5.2 Activity-Based Management (ABM)

Activity-Based Management (ABM) takes cost info and uses it to boost efficiency. It's all about spotting activities that add value and those that don't. The goal? Cut out the fluff and make your business run smoother.

ABM isn't just about crunching numbers. It's a tool for making smart choices, both day-to-day and long-term. From tweaking processes to reshaping strategy, ABM helps businesses stay competitive by managing costs intelligently.

Activity-Based Management Fundamentals

Understanding ABM and Activity Types

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• Activity-Based Management (ABM) utilizes activity-based costing information to improve organizational efficiency and effectiveness
• Value-added activities directly contribute to customer satisfaction or organizational goals (product assembly)
• Non-value-added activities consume resources without adding value to the final product or service (excessive inventory storage)
• ABM focuses on eliminating or reducing non-value-added activities to improve overall performance
• Managers use ABM to identify opportunities for cost reduction and process improvement

Performance Measurement in ABM

• ABM incorporates performance measurement to evaluate the efficiency and effectiveness of activities
• Key performance indicators (KPIs) track progress towards organizational goals
• Activity-based performance measures assess the cost and quality of individual activities
• Benchmarking compares performance against industry standards or best practices
• Performance measurement in ABM helps identify areas for improvement and guides decision-making

Operational ABM

Process Improvement Techniques

• Operational ABM focuses on enhancing day-to-day operations and processes
• Process mapping visualizes workflow to identify inefficiencies and bottlenecks
• Lean manufacturing principles eliminate waste and streamline production processes
• Six Sigma methodology reduces variability and defects in processes
• Continuous improvement culture encourages ongoing refinement of operational activities

Cost Reduction Strategies

• Activity analysis identifies and eliminates non-value-added activities
• Resource allocation optimizes the use of personnel, equipment, and materials
• Automation reduces labor costs and improves process efficiency
• Supplier negotiations aim to secure better pricing and terms
• Cross-functional collaboration identifies cost-saving opportunities across departments

Strategic ABM

Long-term Performance Measurement

• Strategic ABM focuses on improving organizational performance over the long term
• Balanced Scorecard approach aligns performance measures with strategic objectives
• Customer profitability analysis identifies most valuable customer segments
• Product line profitability assessment guides product mix decisions
• Return on investment (ROI) analysis evaluates the effectiveness of strategic initiatives

Strategic Process Improvement

• Business process reengineering fundamentally redesigns core business processes
• Value chain analysis optimizes activities across the entire supply chain
• Strategic partnerships foster collaboration with suppliers and customers
• Innovation management encourages development of new products and services
• Organizational restructuring aligns company structure with strategic goals

Cost Management for Competitive Advantage

• Target costing sets cost goals based on market-driven pricing
• Life-cycle costing considers all costs associated with a product from design to disposal
• Activity-based budgeting aligns resource allocation with strategic priorities
• Outsourcing non-core activities reduces costs and improves focus on core competencies
• Pricing strategies leverage cost information to maximize profitability and market share