ABM can help in both ways
a) Are we doing the right things (Strategic) – This is related to the customer and product profitability. It is always best for any organization to sell their best products to their best customers. One should always analyze this and improve upon. For this one should know who are area their best customers and which are their best products. Second step is to find out whether they are doing this. Next is if not then find out why the customers or products that are not profitable are behaving so. Once we understand thins then move towards the action plan and get the feedback. In all this process ABM helps in every step.
a) Are we doing the right things (Strategic) – This is related to the customer and product profitability. It is always best for any organization to sell their best products to their best customers. One should always analyze this and improve upon. For this one should know who are area their best customers and which are their best products. Second step is to find out whether they are doing this. Next is if not then find out why the customers or products that are not profitable are behaving so. Once we understand thins then move towards the action plan and get the feedback. In all this process ABM helps in every step.
b) Are we doing the things right (Operational) – This is related to the value that we are adding or destroying through our business processes (and/or activities). ABC helps to identify the non-value adding activities in the organization. It also helps to understand the underlying drivers for the same. One can work on these drivers to improve the organizational cost structure and productivity. ABM also helps in prioritizing various action plans in the organization simply by providing the information about the cost of the processes (or activities). Typically the processes (or activities) with high cost can be pushed forward for improvement, but within those processes (or activities) we can further prioritize depending upon their importance towards improving customer value, potential to change within organization, the competitive advantage that it can add etc.
In today’s radical scenario organizations have to look at both these things as to whether they are doing the right things as well as the thing right. For understanding the level of accurate information and feedback on the same, one must look at the use of Activity Based Management in their organization.
In today’s radical scenario organizations have to look at both these things as to whether they are doing the right things as well as the thing right. For understanding the level of accurate information and feedback on the same, one must look at the use of Activity Based Management in their organization.
Rajen,
ReplyDeleteYour post clearly distinguishes the differences between a "strategic" and an "operational" activity-based cost management (ABC/M) system. It is important to understand the differences. Too often the accounting department initially over-engineers the size of its first ABC/M model well beyond diminishing returns on extra accuracy for the extra effort of work. That is, the ABC/M model is excessively large and thus confusing to managers plus it is difficult to maintain early-on until it is automated. I recommend organizations begin their ABC/M journey with a simpler ABC/M-lite (80/20 rule) model primarily for strategic profit margin reporting for executives and higher level managers. Then later, that model (or separate ABC/M models) can be decomposed for "operational" process cost productivity improvement. So, nice writing.
I write a blog on these topics at http://blogs.sas.com/cokins
Gary Cokins, SAS