Activity Based Management, Activity Based Costing, Activity Based
ACTIVITY BASED MANAGEMENT (ABM) DEFINED
.focuses on managing activities/business processes to achieve organizational
.reduces cost drivers and non-value and transfers resources to economic value creating
activities/business processes the customer wants and is willing to pay for.
.Creates performance measures for cost, time, quality, and outcomes so everyone
understands how their activities contribute to the mission and strategy.
. Supports Balanced Scorecard by creating performance measures
. Improves cash flow, quality, cycle time reduction,
. Basis for Business Process Redesign,
. Supports gain sharing /goal sharing, and teams.
ACTIVITY BASED COSTING (ABC) DEFINED
ABC is a subset of ABM. ABC improves costing by tracing expenses (e.g. salaries,
supplies, rent) to activities and tracing activities to business processes, products,
services, customers, distribution channels, etc.
ACTIVITY BASED MANAGEMENT GENERAL INFORMATION
We thank Mike Roberts for the following information.
For those new to ABM, this section will introduce you to the world of ABM.
We have provided a vast amount of free material that will enhance your ABM presentation.
This includes The CAM-I Glossary, our fast track Approach and the ABM Bibliography.
By now you have probably either read or heard success stories about how ABC or ABM
techniques have helped companies better understand product cost and profitability,
identify opportunities or develop improved performance measurement. What you may not know
is that recent studies have shown that 70 percent of ABC/ABM implementations fail! Indeed,
some organizations have achieved great success as a result of their ABM efforts. For these
companies, Activity Based techniques have helped lead management to find ways to
significantly improve bottom line profits and returns.
On the other hand, for many companies, ABM implementation has become a long and drawn out
affair, consuming considerable resources in terms of management time, consulting fees and
software costs. Worse yet, many of these efforts ended as dismal failures, producing
little, if any, tangible benefit.
Why would a web page on ABM begin by describing this high rate of failure? Because our
organization is a different kind of company and we want you to be in the top 30 percent of
successful ABM implementers. More importantly, we're prepared to help you plan, develop
and implement an ABM system tailored to your company's needs; a system which is practical,
produces positive results and provides a sound basis for continuous improvement. We
believe that the success of any improvement program is largely dependent on three key
elements which are incorporated in every ABM project we undertake.
Designing a practical approach to fit the organization's objectives.
The caliber and experience of people involved in the program
Providing hands-on support to ensure timely execution, measurable results and ongoing
Practical, Tailored Solutions
First, we recognize each company has different objectives and
requirements for their ABM System. Even within the same company, different organizations
will commonly have different objectives which should be addressed through the ABM
implementation. ABM should be adapted so it "fits" with other organizational
initiatives such as BPR, TQM and employee empowerment. Our first objective is to
understand your needs and objectives. Only then can we tailor an implementation approach
that is right for your company.
Secondly, developing the right Activity Based Approach for your company requires
experience. We are highly experienced experts, not just in ABM, but in other advanced
management techniques as well. Our Team is comprised of many of the leading experts in
ABM, who have extensive experience in successfully leading ABM implementations in a number
of different industries. Support
Finally, throughout your ABM implementation, our experts will assist you through the
process. We'll work closely with your team to successfully complete the implementation and
to enhance their understanding of Activity Based Management. Our goal is to transfer our
skill and knowledge to your team so that future ABM projects can be undertaken with
minimal outside support. Take a minute and review our experience and qualifications. Then
review the fast track Approach we developed to speed our clients through the ABM process.
Finally, contact us so we can get you on the fast track to successful ABM.
We are is a different kind of company. We are an elite coalition of recognized
industry experts in Activity Based Management and Process Improvement. Every Associate has
over twenty years of hands-on industry experience and each of these experts have
successfully lead ABM implementations for major companies. When you review our team and
their credentials, you'll probably recognize the names of these experts who have helped
pioneer ABM. By working together, we provide an unparalleled level of expertise and
support to our clients. We have extensive experience in the manufacturing, service,
distribution and medical fields.
Our approach to ABM is different. We developed a fast track approach
to provide clients an accelerated approach and software to ABM which is both practical and
consistently produces measurable results. Our approach and software is tailored to
specific needs of clients and is linkable to ABM software products.
Our unique approach to ABM implementation combines group techniques, process mapping and
ABC to improve business processes, provide strategic cost data, and promote continuous
improvement. This approach utilizes cross-functional teams to define outputs and
activities, trace cost to activities and products, develop process maps, define and
prioritize improvement opportunities, and build group consensus on performance measures
and process improvement opportunities. This approach significantly reduces ABM
implementation time and allows organization to rapidly begin realizing measurable results.
Our results have been excellent. During these projects participants
typically identified improvement opportunities with first year payback of 15-20 times the
investment in the project. Our approach emphasizes "learning by doing". This
enables the company to develop its own internal team and eliminates the need for full time
The information included in this Web site will provide you with some
additional information on our Associates and ABM approach. If you're serious about
implementing a successful Activity Based Management system, contact us. We will be happy
to discuss availability of training, education, workshops or seminars that are tailored to
your organization. We'll be glad to provide references from our most recent ABM
implementations and discuss your company's ABM needs and objectives.
We have a wealth of experience in ABM processes and work with some of the biggest
companies in the US.
Alexian Brothers Medical Center, Blue Cross Blue Shield, CAM-I, Caterair, Ciba-Corning,
Discover Card, Delta Dental, Ford, GATX, Harris, IBM, J.C. Penney Life, Johnson &
Johnson, JLG Industries, LAM Research, National Semiconductor, Norton, Racal Datacom,
Tredegar Industries, US Air Force, University of Alabama, Zenith
What is difference between Activity Based Costing (ABC) and Activity Based Management
Activity Based Costing is a technique that was originally developed to improve a company's
understanding of the cost of the products and services it provides. ABC provides this
improved understanding by first tracing resources (operating costs) to the activities
(work) performed within the organization. Secondly, these activities are traced to the
products, services, or customers for whom the activity is performed. The primary uses of
Activity Based Costs tend to be strategic in nature and include:
Evaluation of product line or customer profitability
Enhancement of make or buy decisions, and
Costing of intra-company services.
Activity Based Management, addresses not only the strategic issues of profitability of
products, customers, or services, but expands the analysis to understand and define:
Non-value-added activities, Cost drivers, Performance measurements, and
Opportunities to redefine or redesign business processes. ABM provides decision makers the
opportunity to not only assess which products or customers are more profitable, but
defines the opportunities to eliminate waste and improve the profitability of all products
How does Activity Based Costing differ from
traditional cost accounting systems?
Most traditional costing systems utilize a single basis, (e.g. direct labor) to
distribute the indirect costs to all products and services. This method of allocating
indirect costs commonly results in erroneous cost data. Often products which have high
volume (and high labor cost) are over costed. Likewise, the cost of lower volume products
are often understated, and many of the indirect costs of these products are overlooked.
Rather than relying on a single basis to distribute costs, ABC assigns costs to activities
and products based on how the costs (resources) are actually consumed by the process or
product. By moving away from traditional cost allocation methods and using improved ABC
methods of tracing and assignment, ABC provides managers with a clearer picture of cost of
processes and the profitability of customers and products.
How are activities analyzed?
The three most common techniques for defining and analyzing
activities are as follows:
Interview techniques rely on asking an expert on the activity or process specific
questions about the work that is performed within their area. These interviews are used to
The outputs of the process
The customer for the output
The quality measurement for the output
The activities required to produce the output
The resources consumed by the activities
How the activities add value
The cost drivers of the activities
A series of questions are used during the interview to elicit the required information.
Group workshop techniques utilize working sessions with the people who actually perform
the activity, to gather the information noted above. Utilizing work groups improves
understanding of the process, while at the same time helping to build consensus about the
process, activities, and opportunities to make improvements. Typically these working
sessions will include training on how ABC and ABM are used, as well as specific techniques
to define the activities and build group consensus. Some of the more popular
techniques used in these workshops are:
Nominal Group Technique
Cause and Effect Analysis (Fishbone Diagramming)
Groups that participate in activity analysis workshop are better prepared to begin
development of plans to implement process improvements that have been identified. The fast
track process developed by Mike Roberts is an excellent example of using the group
workshop technique to perform activity analysis.
Analyzing activities through specific observation utilizes time-study and other work
measurement techniques to define activities and resources consumed by the activity. These
techniques have disadvantages related to their impact on people and the work being
studied. People tend to behave differently when studied which can lead to a poor or
incorrect definition and analysis of an activity. Specific observation is best used as a
follow on to group analysis to confirm information provided by the group or to develop
more precise data. It should only be used when the group understands the need for it and
there is consensus for using it.
How do you define non-value-added (NVA) activities?
The concept of non-value-added activities is without a doubt the most controversial issue
within ABM. There are a number of definitions in use for NVA; some of the most common ones
NVA Activities are activities that do not contribute to meeting customer requirements and
could be eliminated without degrading the products, service, or functionality of the
NVA Activities are those activities and tasks within activities an informed customer is
not willing to pay for.
NVA is anything other than the absolute minimum of material, machines, and human power
required to add value to the product or service.
Activities that have any of the following words as part of their name or definition are
generally considered to be non-value-added:
Mike Roberts has developed the concept of Ownership Value
Added(tm) (OVA) to help define those portions of activities that are NVA
and assign responsibility for eliminating the waste. The OVA concept separates the NVA
waste into two buckets; one that can be fixed by operational people and the other that
requires strategic changes that have to come from the top of the business.
What is the relationship between ABM and other improvement techniques such as
Reengineering and Total Quality Management (TQM)? ABM complements Reengineering and TQM by
providing quantified cost data associated with existing processes and activities, thus
enabling intelligent evaluation of process changes and improvements. Further, ABM can be
used effectively to model and measure the cost/cost savings of redesigned or improved
processes that result from TQM and Reengineering efforts.
What is the difference between Cost Drivers, Resource Drivers and Activity Drivers?
Here are some definitions of these ABM terms that can sometimes cause confusion. For more
information the CAM-I (Consortium for Advanced Manufacturing International) Glossary of
ABM should be consulted.
Cost Driver - cause of activity and its cost; any factor causes increase or decrease in
occurrence of an activity or level of effort required to perform activity. There are often
several cost drivers for a single activity.
Resource Driver - is the means for tracing the resources that are consumed by a particular
activity to that activity. As an example, when tracing the cost of a resource such as
labor to an activity, the amount of effort to perform that activity must be identified.
Here, the Resource Driver called Headcount or FTE's is very useful. In the old days,
Resource Drivers were called 'first stage drivers'.
Activity Driver - means for tracing a costed activity to the object consuming that
activity. The object can be a product, a service or a customer, depending on what you are
trying to establish the cost of. For instance, if costed activity is Assemble Product, and
you want to establish product costs, Activity Driver called Product Volume, might be
appropriate. Again, in the old days, Activity Drivers were called 'second stage drivers'.
What is Activity Based Budgeting?
How does it differ from traditional budgeting techniques? Activity Based Budgeting
(ABB) is a technique for enhancing the accuracy of financial forecasts and increasing
management understanding. When automated, ABB can rapidly and accurately produce financial
plans and models based on varying levels of volume assumptions. Also, ABB eliminates much
of the needless rework created by traditional budgeting techniques. ABB analyzes the
products or services to be produced, what activities are required to produce those
products or services, and finally what resources need to be budgeted to perform those
activities. Simply said, ABB is the reversing of the ABC process to produce financial
plans and budgets.
What kind of software do I need and what are some of the pitfalls in doing an ABM pilot
The most important element in completing an ABM pilot is how well the activity analysis is
done and the depth of understanding of the ABC/ABM process from the bottom to the top of
the organization. Many organizations will embark on an ABM pilot by purchasing an
expensive piece of software and spending an inordinate amount of time learning to use the
software; time that should be spent during a pilot on the aforementioned issues. RPM
Associates has found that using a spreadsheet or simple data base product is all that is
required during a pilot project. In fact, we provide Microsoft Access-based software free
to our clients that are embarking on a pilot project. The time to decide on a permanent
software solution is after the pilot is completed and the long term strategy for using ABM
is rolled out.
The duration of a pilot is another important consideration. We have found that depending
on the scope of the area to be piloted, a project should take at least four weeks and no
longer than three months. Pilots that take longer than this usually lose focus and consume
too much of an organization's resources. The three month time frame is fully adequate to
evaluate the benefits of ABM and to make the decision to go forward.
Developing a solid plan with specific phases and objectives will help avert many pitfalls.
As a minimum, the following phases are suggested:
Preliminary Data Analysis
Activity Analysis and Costing
Identification of Process Improvement Opportunities
Project Evaluation and Reporting
RESULTS FROM EXPERIENCED VALUE CREATORS
To achieve your goals, contact our experienced value creators who transfer
knowledge to your organization. We look forward to helping you achieve your goals.
Value Creation Group, Inc. 7820 Scotia
Dr. #2000 Dallas, TX 75248 Phone: 972.980.7407