Activity Based Management (ABM)

Applying ABM

Operational ABMActivity based management (ABM) includes all the actions that managers take to improve operations or reduce costs based on the ABC data. The first step in any improvement program is to target areas that need improvement.

What Activities

Are Performed?

How Much Does it Cost to Perform

Each Activity?

Does the Activity Add Value to the Customer?

4-3

Actions from ABC• As a result of your ABC analysis you

have costing figures that can assist in the following decisions

• Pricing– Re-pricing up particularly if it is a

custom or unique product– Re-pricing down on mass market

products to meet or beat the market

Actions from ABC : Substitution

• Product Substitution –Demonstrating to the customer

how they might substitute a less complex product with the same result

Actions from ABC : Redesign

• Examining a particular product to identify areas which can be eliminated particularly areas that add cost but no value

Actions from ABC :Process Improvement

• Process Improvement– improving the process to reduce the

use of resources per unit of cost driver e.g reducing the time and cost to set up batches

– setting up job shop units that deal only with small batches

A strategic Point of View

A Strategic Perspective• After applying the ABC Analysis. • Firms often find that the overall

cumulative profit of the firm peak and then declines as the number of Products/Customers increases

Whale Curve (Pareto Rule)

Whale Curve• This is particularly true if firms have

– Large expenses in indirect and support resources

– Diversity in products,customers and processes

Sometimes you Get Hidden Gains and Losses

A QUADRANT VIEW OF CUSTOMERS

Cost to serve

CUSTOMERS Types from ABC :

A QUADRANT VIEW OF CUSTOMERS

• Upper left : – Great customers easy to serve and

highly profitable …– Problem may be fished by others be

prepared to service – Examples ?

A QUADRANT VIEW OF CUSTOMERS

• Lower Right : • Problematic customers • Need to reanalyze and substitute/

eliminate• Examples ?

Other Actions from ABM• Eliminate products entirely• If necessary Eliminate Capacity• Focused Facilities