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

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 What is ABM?

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

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 What is ABM?

Using ABM Identifying Resources

management can…. spent on

Customers
Through Products
Improve operations Activities
Reduce Costs
Increase Value to customers

Paramjit Sharma
 Case of Stockholm Valve and Fittings

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

and
Earned
Higher Profits

Paramjit Sharma
 What Else is ABM?

ABM
Improves management focus on the firm’s
Critical success factors and enhances its
Competitive advantage

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 Cooper and Kaplan classify ABM

ABM

Operational Strategic
ABM 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

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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

Paramjit Sharma
 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 Bench Marking, JIT processes, performing Process

better? redesign, eliminating low value added activities

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 ABM - tools

Cause and Effect

Diagram

COST DRIVER
ANALYSIS

Performance
Pareto Analysis 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

Waste
Cause and Effect Diagram More Consumption
Slow Production
It maps out causes that affect an Productivity
activity, process, stated problem Labour
or desired outcome. 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

NO Is the activity required No

to meet the specification
of the product or Service or
Satisfy Customer demand

Does the Are all costs

NO Is the activity activity No Reduction
Required to sustain Yes Yes Contain low-value Opportunities
The Added Identified?
Organisation NO
Tasks?
Can the driver
Frequency be
Reduced?
Can the NO
Activity be
Yes Yes Yes
eliminated

Yes Reduce the activity Eliminate low value

Frequency to
Added DONE
Activity
Reduce cost To reduce cost
Eliminate activity
To reduce the
cost Paramjit Sharma
 High Value Added Activity

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

•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

Paramjit Sharma
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

• Activities that augment accuracy

-Verification of story sources and

acquired information

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 TNB – HV Added

1. 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.

Paramjit Sharma
 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

• 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.

Paramjit Sharma
 Classification of HV Added & LV Added Activities

Activity HV Added LV Added

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

Paramjit Sharma
AMC/M &
Customer Profitability Analysis

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 Profitability Matrix

Type of Customers

High Champion Demander

• Product/service • Pays top-shelf price

is crucial • Costly to serve
• Good trading
partner
Product
Margin

Cheapskate Losers

• Price-sensitive
•Low Buying Power
• Low service requirement

Low Nominally Very

Cost to serve
Demanding Paramjit Sharma Demanding
 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

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

Paramjit Sharma
 ?

Paramjit Sharma