Activity Based Management

Paramjit Sharma

activity

based

management

Paramjit Sharma

Did you ever noticed-------?

Few Activities ?

Which takes more time than required

Which are not making much value addition

Which can be eliminated

Which cannot be eliminated

Which can be substituted

Which cannot be substituted

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These activities consume resources, time, space

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Therefore, these activities require management

Paramjit Sharma

What is ABM?

ABM Manages activitiesto improve the value of Products and Services to Customers and increase firm’s Profit

Paramjit Sharma

What is ABM?

Using ABM

management can….

Improve operationsReduce CostsIncrease Value to customers

Through

Identifying Resources spent on

CustomersProductsActivities

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Case of Stockholm Valve and Fittings

Redesigned Partsto minimize

Manufacturingcost

Modified Equipments toReduce Costs

It increased Pricesof productsPriced belowABC Cost

andDropped UnprofitableProducts

and EarnedHigher Profits

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What Else is ABM?

ABM Improves management focus on the firm’sCritical success factors and enhances itsCompetitive advantage

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ABM

OperationalABM

StrategicABM

Cooper and Kaplan classify ABM

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OperationalABM

Enhances operational efficiency

Efficient Assets utilization

Lowers Cost

Focus on doing things Right

Performing activities Efficiently

Use Management techniques activity management business process reengineering total quality management performance management

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StrategicABMAttempts to alter the demand for activitiesand increase profitability at the current orimproved activities efficiency

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Focus on appropriate activities, eliminate non essential activities for the operations

Improve profitability by reducing unprofitable activities

Selecting most profitable customers

Management techniques Process Design, Product line and Customer mix Supplier Relationship, Customer Relationship Market Segmentation and Distribution channels

Strategic ABM

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The Role of ABC/ Management - Tools

What do we do? Activity Analysis, Cause & Effect, Pareto AnalysisWhat do we do?

Activity based CostingHow much it Cost?

Performance MeasurementHow well we do it?How well we do it?

Bench Marking, JIT processes, performing Process redesign, eliminating low value added activities

How can we do it better?

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ABM - tools

Cause and EffectDiagram

Pareto AnalysisPerformanceMeasurement

COST DRIVERANALYSIS

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ABM tools

Cost Driver Analysis

Examines, quantifies and explains the effectof the cost driver on the cost of an Activity.It searches for root cause of activity cost.

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ABM tools

Tools used in Cost driver analysis

Cause and Effect diagrams Pareto Analysis Performance Management

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ABM tools

Cause and Effect Diagram

It maps out causes that affect anactivity, process, stated problemor desired outcome.

WasteMore ConsumptionSlow ProductionProductivityLabourTransport

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ABM tools

Pareto Analysis

Is a histogram of cost drivers that contributeto the total cost.

It show that 20% of cost drivers are responsibleFor 80% of the cost incurred

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ABM tools

Performance Measurement

Identifies the work performed and the result achieved by an activity, process,or organizational unit. Measures bothFinancial and non financial results

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Activity Analysis

A firm performs an activity because it is

•Required to meet specification of the product/service•Required to sustain the Organisation•Deemed beneficial to the firm

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Activity Analysis

A firm must assess each of its activities for their

Need for customer or productEfficiency &Value content

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Activity Analysis

Selected Activity

Is the activityRequired to sustain

The Organisation

Can theActivity beeliminated

Eliminate activityTo reduce the

cost

Can the driverFrequency be

Reduced?

Does the activity

Contain low-valueAddedTasks?

Reduce the activityFrequency toReduce cost

Eliminate low valueAddedActivity

To reduce cost

DONE

Is the activity requiredto meet the specification

of the product or Service or Satisfy Customer demand

NO

YesNO

Yes

NO

Yes

NO

Are all costsReduction

OpportunitiesIdentified?

No

No

Yes Yes Yes

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High Value Added Activity

A high value added activity increases the Value of the product or service to thecustomers

•Inserting flange into a part•Pouring molten metal into mold•Preparing field for planting•Installing anti virus software•Designing, Processing, delivering products and Services•After Sales Service

High ValueAddedActivities

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Television News Broadcasting – HV Added

A high value added activity is one that, if eliminated, would affect the accuracy and effectiveness of the news cast and decrease total viewers as well as ratings for that time slot.

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TNB – HV Added

1. Activities that augment accuracy

-Verification of story sources and acquired information

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TNB – HV Added

2. Activities that augment effectiveness

- Efficient electronic journalism to ensure effective taped segments - News cast story order planned so that viewers can follow one story to the next. - Field crew time used to access the best footage possible - Meaningful news story writing - Contents to the newscast planned so that viewers get the best possible package of stories

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Low Value Added Activity

Low Value Added Activity consumes time,Resources, space but adds little in satisfying customers needs . If eliminated, customer valueor customer satisfaction may not decreaseor remains unchanged

Moving parts between processesWaiting timeRepairingRe-work

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A low value added activity is one that, if eliminated, would not affect the accuracy and effectiveness of the newscast. The activity contributes nothing to the quest for viewer retention and improved ratings.

TNB – LV Added Activities

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1Activities that generate excess

- Developing stories not used in a newscast - Assigning more than one person to develop each facet of the same news story

TNB – LV Added Activities

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2. Activities that augment delay (downtime)

- Newscast not completed on time because of one or more inefficient processes. - Too many employees on a particular shift or project.

TNB – LV Added Activities

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Classification of HV Added & LV Added Activities

Activity HV Added LV Added

Designing Product XSetting up XWaiting XMoving XProcessing XReworking XRepairing XStoring XInspecting XDelivering product X

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- Can be eliminated without affecting the form, fit, or function of the product or service;

- Begin with prefix “re” (such as rework or returned goods);

Low Value Added Activities- features

Contd…

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- Result in waste and add little or no value to the product or service

- Are performed due to inefficiencies or errors in theprocess stream;

Low Value Added Activities- features

Contd…

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- Are duplicated in another department or add unnecessary steps to the business process;

- Are performed to monitor quality problems;

- Are performed due to a request of an unhappy or dissatisfied customer;

- Produce an unnecessary or unwanted output; and- If given the option, you would prefer to do less of.

Low Value Added Activities- features

Paramjit Sharma

AMC/M & Customer Profitability Analysis

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Profitability Matrix

Champion

• Product/service

is crucial

• Good trading

partner

Demander

• Pays top-shelf price

• Costly to serve

Cheapskate

• Price-sensitive

• Low service requirement

Losers

Type of Customers

•Low Buying Power

ProductMargin

High

LowCost to serveNominally

DemandingVeryDemanding

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AMC/M & Customer Profitability Analysis

Allows Managers to

•Identify most profitable customers – the champions

• Manage each customer’s “costs-to-serve” to a lower level

• Establish a surcharge for or re-pricing expensive “costs-to-serve” activities;

• Reduce services;

• Introduce new products and services;

• Raise prices for demanders;

• Abandon products, services, or customers

•Improve the process

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Customer Profitability Analysis- tracing their costs & revenue

• Providing better services to highly profitable customers

• Securing highly profitable customers from competitors

• Setting prices based on the cost to serve;

• Higher prices for expensive services and granting discounts, to gain customers requiring lower costs

• Negotiating with customers to reach mutually beneficial levels of services.

•Transforming unprofitable customers for negotiation on price...

•Identifying and conceding permanent loss customers to competitors

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ABC/M & Strategic Cost Management

ABC/ M helps SCM in…..

•Comparing Cost structure and Profits with Competitors

• Identifying Impact on price, design… with switch over from CCA

•Selection of most profitable distribution Channel

•Identifying impact on bottom-line in change due to ABC

•Identifying and eliminating low value added activities

•Achieving its competitive strategy through high performance

•Finding out effect on production costs due to change in method

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Key factors for successful ABC/M Implementation

Accountants Engineers Manufacturer Operations

Identify activities, cost drivers, cost & non cost information

Cost Management &Measurement System

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Key factors for successful ABC/M Implementation

Involving Management & Employees

Maintain a parallel System

Use ABC/M on Jobs which succeed

Keep the initial ABC/M design simple

Create desired incentives

Educate Management

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Survey by Shield and McEven-7 factors

Top Management support

Linkage to competitive strategy

Linkage to Perf evaluation and Compensation

Training

Ownership by Non Accountants

Adequate Resources

Consensus & Clarity in ABC/M Objectives

Paramjit Sharma

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