Activity Based Management as a Cost Reduction Technique

Independent of the condition of the economy, at any point, there is an increasing need within organizations, in every industry, to have more transparency across the overall supply chain costs and the factors that influence it. Activity Based Management (ABM) is a technique used to provide this visibility, and thereby help improve strategic and operational decisions in the organization. ABM involves identifying activities that a business performs, and carrying out a value chain analysis, using Activity Based Costing (ABC).

Figure 1 illustrates the traditional Activity Based Management (ABM) process. There are two workstreams in this process – (a) Cost Assignment and (b) Activity Analysis/Evaluation. The premise of the cost assignment workstream is that every cost is assigned to an activity. Additionally, cost drivers are determined by the cost level, including number of products manufactured or orders fulfilled. Through the cost per activity and number of drivers, a tariff per activity can be calculated. Activity analysis is the detailed description of all activities that the organization performs, and the root cause that triggers them. Activity evaluation is done through performance measures or KPIs. ABM helps improve efficiency through cost management based on information out of ABC.

Figure 1: Traditional ABM Model


CGN ABM Methodology:

Figure 2: CGN ABM Methodology

At CGN, we have a structured ABM methodology (Figure 2) which has been continuously refined, based on experience with world class organizations. We begin with a focus on the customer’s requirements, and establish a linkage between activities, costs and business priorities through Voice of Business (VoB) and Voice of Customer (VoC). The next step is to build a ground-up inventory of processes and analyze the cost benefit of each individual activity in a financial model, to clearly demonstrate executable value opportunities (Figure 3). In addition to providing much needed visibility into Non Value Add (NVA) costs, our process drives an execution roadmap with short and long term glide paths from the current state to the desired state.

Figure 3: Opportunity Identification (VA/NVA/PNVA)

Dinesh Vyas
CGN Global
Senior Consultant
Tom Rauch
CGN Global
Managing Principal