Activity-Based Management

Chapter 5

Activity-based costing
Allocation process
Does not reduce or create costs
Does determine the cost to perform
activities
Forms the basis for process improvement
Activity-based management

Activity-based management
Evaluates the cost and value of
activities to identify opportunities for
improvement
High or low value to the customer?
Enhance value-added activities
Reduce non-value-added activities

Value- vs. non-value-added

Would the customer willingly pay for the
cost of the activity?
Would the customer encourage doing
more of the activity?
Does the activity help the organization
reach its goals?

Value-added vs. non-value-added

activities
Activity
Material handling
Set-up
Assembly
Testing and inspection
Rework
Packaging
Breaks and meetings

Value-added?
No
No
Yes
Maybe
No
Maybe
No

Value-added vs. non-value-added

activities
Determination is often subjective
Some are obvious
Others may be necessary, but do not
add value to the customer
Use rating scale to categorize
Too much or too little detail can hurt
Should use a team-based approach
Must consider interactions

Steps in the ABM process

Activity analysis
Value-adding?
Customers viewpoint
Necessary evil
Non-value-adding

Cost

Steps in the ABM process

Identify opportunities for improvement
Low value-adding
Willie Sutton rule

Identify the root cause of the problem

The 5 whys
Fix the problem, not treat the symptoms

Steps in the ABM process

Estimate cost and cost savings
What will the changes cost?
How much will they save?

Make the changes

Evaluate results
Are expected results achieved?

Repeat the process

ABC/ABM implementation
considerations
Management commitment
Scope of project
Determines resources needed

Resources
Personnel
Time
Technology

ABC/ABM implementation
considerations
Organizational culture
Acceptance of change
Willingness to use the information

Open communication
Sharing ideas
Rumor control

Teamwork

Cost of unused capacity

CAM-I capacity model
Productive capacity
Output of saleable product

Non-productive capacity
Capacity lost to non-productive activities
Set-ups, maintenance, defects, delays, etc.

Idle capacity
Unused capacity
Weekends, vacations, lack of orders, etc.

Cost of unused capacity

Identifying cost of unused capacity
Resources supplied resources used
Identifies opportunities for improvement
Reduce capacity
Increase output without incurring more of
the cost

Some unused capacity is inevitable

and good