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 Paramjit Sharma

These activities consume resources, time, space

Paramjit Sharma

Therefore, these activities require management

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What is ABM?

ABM
Manages activities to improve the value of Products and Services to Customers and increase firms Profit

Paramjit Sharma

What is ABM?

Using ABM management can. Through Improve operations Reduce Costs Increase Value to customers

Identifying Resources spent on Customers Products Activities

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Case of Stockholm Valve and Fittings

It increased Prices of products Priced below Redesigned Parts to minimize Manufacturing cost Modified Equipments to Reduce Costs
ABC Cost

and Dropped Unprofitable Products and Earned Higher Profits

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What Else is ABM?

ABM
Improves management focus on the firms Critical success factors and enhances its Competitive advantage

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Cooper and Kaplan classify ABM

ABM

Operational ABM

Strategic ABM

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Operational ABM 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 Paramjit Sharma

Strategic ABM
Attempts to alter the demand for activities and increase profitability at the current or improved activities efficiency

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Strategic ABM

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

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The Role of ABC/ Management - Tools

What do we do?

Activity Analysis, Cause & Effect, Pareto Analysis

How much it Cost?

Activity based Costing

How well we do it?

Performance Measurement

How can we do it better?

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

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ABM - tools

Cause and Effect Diagram

COST DRIVER ANALYSIS

Pareto Analysis

Performance Measurement

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ABM tools

Cost Driver Analysis

Examines, quantifies and explains the effect of 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 an activity, process, stated problem or desired outcome.

Waste More Consumption Slow Production Productivity Labour Transport

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ABM tools

Pareto Analysis
Is a histogram of cost drivers that contribute to the total cost. It show that 20% of cost drivers are responsible For 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 both Financial 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 product Efficiency & Value content

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Activity Analysis
Selected Activity
Is the activity required to meet the specification of the product or Service or Satisfy Customer demand
Does the activity Yes Contain low-value Added NO Tasks? Can the driver Frequency be Reduced?

NO

No

NO

Is the activity Required to sustain The Organisation

Yes

No

Are all costs Reduction Opportunities Identified?

Can the Activity be eliminated

NO Yes Yes
Eliminate low value Added Activity To reduce cost

Yes

Yes
Eliminate activity To reduce the cost

Reduce the activity Frequency to Reduce cost

DONE

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High Value Added Activity

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

High Value Added Activities

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

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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 value or customer satisfaction may not decrease or remains unchanged

Moving parts between processes Waiting time Repairing Re-work

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TNB LV Added Activities

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.

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TNB LV Added Activities

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

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TNB LV Added Activities

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.

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Classification of HV Added & LV Added Activities

Activity

HV Added

LV Added

Designing Product Setting up Waiting Moving Processing Reworking Repairing Storing Inspecting Delivering product

X X X X X

X X X X
X

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Low Value Added Activities- features

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);
Contd

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Low Value Added Activities- features

Result in waste and add little or no value to the product or service Are performed due to inefficiencies or errors in the process stream;
Contd

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Low Value Added Activities- features

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.

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AMC/M & Customer Profitability Analysis

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Profitability Matrix

Type of Customers High Champion Product/service is crucial Good trading partner Demander Pays top-shelf price Costly to serve

Product Margin

Cheapskate Price-sensitive Low service requirement

Losers

Low Buying Power

Low

Nominally Cost to serve DemandingParamjit Sharma

Very Demanding

AMC/M & Customer Profitability Analysis

Allows Managers to

Identify most profitable customers the champions

Manage each customers 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 Paramjit Sharma

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 Paramjit Sharma

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

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Paramjit Sharma