Activity Based Management

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Activity Based Management
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Three Views of Cost
Operational View
Financial View
Strategic View
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What is ABM?

• Focus on management of activities as the route to
  continuously improve value received by customers
  and profits
• Includes Cost Driver Analysis, Activity Analysis
  and Performance Analysis
• Draws on Activity Based Costing as a major source
  for data and information

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Activity Based Management Why?

• Activities are easily understood by people
• Activities can be actionably affected
• Activities highlight the root causes that drive
  costs
• Activities integrate time, cost and quality
  performance measures with process based thinking
  and improvement projects

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Activity Based Management Why?

• Useful in organisations with Multiple Products
• Useful where overhead constitutes a significant
  portion of cost
• Useful in organisations which need to identify
  key customers

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Activity Based Management Where???

• Quotations, Bidding and Pricing
• Target Costing
• Product Rationalization
• Information about cross subsidization good or
  bad?

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Activity Based Management Where???

• Value Added vs. Non Value Added Costs
• Will the customer pay for this activity???
• Business Process Re-engineering
• Superior Processes provide long term advantage
• Dramatically affects cost, quality, service and
  speed
• Make vs. Buy Decisions

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Activity Based Management Where???

• Capital Investment Justification
• Understanding Customer Demands and Profitability
• Performance Management (Business Managerial)

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ABC/M Main Usage Areas

• Product / Service Costing
• Performance Improvement
• Cost Reduction
• Others - make/buy decisions
• - strategic planning
• - project management
• - budgeting

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ABM and Products

• Product Profitability (The Whale Curve)
• Product Related Action
• Reprice Products
• Substitute Products
• Redesign Products
• Improve Product Features
• Eliminate Products

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Product Profitability
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Customers and Suppliers

• Customer Profitability (20- 80 Rule)
• Hidden loss and Hidden Profit Customers

• Supplier Relationships
• Analyse Procurement Activities
• Choose low-cost, low price suppliers
• Vendor sustaining costs
• Product design Engineering

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Outputs of ABM
ABM evaluates the activities critical to your
business

• Cost of Activities
• Cost of Non-Value Added Activities
• Performance Measures
• Accurate Product/Service Cost
• Cost Drivers

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Reducing Cost the ABC way

• Reduce the time or effort required to perform an
  activity.
• Eliminate unnecessary activities
• Select low-cost activities
• Share activities wherever possible
• Redeploy unused resources

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High and Low Cost to Serve Customers

• High Cost
• Order custom products
• Small order quantities
• Customised delivery
• Change delivery requirements
• Post sales support
• Slow payments

• Low Cost
• Order standard products
• High order quantities
• Predictable orders
• Very limited post sales support
• Pay on time

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High
Net Margin
Low
Low
High
Cost to Serve