Activity-based #management (#abm) is a technique of classifying and evaluating actions that a business performs using activity-based #costing (#abc) to carry out a value chain analysis or a re-engineering initiative to develop strategic and operational assessment in an organization.
Activity Based Costing
In simple terms activity-based costing establishes #relationships between overhead costs and activities so that overhead costs can be more precisely allocated to services, products and customer segments. Now what is so special about that? Well:
- ABC systems help companies make better pricing and product mix decisions.
- ABC assists in #cost management decisions by improving processes and product designs.
- Activities generate transactions.
- Transactions generate costs.
- ABC traces costs to activities.
ABM focal point is managing activities and reducing costs and improving customer value. ABM is a distinctive model and ABM is not a technique, it is process of performing management.
Activity-based management is classified into 1) Operational and 2) Strategic ABM.
- Operational ABM is about “doing things right”, using ABC #information to improve #efficiency. Those activities which add value to the product can be identified and improved. Activities that don’t add value are the ones that need to be reduced to cut costs without reducing product value.
- Strategic ABM is about “doing the right things”, using ABC information to decide which products to develop and which activities to use. This can also be used for customer profitability analysis, identifying which customers are the most profitable and focusing on them more.
A risk with ABM is that some activities have an implicit value, not necessarily reflected in a financial value added to any product. For instance a particularly pleasant workplace can help attract and retain the best staff, but may not be identified as adding value in operational ABM. A customer that represents a loss based on committed activities, but that opens up leads in a new market, may be identified as a low value customer by a strategic ABM process. Managers should interpret these values and use ABM as a common, yet neutral, ground.
Deployment throughtout the Organization
ABM needs to be understood and applied at different function levels of the organization so its power can be unleashed and the benefits can be obtained from this model. ABM goals for managers will ensure alignment and focus on reducing non-value added activities and waste from the organization.
ABM has evolved over time and is now considerably applied in #manufacturing, service companies, logistics, utilities, government bodies, telecommunications and many more sectors. Dramatic improvements are achievable in measuring process and product costs, and more critically customer profitability.
The Hewlett-Packard North American Distribution Organization teams and acronym itself has evolved from ABC to ABCM (activity-based cost management) to ABM, and the application of ABC evolved from a manufacturing product costing orientation to a management philosophy of activity management applied in industries and organizations other than manufacturing. It has also played a role in today’s fast paced world, organizations are moving from managing vertically to manage horizontally. It is a move from a function orientation to a process orientation. Total quality management (TQM), just-in-time (JIT), benchmarking and business process reengineering (BPR) are all examples of horizontal management improvement initiatives. These initiatives are designed to improve an organization’s work processes and activities to effectively and efficiently meet or exceed changing customer requirements.
Organizations that are designing and implementing ABM will find that there are five basic information outputs:
- the cost of activities and business processes;
- the cost of non-value-added activities;
- activity-based #performance measures;
- accurate product/service cost (cost objects);
- cost drivers
ABM contributes to management improvement initiatives and improved #decision making by providing cost and operating information about the activities of the organisation. Activity-based management depicts the key relationship between ABC, and the management analysis tools that are needed to bring full realisation of the benefits of ABC to the organisations. ABC is a methodology that can yield significant information about cost drivers, activities, resources and performance measures. However, ABM is a discipline that offers the organisation the opportunity to improve the value of its products and services.
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