1. Activity-Based Management
Chapter 5

2. 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

3. 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

4. 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?

5. Value-added vs. non-value-added activities
Activity
Material handling
Set-up
Assembly
Testing and inspection
Rework
Packaging
Breaks and meetings
Value-added? No
Yes
Maybe

6. 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

7. Steps in the ABM process
Activity analysis
Value-adding?
Customer’s viewpoint
Necessary evil
Non-value-adding
Cost

8. Steps in the ABM process
Identify opportunities for improvement
Low value-adding
Willie Sutton rule
Identify the root cause of the problem
“The 5 why’s”
Fix the problem, not treat the symptoms

9. 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

10. ABC/ABM implementation considerations
Management commitment
Scope of project
Determines resources needed
Resources
Personnel
Time
Technology

11. ABC/ABM implementation considerations
Organizational culture
Acceptance of change
Willingness to use the information
Open communication
Sharing ideas
Rumor control
Teamwork

12. 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.

13. 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