Neither Neithervalue-added value-addednor nornon-value-added non-value-added Technological Technological Requirements Requirements Policy Policy Requirements Requirements

Regulatory Regulatory Requirements Requirements

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Who Should Perform The Measurement Activity?

Use Usea ateam team approach approach

Everyones Everyonesknowledge knowledgeis islimited limited Everyone Everyone is is potentially potentially biased biasedin in his hisor orher her response response

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Tasks Required by ActivityBased Management

Twin Twinobjectives objectives of of ABM ABM

Identify Identifynon-value-added non-value-added activities activitiesto tobe beeliminated eliminated or orreduced reduced

Identify Identifyvalue-added value-added activities activitiesto tobe beenhanced enhanced

Redesign Redesignprocesses processesto toeliminate eliminatewasteful wastefulspending spendingon on non-value-added non-value-addedactivities activities

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Sorting Activities By Cost And Value

By Bycomparing comparingthe thecost costto tothe thevalue valueof ofthe thetask, task,we wecan canidentify identify oversupplied oversupplied non-value-added non-value-addedactivities activitiesand andundersupplied undersuppliedvaluevalueadded addedactivities. activities. By Byfocusing focusingon onthose those low-value low-valuetasks taskswith withhigh high resource resourceallocation, allocation,we wecan canimprove improveefficiency. efficiency.

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

Oversupplied Oversupplied non-value-added non-value-added activities 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

Ask Why? for each step in the process. Why do employees need to trim excess plastic from molded products?
Why#1: Appearance and product function requires removal of the excess Why#2: Under high-injection pressure, plastic leaks from the edges of the mold Why#3: High pressure is required to mold the products properly Why#4: The design of the molds permits leakage Why#5: The molds are based on old designs SOLUTION: Rework or replace old molds with improved molds to eliminate the need for trimming and recycling.

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Identifying Opportunities For Process Improvement

Ask Why? for each step in the process. Why Whyare arewe wespending spendingso somuch muchtime time on on non-value-added non-value-addedrecord recordkeeping keeping and and the thecorrection correctionof of recording recordingerrors? errors? SOLUTION: SOLUTION: Install Installaabar-coding bar-coding system systemto tomark markand andtrack trackall all orders orderselectronically electronically A Abar-coding bar-codingsystem systemcreates createsaa unique uniquebar barcode codefor foreach eachorder order and andallows allowsthe thecompany companyto tomark mark and andtrack trackall allorders orderselectronically electronically

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Identifying Opportunities For Process Improvement

After process improvements, total elapsed time has been reduced to 82.2 minutes. If Ifwe weassume assumea a cost costof of$10 $10per per hour, hour,what whatis is the thecost cost savings? savings?

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Identifying Opportunities For Process Improvement

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

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Implementation Of ActivityBased Costing & Management

The TheFocus Focusof of ABC ABC The TheFocus Focusof of ABM ABM

Developing Developingimproved improved product productor orservice servicecosts costs given givencurrent current processes processes

Identifying Identifyingopportunities opportunities for forimproving improvingprocesses processes

Consider Consider cost-benefits cost-benefits

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Implementation Of ActivityBased Costing And Management

What WhatOrganizations OrganizationsAdopt AdoptABC ABCand and ABM? ABM? Companies Companiesfacing facingprice pricecompetition competition Companies Companiesproducing producingmany manydifferent, different, complex complexproducts productsfrom from common common facilities facilities

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

What Whatis isthe thescope scopeof ofthe theABC ABCor orABM ABMproject? project? Pilot PilotProject Project What Whatis isa apilot pilot project? project?
A Aproject projectof oflimited limited scope scopethat thatis isintended intended to tobe bea asmall-scale small-scale model modelof ofan an organizational organizationalsystem. system.

Organizationwide Organizationwide System System Why Whyuse usea apilot pilot project? project?
Anticipate Anticipatethe thelinkages linkages across acrossdepartments, departments, groups groupsand andprocesses. processes. Anticipate Anticipatethe thedata data gathering and reporting gathering and reporting requirements. requirements.

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

What Whatresources resources are arenecessary? necessary? Management Management Commitment Commitment Personnel Personnel and andTime Time Significant Significantprojects projects will willrequire requirea athreethreeto tofour-person, four-person, cross-functional cross-functional team teamat atleast leastfour four to tosix sixmonths monthsof of full-time full-timeeffort effort

Technology Technology

Educate Educatetop top management management as asto to cost/benefits cost/benefits

Begin Beginwith with existing existing commercial commercial software software

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

Howcan canyou youanticipate anticipateand andovercome overcomeresistance resistanceto to How change? change?
Education Educationand andTraining Training Incentives Incentivesthat thatEncourage Encourage and andReward RewardChange Change Widespread WidespreadSponsorship Sponsorship and andParticipation Participation Be BeSensitive Sensitiveto toDifferences Differences in inNational NationalCultures Cultures

Prevent Preventor orMinimize Minimize Resistance Resistanceby: by:

Effects Effectsof ofCulture Culture

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

How do do you you gather gatherinformation? information? How
ABCand andABM ABMrequire requireinformation information that thatis isnot notnormally normallyavailable available ABC froman anorganizations organizationsinformation informationsystems systems from

Observation Observation

This This informationcan can information begenerated generated be by: by: Interview Interview

Survey Survey

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END