Activity Based Management
Activity-Based Management (ABM) is a management approach that focuses on analyzing, understanding, and improving the activities and processes within an organization to optimize its overall performance. ABM builds upon the principles of Activity-Based Costing (ABC) by using the information provided by the ABC system to identify areas for improvement, streamline operations, and make informed strategic decisions.
ABM aims to improve the value of products and services while reducing costs by focusing on the activities that drive costs and their relationship with the products, services, and customers. This approach emphasizes the identification of non-value-added activities and the elimination or reduction of these activities to minimize costs and improve efficiency.
Some key components of Activity-Based Management include:
- Identifying and analyzing activities and processes within the organization.
- Determining the cost drivers associated with each activity.
- Allocating costs to products, services, and customers based on their consumption of activities.
- Analyzing the efficiency and effectiveness of activities and processes.
- Identifying opportunities for improvement, such as eliminating waste, streamlining processes, and reducing cycle times.
- Implementing process improvements and monitoring the results to ensure that the desired outcomes are achieved.
The goal of ABM is to help organizations become more competitive and profitable by providing better insights into their operations and facilitating continuous improvement. By understanding the relationship between activities, costs, and the value created for customers, organizations can make more informed decisions about resource allocation, pricing, product mix, and overall strategy.
Example of an Activity Based Management
Let’s consider a fictional company called “TechWidget” that manufactures electronic gadgets. The company wants to improve its profitability and has decided to implement Activity-Based Management (ABM) to identify areas for cost reduction and efficiency improvements.
- Identifying and analyzing activities and processes: TechWidget first identifies its primary activities, such as product design, purchasing raw materials, production, packaging, and shipping. The company also identifies its support activities, such as human resources, administration, and marketing.
- Determining cost drivers associated with each activity: Next, the company identifies cost drivers for each activity. For example, the cost drivers for the production activity could be machine hours and labor hours, while the cost drivers for the purchasing activity could be the number of purchase orders placed.
- Allocating costs to products, services, and customers: TechWidget allocates costs to its products by tracing the consumption of each activity. For instance, if a specific gadget model requires more machine hours and labor hours for production, it will be allocated a higher share of the production costs.
- Analyzing the efficiency and effectiveness of activities and processes: By examining the costs associated with each activity, TechWidget discovers that the packaging process is inefficient and more expensive than industry benchmarks. The company also realizes that its marketing efforts are not generating the desired return on investment.
- Identifying opportunities for improvement: TechWidget decides to invest in automated packaging equipment to reduce labor costs and improve packaging efficiency. The company also decides to reevaluate its marketing strategy and shift its focus towards digital marketing channels that have shown better results in the past.
- Implementing process improvements and monitoring results: After implementing the new packaging equipment and adjusting its marketing strategy, TechWidget closely monitors the results. The company observes a reduction in packaging costs and an increase in marketing ROI. This enables TechWidget to price its products more competitively and improve its overall profitability.
Through Activity-Based Management, TechWidget was able to identify inefficiencies, implement improvements, and achieve better financial performance by focusing on the activities that drive costs and create value for its customers.
