Operational Activity-Based Management

1. Operational Activity-Based Management Filinova Olga Kostornov Ivan Storozhenko Roman Tcheshkova Nadezhda Management Accounting for Multinational Companies Associate Professor Igor N. Baranov

2. What is Activity-Based Management? • Aim: • improve the value of products or services to customers; • increase the firm’s competitiveness and profitability; • The main source of information: • activity-based costing;

3. Operational Activity-Based Management • Aim: • increase operation efficiency; • enhance asset utilization; • lower costs; • Focus on: • doing things right; • performing activities more efficiently; • Benefits • reduction costs; • higher revenue; • cost avoidance.

4. The key tools of operational ABM • activity analysis; • activity-based costing; • business process reengineering; • total quality management; • performance management.

5. Activity classification • Unit-level activities; • Batch-level activities; • Product-sustaining or service-sustaining activities and customer-sustaining activities; • Facility-sustaining activities.

6. Conditions and organizational characteristics for which operational ABM as a management systemis recommended: • intensive competition; • diversity of products; • complex operations; • production volumes vary significantly among the products; • different proportions in consuming resources among the products; • relatively high overhead costs and for some products higher than the direct cost; • the belief by the operating managers that the old traditional system did not give meaningful product costs.

7. VALUE = Price/Quality ratio Operational ABM and comparison with TQM & BPR ABM TQM Focus on creating maximum value for customers through business activities and cost optimization Focus on creating maximum value for customers through quality management BPR

8. ABM versus TQMand business processes reengineering • ABM motivates managers for launching TQM and reengineering; • ABM establishes where initiatives should be launched; • ABM provide cost justification for reengineering and other improvement projects; • ABM traces benefits from organizational improvement; • ABM through process drivers performance measures.

9. Operational Activity-Based Management and Strategy Implementation TWO WAYS • Shifting the mix of activities and products away from less profitable to more profitable applications • Becoming a low-cost producer/seller

10. Steps for activity analysis • chartthe activities; • classify activities; • eliminate non-value-added activities; • continuously improve the efficiency of activities.

11. Difference in decision making between companies adopted and not adopted operational ABM - Companies not adopted operational ABM use traditional cost management systems. Some common problems, associated with such systems: • Traditional systems look backward. • Traditional cost accounting techniques for capturing cost are flawed. • There is a lack of alignment, as reporting of costs does not reflect the true flow of processes in the business. • They encourage dysfunctional behavior by supporting the “ship at all costs” mentality. • In a traditional cost accounting system, there is a lack of customer focus. There is no differentiation between activity costs and added value to customers. • Standard costing does not identify key cost drivers, specifically for overhead costs. Therefore, the constant change and development of organizations is not examined. • Standard costing does not point out how to improve current processes.

12. So, traditional financial managers focuse on internal cost controls, things they can see easily. • They're disinclined to venture outside the company to measure external customer costs and customer profitability. • Activity-based management focuses on managing activities to reduce costs and improve customer value, it means that decisions are made on internal and external costs.

13. Avoidance cross-subsidization; Less subjectivity; ABM and Decision making

14. Optimum cost system High Total Cost Expenses Cost of error Measurementcost Low Optimum cost system High Low Accuracy

15. Optimum cost system • Costs of introducing ABM in a company = expenses on cost of error + expenses on receiving accurate information about product cost; • Benefits: • reduction costs; • higher revenue; • cost avoidance.

16. “Those who look deeply into the process of activity-based management will find that it is an area of management that will empower them with the solid information about their organization that enables them to exercise leadership and wisdom in decision making.” By Stephen R. Covey, author of The Seven Habits of Highly Effective People and Principle-Centered Leadership