BENCHMARKING CONSOR TIUM STUDY ACTIVITY-BASED … · in this report, include the following: ABM...

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©1996 AMERICAN PRODUCTIVITY & QUALITY CENTER. ALL RIGHTS RESERVED.

ACTIVITY-BASEDMANAGEMENT

• final report •

B E N C H M A R K I N G C O N S O R T I U M S T U D Y

2 A C T I V I T Y - B A S E D M A N A G E M E N T S T U D Y ● F I N A L R E P O R T

PROJECTP E R S O N N E L

Consortium Study Managers: Leigh-Ann Sonnier, benchmarking specialistAPQC International Benchmarking Clearinghouse

Subject Matter Expert: John MillerArthur Andersen

Editors: Vicki J. Powers

Designer: Eric Heisserer

Illustrator: Beth McCash

M E M B E R S H I P I N F O R M A T I O NFor more information about how to become a member of the International Benchmarking Clearinghouse, a service of theAPQC, and receive publications and other benefits, call: (800) 776-9676 or (713) 681-4020.

C O P Y R I G H T©1996 American Productivity & Quality Center, 123 North Post Oak Lane, Third Floor, Houston, Texas 77024. Data included in this report is the exclusive property of American Productivity & Quality Center and cannot be reproduced without the prior consent of American Productivity & Quality Center.

S T A T E M E N T O F P U R P O S EThe purpose of publishing this study is to provide a reference point and insight into the processes and practices associated with certainissues. It should be used as an educational learning tool and should not be used as a “recipe” or step-by-step procedure to be copied orduplicated in any way. This report may not represent current organizational processes, policies, or practices because changes may haveoccurred since the completion of the study.

© 1 9 9 6 A M E R I C A N P R O D U C T I V I T Y & Q U A L I T Y C E N T E R 3

CONTENTSO F R E P O R T

Sponsor Companies

Best Practice Partner Companies

Executive Summary

Key Findings

Best Practice Company Summaries:

Acxiom Corporation

United Technologies Corporation-Carrier

Deere & Company

Electronic Data Systems (EDS) Strategic Support Unit

First Tennessee Bank

General Motors–Service Parts Operations

IBM-Endicott Panel

Parker Hannifin Compumotor Division

PCS Health Systems, Inc.

Texas Instruments

Valvoline Company

456

113132

37

41

45

49

52

56

61

65

69

73


SPONSORC O M P A N I E S

Armstrong Laing

ABC Technologies

Acxiom Corporation

Advanced Micro Devices

AGT Ltd.

Alyeska Pipeline Company

American Greetings Corporation

Ameritech

AMP, Inc.

Arthur Andersen

AT&T

The Boeing Company

Chrysler Corporation

Cott Beverages

Delta Systems

Digital Equipment Corporation

Eastman Kodak Company

Electronic Data Systems

Emerson Electric Co.

Ernst & Young

GTE Corporation

Grumman Aerospace

Harris Corporation

Hewlett-Packard

Honeywell, Inc.

Hughes Aircraft Company

IBM Corporation

Intel Corporation

Johnson Controls

Kohler Company

L.M. Ericsson Data

Martin Marietta Energy

McDonnell Douglas Corporation

Mead Corporation

Merck & Co., Inc.

Monsanto Chemical Company

Motorola

NCR

National Semiconductor Corporation

Northrop Corporation

PHH Corporation

Pennsylvania Power & Light Company

Pennzoil Company

Public Service Electric & Gas

R.L. Polk

Rhone-Poulenc Rorer Inc.

Rockwell International

Schlumberger

SEMATECH

Space Systems

Stentor Canadian Network Mgt.

Stern Stewart

Telephone and Data Systems

Texas Instruments Inc.

Union Carbide Chemicals & Plastics

U.S. Department of Defense

Valmet


PARTNERC O M P A N I E S

Acxiom Corporation

The Boeing Company

United Technologies Corporation—Carrier

Current, Inc.

Deere & Company



General Motors—Delco Electronics

General Motors—Service Parts Operations

IBM-Endicott Panel

McNeil Consumer Products



Texas Instruments

Valvoline Company


EXECUTIVES U M M A R Y

The American Productivity & Quality Center’sInternational Benchmarking Clearinghouse, the

leader in cooperative benchmarking, and theConsortium for Advanced Manufacturing-International (CAM-I), the leading consortium in thefield of activity-based costing and management prac-tices, joined together to conduct this study of bestpractices in the area of activity-based management(ABM) and activity-based costing (ABC). The studyand related survey represent the most comprehensivepiece of work undertaken in the emerging area ofABM. The intent was to identify best practices in theinstallation, application, and use of ABM informa-tion systems.

S C O P EAs part of this study, the organizations attempted

to identify all known ABM implementations under-taken in North America. More than 750 of the 3,000+organizations identified were invited to participate ina detailed survey designed to identify best practices inABM. The instructions with the survey stated thatonly those organizations that had achieved positiveresults from ABM efforts need complete and respondto the survey. Overall, 167 qualified responses werereceived.

Based on the survey responses, 40 companies wereidentified as best practice sites—15 of which partici-pated and hosted site visits. Criteria for selection of bestpractice sites included maturity of installation, scaleof coverage, scope of application, results attained, andanticipated learning opportunities. The 15 site visitswere selected as representative of the 40 organizationsidentified as best practice. The selection of site visits wasbased on availability, scheduling, and willingness toparticipate.

P R O P R I E T A R Y I N F O R M A T I O NThis consortium study was funded by 60 spon-

soring organizations. Some of the study results andfindings are proprietary to these organizations. Thisfinal report is a summary of the study results and find-ings and contains no proprietary information. Elevenof the best practice companies agreed to release sum-maries of their site visit write-ups, which are containedin this report. Additional reports and documentsdeveloped as part of this study include the following:

• Kick-off Meeting (September 28, 1994)• Mid-study Review (December 15, 1994).• Executive Summary (February 1995).• Proprietary Survey Database (April 17, 1995).• Final Study Review and Best Practices Model

(April 17-18, 1995).• Presentation Material (April 17-18, 1995).• Proprietary Site Visit Database (June 30, 1995).

M E T H O D O L O G YThe data collection tools used to collect informa-

tion included both questionnaires and site visit inter-views. The two questionnaires included (1) a detailedquestionnaire designed to collect objective and quan-titative data, and (2) a site visit questionnaire designedto collect qualitative information about the develop-ment, application, and use of ABM information sys-tems.

The survey questionnaire was designed to be com-pleted in one hour and consisted of 44 questions, fiveof which were optional. Many of the questions pro-vided multiple answers. In total, 104 discrete pieces ofdata were gathered from each of the 167 companiesthat completed the survey. The survey was subdividedinto nine areas: company/organization information,


best practice site information, installation criteria, datacollection, status of ABM information system, evalu-ation of ABM information system, result of efforts,implementation environment, and optional questions.

As this was a comprehensive study covering manyaspects of ABM, the site visit questionnaire wasdesigned to provide flexibility and allow the best prac-tice company to select specific agenda areas for reviewand discussion. The three principle areas for discussionwere results achieved, linkage to business environment,and integration with existing information systems.

Areas of discussion for results achieved included: • Process improvements, • Decision support information, • Measurements, • Competitiveness, and • Innovation.

Topics under linkage to business environment included:• Improvement initiatives, • Strategy, rewards and recognition, • Compensation and benefits, and • Supply chain management.

Topics related to integration with existing information systems included: • MIS and function integration, • Credibility/acceptance, • Cultural characteristics, • Ease of data collection, • Ease of use, and • Internal/external customer requirements.

These focused one-day site visits at each of the 15best practice companies allowed the research team togain insights into interview questions and to experiencethe organization’s culture. In addition, subsets of spon-sors attended each site visit to participate in discus-sions with best practice companies. A free-flowingquestion-and-answer session also was allowed at theconclusion of each site visit.

The study concluded with a sharing day where

eight of the best practice companies presented an aspectof their ABM initiative to the sponsors over a two-dayperiod. The presentation areas included: • IBM—Changes in the business environment that

prompted the move to ABM • First Tennessee Bank—Organization support and

transfer of ownership/support to operations • GM Service Parts Operations—Customer and dis-

tribution channel profitability • Parker Hannifin Compumotor Division—ABM use

in total purchasing and design for manufacturability• UTC Carrier Corporation—ABM use as a decision

support tool • Delco Electronics—cost improvement process • Acxiom Corporation—training and education of

personnel in ABM techniques and uses, and • EDS—embedded ABM reporting system.

K E Y F I N D I N G SThis report contains a summary of the key findings

and significant contributions of the ABM Best PracticeStudy. These key findings, covered in detail elsewherein this report, include the following:

ABM Best Practices ModelPerhaps the most significant contribution of the

ABM Best Practice Study was the development of theBest Practices Model for ABM. Widely used and fre-quently quoted, this Model is a structural framework tounderstand best practices in the development, appli-cation, and use of ABM.

The Model groups best practices around themes ofmethodology, management needs/direction, applica-tions, integration, and embracement. Since its releasein April 1995, the ABM Best Practices Model hasbecome the industry standard and has been used inarticles, publications, and presentations.

ABM Value CycleAnother significant contribution of this ABM Best

Practice Study was the development of the ABM ValueCycle that specifies 16 frequently used applications ofABM information. The study consolidates the benefits

SUMMARY


SUMMARY

and value of these applications into three areas: processrelated, decision making, and performance measure-ments.

Best practice companies have learned that singleand limited use of ABM information fails to capture thefull value and potential of the information. Therefore,they consistently seek new applications and uses ofABM information.

Consistent Application of ABM MethodologyBest practice companies consistently apply gen-

erally accepted ABM methods, procedures, terms,techniques, and practices. Examples include the con-sistent use of the CAM-I ABC Basic Model and itsGlossary of Activity-Based Management, the IBCProcess Classification Framework, and general andindustry-specific activity dictionaries.

Most of the time the methods and techniqueswere adapted to the specific requirements of the bestpractice companies. Each organization insisted on acommon language that could be understood acrossthe organization. For example, the ABC two stagecost tracing methodology is well known and under-stood, and people clearly understand the distinctionbetween ABC and ABM.

Management Commitment and PriorityLeadership commitment and support were iden-

tified as critical success factors to a successful ABMimplementation at every best practice company.Thirteen of the 15 best practice companies identifiedsenior management commitment to ABM as either ahigh or top priority. The ABM initiatives at each of thebest practice companies had high visibility and wereimportant to the success of the organization.

At best practice companies, commitment and pri-ority were not only stated in words but also demon-strated through the commitment of resources.Examples include the commitment to training, level ofABM sponsorship, the frequency of involvement bysenior and operations managers, and the percentageof total personnel involved in the implementation.

Cost Efficient, Reliable, and User-Friendly Systems Best practice companies place significant empha-

sis on installing the systems, procedures, and meth-ods necessary to collect and report activity-basedinformation on a regular basis. The frequency of ABMreporting ranged from continuous and real time toperiodically (quarterly or yearly). Most often thereporting period was monthly.

In general, those organizations using ABM infor-mation in the applications of process improvement,cost control, measuring operational performance, andday-to-day operational decision making tended toreport ABM information more frequently and in moredetail. Best practice companies that used ABM infor-mation in the more strategic applications, like productcost and customer profitability, tended to report ABMinformation less frequently.

Either way the systems, procedures, and methodsthat are installed are responsive to the needs of theusers, easy to update and maintain, reliable, and costefficient. If the ability to collect and report ABM infor-mation to the level of specificity required at the fre-quency demanded by the users is absent, the ABMimplementation is a non-event. A lesson from theBest Practice companies is that the systems and softwareaspect of the ABM implementation cannot be ignored;in fact it must be emphasized

Culture that Supports ChangeBest practice companies manage their internal

environment by nurturing a culture that supportschange. Teamwork, trust, and a common vision wereevident at each of the best practice companies. Whileall of the best practice companies acknowledged thatexternal factors were the drivers to implement ABM,each was willing to embrace change and meet the chal-lenge created by the external environment.

For example, best practice companies positionABM as a business analysis tool that serves as an enablerfor decision making and process improvement. ABMis used to address the entire value chain for their prod-ucts and services. Suppliers are used to support prod-uct development and reductions in total part costs.

A P Q C ’ S I N T E R N AT I O N A L B E N C H M A R K I N G C L E A R I N G H O U S E 9

SUMMARY

Customers are used to support product developmentand reductions in customer support costs.

Emerging Management ToolEvery best practice company indicated that it had

not fully implemented ABM and had a long way togo. Each expressed surprise as to having been selectedas a best practice company, as no one is satisfied withthe status of his initiative. The lesson here is that wemust continue to “push the envelope” in terms ofunderstanding the use and application of this man-agement tool.

S U M M A R YWhen we initiated this ABM Best Practice study in

September 1994, we intended to make this the mostsignificant and comprehensive study ever conducted inthe emerging area of ABM. We wanted to create alandmark work that would provide value and long-term impact to those managers and organizations thatelect to implement ABM in their organizations.

The combined knowledge and resources of theAPQC and CAM-I, sponsorship by more than 60leading companies, involvement by six subject mat-ter authorities (including two from academia), 167organizations willing to complete a detailed survey ofABM, and the willingness of 15 best practice compa-nies to share their insights and knowledge, would indi-cate that we accomplished our objective.

Our vision for the study included sharing knowl-edge gained, lessons learned, insights, methods, andpractices of successful ABM initiatives with others.Our vision was to lay a foundation for others to buildupon and improve. This final report document is thefulfillment of that vision and mission.

KEY FINDINGSFINDING I:

ABM Best Practices Model

FINDING II:

ABM Value Cycle

FINDING III:

Consistent Application of ABMMethodology

FINDING IV:

Senior Management Commitment to ABM

FINDING V:

Reliable ABM Systems Required

FINDING VI:

Culture that Supports Change

FINDING VII:

Still an Emerging Management Tool

12

14

16

19

22

24

26


1 2 A C T I V I T Y - B A S E D M A N A G E M E N T S T U D Y ● F I N A L R E P O R T

FINDINGN U M B E R O N E

ABM Best Practice Model

One of the principal and most significant contributions of the ABM

Best Practice study was the development of an ABM Best Practices

Model. Widely used and quoted, this model represents a structural

framework to understand best practices leading to effective

implementation and use of ABM.

The ABM Best Practice Model, Figure 1, groups best practices around themes of methodology and technology, man-agement needs/direction, applications, integration, and embracement.

SUPP

LIERS

CUS

TOM

ERS

EXTERNALENVIRONMENT

INTERNALENVIRONMENT

ABM BEST PRACTICE MODEL

INTEGRATIONMANAGEMENT NEEDSAND DIRECTIONS

APPLICATIONSEMBRACEMENT

METHODOLOGYAND

TECHNOLOGY

Figure 1

© 1 9 9 6 A M E R I C A N P R O D U C T I V I T Y & Q U A L I T Y C E N T E R 1 3

FINDINGS

Best practices of methodology and technologyinclude the development of the ABM system and

the use of activity dictionaries, activity and cost driveranalysis and definition, user training, managementinvolvement, and implementation teams. Best prac-tices of management needs and direction include accu-racy of information, level of detail and specificity,frequency of update, ease of access and use, flexibilityand relevance. Best practices for applications includebalanced scorecard performance measurement, decisionsupport, and new reports and applications.

The ABM Best Practices Model makes an impor-tant distinction between best practices for integrationand best practices for embracement. Best practicesfor integration include how well the information isintegrated with the legacy financial and operating sys-tems and the ease of update and system maintenance.

Best practices for integration also include the inte-gration of the information system with the business

itself—its strategies, goals, initiatives, and plans. Bestpractices for integration, in effect, deal with tying theABM system to the existing strategies, systems, prac-tices, and procedures of the organization.

Embracement goes beyond integration.Embracement occurs when the people who use theinformation take ownership. Best practices forembracement include accountability, acceptance, anduse of the information for self-monitoring.

The ABM Best Practices Model also takes intoconsideration the overall business environment, includ-ing suppliers and customers (the entire value chain).The external environment describes the competitive sit-uation that exists, while the internal environment doc-uments those internal factors in best practice companiesthat lead to success.

The ABM Best Practices Model has become theindustry standard and has been used in numerous arti-cles and presentations.


FINDINGN U M B E R T W O

ABM Value Cycle

The ABM Value Cycle specifies 16 frequently used applications of

ABM information and consolidates the benefits and value of these

applications into three areas—process related, decision making, and

performance measurements.

ABM VALUE CYCLE

Improvement Initiatives• Process Improvement

• Cost Reduction

• Downsizing

• Business Process Reengineering

• Project Management

• Benchmarking

Decision Making• Product Costing

• Capital Justification

• Cost Estimation

• Target Costing

• Pricing Models

Performance Measurements• Budgeting

• Profit Analysis

• Activity Performance Measurements

• Inventory Valuation

• Capacity Utilization

As ABM matures, companies migrate to multiple applications...demonstrating a continuum toward a broad based ABM system

Figure 2


FINDINGS

Organizations can enter the value cycle at anypoint. As the ABM system matures, organiza-

tions migrate to multiple applications. This migra-tion is important because a single use or application ofactivity-based information may not provide sufficientvalue to offset the cost of implementing and main-taining the system.

While the dominate initial ABM application isfor product costing, best practice companies have

learned that this single and limited use of ABM infor-mation fails to capture the full value and potential of theinformation. Best practice companies consistentlyseek new applications and uses for ABM information.Figure 3 displays the number of primary and secondaryapplications used by the best practice companies.

Used 6-77%

Used 4-560%

Less Than 313%

Used Over 720%

Used 4-520%

Less Than 327%

Used Over 720%

Used 6-733%

Primary Applications Secondary Applications

Figure 3


FINDINGN U M B E R T H R E E

Consistent Application of ABM Methodology

Best practice companies consistently apply generally accepted ABM

methods, procedures, terms and techniques, and adapt them to their

specific requirements. Examples include consistent use of the CAM-I

ABC Basic Model and CAM-I Glossary of Activity-Based Management

terms and definitions, tested data collection methods and techniques,

generic process classification frameworks, and general and industry

specific activity dictionaries.

Profitability View

Productivity Costand Profitability

AssignActivity

Activities

AssignCost

G/L Data

ActivityDrivers

ActivityAnalysis

ActivityMeasures

ResourceDrivers

DefineActivities

Activity View

ABM TWO STAGEMETHODOLOGY

The CAM-I ABC Basic Model, or CAM-I Cross, Figure 4, is a conceptual model used to explain the basicsof activity-based costing.

Figure 4


FINDINGS

There are two axes to the CAM-I ABC BasicModel. The vertical axis deals with the classic

two-stage cost assignment view, where resource costs aretraced or assigned to activities that, in turn, are tracedor assigned to cost objects (products, services, cus-tomers, distribution, and channels). These are based onuse and consumption of the activity by the cost object.

The horizontal axis contains the process view andidentifies the cost drivers (cause of cost) of the activitytogether with measures of activity performance. Bestpractice companies consistently used the ABC two-stage cost assignment methodologies for tracing costsand consistently identified cost drivers and perfor-mance measures for their key and significant activi-ties.

Another example of the consistent application ofABM methodology is the use of standard and acceptedterms—the source of the CAM-I Glossary of Terms.When developed, the primary objective of this glossarywas to unify, standardize and, when necessary, developa set of terms pertaining to ABM. When published in1993, the purpose of this work was to facilitate theunderstanding of ABM and to encourage better com-munication among those involved in the research,development, and implementation of this discipline.

This body of work has been enormously successfulin eliminating confusion caused by lack of definitions.The terms and definitions of the CAM-I Glossary ofTerms have been incorporated into most commercialABM software products, in all the leading public sem-inars and conferences, in leading business books, and innew editions of cost accounting and management text-books taught in leading institutions like StanfordUniversity and the Harvard Business School. Dr.George Foster, Professor at Stanford University, andDr. Dan Swenson of the University of Idaho, bothserved as subject matter experts on the project teamresponsible for delivering this ABM Best Practice study.

Yet another example is in the consistent use ofdata collection techniques and methods. Eight spe-cific data collection methods (manager interviews,worker interviews, questionnaires, existing documen-tation, observations, group based interviews, work

measurement, and process mapping) were identified bythe survey. Best practice companies identified themethods used and rated their use of each techniquefrom little to extensive. Figure 5 identifies the numberof methods used by best practice companies.

Another way to graphically display the consistentuse of ABM data collection methods is based on thedegree the method was used. The number of timesthe method was cited as frequent or extensive use forthe best practice companies is described in Figure 6on page 18.

The final example of the consistent applicationof ABM methodology is in the use of generic processclassification frameworks and in standard and industryspecific activity dictionaries. Many of the best practicecompanies use or reference the InternationalBenchmarking Clearinghouse’s Process ClassificationFramework in the identification and classification ofbusiness processes and activities. Best practice com-panies consistently prepare and maintain an activitydictionary to document the activity definitions, outputsand output measures, annual activity costs and out-puts, cost drivers, cost per unit of activity output, per-formance measures, and activity process maps.

4-5 Methods27%

All Methods33%

6-7 Methods40%

Figure 5: Number of Methods Used by Best PracticeCompanies


FINDINGS

0

2

4

6

8

10

12

14

Process Mapping

Work Measurement

Group Based Interviews

Observations

Existing Documentation

Questionnaires

Worker Interviews

Manager Interviews

Num

ber o

f Tim

es

13

6

35 5

8

56

Figure 6: Frequent or Extensive Use by Best Practice Companies


FINDINGN U M B E R F O U R

Management Commitment and Priority

Thirteen of the 15 best practice companies identi-fied a level of senior management commitment to

ABM as high or top priority. Leadership commitmentand support was identified as a critical success factor atevery best practice company. The priority of ABM atthe best practice companies was evident from the sitevisits and the survey questionnaires. Examples includethe level of ABM sponsorship, breadth and scope oftraining, ABM project implementation resources, andlevel of management involvement.

L E V E L O F A B M S P O N S O R S H I PIn general, the ABM sponsor or champion is

placed high in the organization. Figure 7 demon-strates the level at which ABM is sponsored.

B R E A D T H A N D S C O P E O FT R A I N I N G

Commitment also was evident in the breadth andscope of training offered to users of ABM information.Each of the best practice companies was asked to identifytypes of training provided to users and ABM imple-mentation teams. Figure 8 on page 20 reflects the fre-quency that the best practice company identified usinga certain type of training. For example, all 15 best prac-tice companies provided conceptual training. Nine ofthe best practice companies used in-house seminars.

Another way to look at commitment and priorityof training is by how many different types were used byeach best practice company. One-third of the bestpractice companies offered all six types of training.

A B M P R O J E C TI M P L E M E N T A T I O N R E S O U R C E S

Commitment and priority also were evident in thecomposition of the ABM project implementation team.Almost every best practice company had a full-time pro-ject leader assigned to the ABM initiative. In fact, a full-time project leader and dedicated ABM implementationteam was identified as a critical success factor by eightof the best practice companies. Figure 9 on page 20illustrates the number of full-time equivalents (FTEs)assigned to the ABM initiative at the best practice com-panies.

VicePresident

CFO40%

ChiefOperating

Officer7%

ManagerLevel7%

DirectorLevel or

Controller46%

Figure 7: Level of ABM Sponsorship

U S E O F C O N S U L T A N T SIn addition to a fully staffed project team, most

often headed by a full-time project leader, best practicecompanies also used outside consulting services tosupplement their internal resources (see Figure 10).

The commitment and priority to ABM also can bedemonstrated by looking at the percentage of the ABMsite personnel that were interviewed or involved in theimplementation. In the survey, best practice companiesidentified the percentage of personnel at the best prac-tice site that participated and were involved in theimplementation (see Figure 11 on page 21).


FINDINGS

Extensive/Significant

34%

Did Not Use33%

Moderate/Limited33%

0

2

4

6

8

10

12

14

16

In-house Seminars

Public Seminars

Implementation Steps

Conceptual Understanding

Applications/Uses

Mechanics of ABM System

Num

ber o

f Tim

es 1211

15

9 9

6

6-7 FTE13%

4-5 FTE40%

2-3 FTE47%

Figure 8: Types of Training Provided to ABM Teams Figure 9: Number of FTEs Assigned to ABM

Figure 10: Use of Consultants


FINDINGS

0

2

4

6

8

10

12

7

109

12 12

6

Num

ber o

f Tim

es

Level of Management Involvement

Line Personnel

Supervisors/Team Leaders

Department Managers

Operations Managers

Senior Finance Personnel

Senior Management

13%

7%

33%

47%

15% Or Less

16-25%

26-50%

Over 51%

Figure 11: Personnel Involved in Implementation

Figure 12

L E V E L O FM A N A G E M E N TI N V O L V E M E N T

A final way to look at the commit-ment and priority of ABM is to examinethe level of people who were significantlyinvolved with the ABM implementationat best practice companies (see Figure12).

Clearly ABM best practice compa-nies have demonstrated that manage-ment commitment and priority representkeys to successful implementation. ForABM to be successful, it must have thebacking of key management personneland a project team with strong leader-ship and adequate resources.


FINDINGN U M B E R F I V E

On-going, cost-efficient, and reliable ABM systems are required.

Best practice companies place significant empha-sis on installing the systems, procedures, and meth-

ods necessary to collect and report activity-basedinformation on an ongoing basis. The systems, pro-cedures, and methods that are installed are responsiveto the needs of the users, easy to update and maintain,and reliable. Best practice companies have learnedthat the systems and software aspect of the ABM imple-mentation cannot be ignored; in fact, it must beemphasized.

Best practice organizations address the long-termtotal ABM information needs of the organization anduse a total or holistic approach to implementation.This includes emphasis on the selection and develop-ment of cost-effective ongoing data collection andreporting systems to collect and report ABM data at thelevel of detail, accuracy, and frequency required by theusers of the information. ABM system design con-siderations used by best practice companies includepurpose and use, accuracy, frequency of update, and rel-evance.

P U R P O S E A N D U S EA key consideration in the design of the ABM

information system is its purpose and use. Best practicecompanies design their systems to meet the needs andrequirements of the organization. The purpose anduse of ABM drives both the amount of informationthat must be collected and the detail that must beobtained. In general, ABM applications that are processand performance related, such as process improve-

ment, reengineering, project management, activityperformance, and benchmarking require more detailand frequency of the reporting than those decision-related applications such as product costing, capitaljustification, and target costing.

L E V E L O F A C C U R A C YThe level of accuracy required by the ABM infor-

mation system is another key design considerationused by best practice companies. The accuracy of theactivity-based information system is dependent on theaccuracy of the data entering the system. Traditionalcost data are often plagued by allocations, misappliedcosts, assumptions, or incorrect coding that make thedata unreliable. Data from other operating systemscan be equally unreliable. Best practice companiesrecognize that high levels of accuracy require fact-based, reliable data.

Best practice companies also recognize that theselection and use of activity and resource drivers willaffect system accuracy. Activity and resource drivers areoften estimated, the most common of which is theresource driver for tracing salary/wage costs to activities.Accuracy is an issue when using estimates of how peo-ple spend their time. Best practice companies use reli-able methods of collecting this data.

F R E Q U E N C Y O F D I S T R I B U T I O NA N D U P D A T E

The frequency of distribution and update, anotherdesign consideration, is largely a function of the system’s


FINDINGS

purpose and use. Where the purpose is more strategicin nature (product cost, profitability analysis, serviceline profitability), the frequency of update is annuallyor quarterly. Where the purpose is more operational innature (process improvement, performance measure-ment), the frequency is monthly or continuous. Whenboth strategic and operational information is required,it would not be unusual for a best practice company toreport cost and performance measurements on a weeklybasis for some activities and on a quarterly basis forothers.

At ABM best practice companies, the ABM infor-mation systems are designed so that users can com-pare relevant internal costs and performance measuresof activities with externally driven targets. Activity-based systems designers anticipate and plan to compareinternal costs and measurements with external stan-dards and requirements. Management sets standards orhighlights performance gaps for a particular activityor business process. Design specifications take intoaccount such techniques as benchmarking, best prac-tices, and target costing.


FINDINGN U M B E R S I X

Best practice companies have a high degree of orga-nizational acceptance that includes senior man-

agement involvement and commitment and stronglinkage with other management initiatives (see Figure13). In general, there is high delegation of authoritywith operating people requiring and using ABM infor-mation. Operating management is a partner withfinance and has focus on process orientation.Communication is open, honest, frequent, visible,and multi-faceted.

Best practice companies tend to be learning orga-nizations that initiate extensive broad-based/multi-level training and cross-functional learning. Trainingbeyond the traditional organizational structure is evi-dent. At the ABM best practice sites, the learningprocess is institutionalized rather than ad-hoc.

Best practice companies position ABM as a tool tosupport decision making and process improvement.At best practice sites, ABM is not a score keeping tool;rather, it is used as a business analysis tool. Best practicecompanies use this tool to address the entire valuechain for their products. Suppliers are used to sup-port product development and reductions in total partcosts. Customers are used to support product devel-opment and reductions in customer support costs.

Best practice companies achieve measurableprocess improvements by aggressively linking ABMinformation with improvement initiatives. Internaland external benchmarking and ABM data are usedto drive and support improvement initiatives. Bestpractice companies used ABM data to select areas forimprovement.

Best practice companies transfer ownership ofABM to line management. Activities and processesare defined by responsible managers, and relevant ABM

Culture that Supports Change

Best practice companies manage their internal environment by

nurturing a culture that supports change. Trust, teamwork, and team

building were evident in all of the best practice companies that were

visited. Missing from most best practice companies are

“hidden agendas.”

MildlyParticipative

33%

EmpowersWorkforce

47%

Participative20%

Figure 13: Senior Management Involvement andCommitment


FINDINGS

data is made available to them to self-monitor theiractivities. At best practice companies, managers inventnew uses of ABM information.

Best practice companies use total cost in decisionmaking and process improvement. Cost improvementinitiatives are viewed in a holistic manner and exhibita high level of customer-driven cost consciousness.Costs are viewed in terms of value created, and part-nering concepts are used with both suppliers and customers.


FINDINGN U M B E R S E V E N

If there was bad news in this study, it would be thatthe application and use of ABM information sys-

tems is not nearly as far along as we would haveexpected and hoped. ABM is still an emerging man-agement tool. This study was conducted at a very crit-ical point in the evolution of ABM as an emergingmanagement tool. Only a handful of organizationshad been engaged in their ABM initiatives long enoughto have made significant impact from their efforts andto have learned those factors that are key to success,such as which ABM applications create value for theirorganizations and what obstacles to avoid. It takes awhile to learn what works, what doesn’t work, andwhy.

Every best practice company indicated that theinformation currently provided by their ABM systemscould be used more effectively to improve the organi-zation. Each best practice company listed their topthree specific ABM application priorities for the future.These applications were summarized and assigned val-ues based on the priority given by the best practicecompany and the frequency that the application wasidentified as a priority. The number one priority appli-cation was assigned a three, the second priority a two,and the third priority a one. The highest value possiblefor one application would be 45, where each of the15 best practice companies listed the same applica-tion as their top priority. The result of this summaryand analysis appears in the following table:

APPLICATION ASSIGNED VALUE

Process improvement ........................26

Customer profitability ........................13

Product/Service design ....................11

Performance measurement..................8

Other applications ............................32

Total assigned values (15X6)............90

O T H E R F I N D I N G SIn addition to the knowledge contribution of

the best practice companies, the ABM Best PracticeStudy also created a forum where sponsors (many ofwhom had their own ABM initiatives), studyparticipants, practitioners, consultants, thoughtleaders, subject matter experts, and experts fromacademia, could all contribute to this emergingknowledge base of ABM methods, procedures,applications, and benefits.

The most significant of these forums was the finalmeeting of the ABM Best Practices Study held April 17-18, 1995, where eight of the 15 best practice companiesgave presentations describing their ABM initiative.As part of this meeting, companies formed break-outgroups to capture the knowledge, insight, and experi-ence of those who participated in this study. Some ofthese key learnings and “take aways” are summarized onthe following page.

Still an Emerging Management Tool


FINDINGS

Breakout of functional silosABM information reflects the process- or hori-

zontal-based view of the organization. The key chal-lenge is to get people to think and use informationdifferently. To a large degree, this amounts to a changein culture for many organizations, from managingcosts to managing activities.

Teamwork (cross-functional teams) Teamwork will be a key element for success as

organizations move from early pilots and tests of ABMin portions and parts of their organization to morecomprehensive and enterprisewide ABM implemen-tations.

Defining what information will be most meaningful Beware of data overload. An enterprisewide ABM

information system could involve hundreds of activi-ties together with the related and associated cost drivers,performance measures, and activity and resource dri-vers. Using ABC for product/service costing couldinvolve thousands of products or services. The detailand specificity at which activities are defined adds to thebase of ABM information. The key challenge is toselect and define activities that are appropriate for deci-sion making.

Apply to compensation package Longer-term compensation and pay should be

linked to activity performance.

Linking ABM to strategic direction/decisions Senior-level managers are users of activity-based

information. A key challenge is to get senior man-agers to see ABM as a tool that will enable the executionof strategy and strategic decisions.

Dealing with two sets of cost data While the total expenditures of an organization

are the same under both a traditional and an activity-based view, they are often shown and expressed dif-ferently. A key challenge is to communicate thedifferences and to let people understand what thosedifferences are.

Crisis is the best motivation People respond to a crisis or an emergency. Crisis

creates a sense of urgency and teamwork that is neces-sary to make ABM successful.

Use a phased approach to implementation Strive for measurable results in each phase of imple-

mentation. The implementation plan should be well-defined.


FINDINGS

S U M M A R YBest practice studies can be done two ways with a

given resource. They can be broad and wide to cover asquare mile of knowledge a foot deep. They can benarrow and deep, covering a square foot of knowledgea mile deep. This ABM Best Practices Study wasintended to cover a square mile of knowledge andincluded best practices in the application, develop-ment, and use of ABM information systems. Thisbroad base of knowledge enabled us to develop theABM Best Practices Model and the ABM Value Cycle.

The good news that came from this study is thatABM is being linked with other initiatives. We learnedthat best practice companies are moving to a processview of their organization. We learned that companiesare admitting that they have “a long way to go,” andthat ABM implementation methodology is consistent.

The good news/bad news was that initiatives wereoften driven by the external environment. Althoughthere was limited evidence of linkage of ABM infor-mation to compensation, most organizations identifiedthis as essential to long-term sustainability of the ABMsystem.

We were disappointed to learn that ABM was notas developed as we thought. Many organizations arestill not thinking “total cost” and ‘“total value.” ABMis still being applied mostly in those areas where a unitcost traditionally existed (i.e., unit product cost). Wealso learned that, like any measurement and informa-tion system, the benefits of using the information toimprove processes and activities and to make betterdecisions can be difficult to quantify. Outside of thebest practice companies, there was a low level ofresource commitment by most organizations that haveunderstood ABM initiatives.

COMPANY PROFILESAcxiom Corporation

United Technologies Corporation—Carrier

Deere & Company



General Motors—Service Parts Operations

IBM—Endicott Panel



Texas Instruments

Valvoline Company

3036424854586470747884



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AcxiomCorporation

Industry Group: Service

Best Practice Areas: Process ImprovementsMeasurementsCultural Characteristics

Management Style: Empowers workforce

Scope of Implementation: Companywide

Site Data:Annual costs $ 101-250 million

Number of people 501-1,000Number of activities 101-250

Number of products/services 26-100Number of resource drivers 26-50

Number of activity (output) drivers 26-50

Primary Applications: Process ImprovementProfitability AnalysisPerformance Measurement


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ABM Reporting System: Internally developed, fully integrated ABMinformation and data gathering system.Updated continuously.

Results of ABM Efforts: Significant changes for process steps andincentive compensation. Moderate quanti-fied dollar improvements were achieved inproduct/service design, production, andcustomer satisfaction.

Critical Success Factors: Senior Management Commitment. Linkageto Continuous Improvement. ProjectManagement. Leadership. FocusedResources (project team). Speed andSense of Urgency. External ConsultantGuidance

B A C K G R O U N DAcxiom Corporation, located in Conway,

Arkansas, is a service company that provides data pro-cessing and related computer-based services and soft-ware products to marketing departments of largecorporations in the United States and the UK. Inaddition, it provides outsourcing services for data pro-cessing departments. Its clientele includes AllstateInsurance Co., Citibank, and AT&T. Acxiom hasannual sales of approximately $200 million andemploys 1,800 people.

In 1992, Acxiom Corporation initiated an exten-sive quality improvement initiative called Race forExcellence (RFE). To create a sense of innovation,creativity, and entrepreneurial spirit, AcxiomCorporation was initially interested in activity-basedcosting to establish transfer prices for services per-formed by support departments to the operating busi-ness units. The initial exposure to this ABC transfercost application led to a more complete understanding

of activity-based management (ABM.) When theABM initiative was formally undertaken, the primaryapplications were process improvement, performancemeasurement, and profitability analysis. Later, prod-uct (service) costing became a primary application.

The ABM initiative at Acxiom is companywide(exclusive of offsite divisions), representing more than80 percent of the organization’s total cost structure.As a result, accounting/finance, production, informa-tion services, product management, customer service,and research and development were involved in theimplementation.

Acxiom Corporation lists its core competenciesas software development, data center management,and information management technology. These tech-nical capabilities led Acxiom to design, develop, andinstall a permanent ABM information system, includ-ing a robust database of ABM information accessibleusing Microsoft Access PC tools. This relational


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database system, which is updated continuously, isintegrated with Acxiom’s internal financial reporting,operating, and product (or service) cost systems.

Perhaps the most impressive part of the ABM ini-tiative at Acxiom is the ownership of the initiative bytop management and operating personnel. Acxiom’sPresident has been very proactive in the implementa-tion and development of ABM and was instrumental inmaking ABM a part of Acxiom’s business culture. Theinitiative is owned by the Chief Operations Officerand led by the Chief Financial Officer. Activity-basedthinking is driven from the top down and being inte-grated with gain sharing, performance measurement,and compensation systems. The goal of top manage-ment is to weave ABM into the base fabric of Acxiom’sculture, values, mission, and vision.

B E S T P R A C T I C E A R E A S :K E Y F I N D I N G S A N D I N S I G H T S

The site visit included discussion and review inthe process improvements, measurements, and cul-tural characteristics of Acxiom’s ABM initiative. Theaccomplishments together with insights gained arecovered for each area.

P R O C E S S I M P R O V E M E N T SProduct delivery took too long and the cost was too

high. The numerous process improvements that hadbeen implemented contributed the following results: 90percent of all print jobs routed to the LAN, 150 jobsteps eliminated, 80 percent reduction in tapes pro-duced, 220 man hours per month eliminated, 75 out of240 DASD datasets eliminated, overall processing costreduced 72 percent, and 61 percent reduction in weeklyCPU time.

Multi-million dollar customers were dissatisfiedwith timeliness and quality of work. Thus projectteams representing four business units gained com-plete understanding of the process and activities.Improvements were implemented resulting in thereduction of time to build the databases by 50 per-cent. Manpower utilization was reduced 61 percent,

and CPU costs were reduced 54 percent. Acxiomreceived letters of commendation from customers indi-cating improved response rates.

Insights• To facilitate improvement, Acxiom mapped the process

and identified activities for potential reengineering.• The company used ABM information to prioritize

opportunities for improvement.

M E A S U R E M E N T SAcxiom developed an integrated, customer-dri-

ven performance model to link the company’s overallstrategic vision and goals to performance measuresand requirements for customers, associates, managers,executives, and other stakeholders. Performance mea-sures were then developed for each business unit. Inconjunction with a Corporate Measurements TaskForce, these measurements were validated and linkedwith gain sharing objectives.

Acxiom also has embraced value-based measures,such as economic value added (EVA), as a tool to cal-culate the value created by the organization and itsbusiness units. Economic value added is now a keyfactor in Acxiom’s incentive compensation structurewhere many of the measures are derived from ABMinformation. ABM performance measures are usedas key indicators of processes and process performancelevels that result in value created.

A specific business unit needed a measurementsystem to drive customer satisfaction to meet customerexpectations. The business unit executive and a teamof associates defined customer expectations and imple-mented a tracking system for monthly reporting. Themeasures included cycle time, number of projects com-pleted on time, order accuracy, and associate produc-tivity. Goals were established and communicated toassociates with monthly results reported to customers.

Insight• The use of ABM measures to refocus resources and

marketing strategies of an existing product line.


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C U L T U R A L C H A R A C T E R I S T I C SAt Acxiom, continuous improvement is embedded

in the culture of the organization. ABM not only hadto be linked with improvement initiatives like RFEbut also integrated with its culture. The Acxiom busi-ness culture is centered around three fundamentalgoals: 100 percent customer satisfaction, 100 percentemployee satisfaction, and 15 percent profitability.Business culture is driven by leadership, a professionalservices environment, customer focused products andservices, associate development, and continuousimprovement. Acxiom has made significant progress inintegrating ABM with its cultural characteristics.

Insight• Leadership at Acxiom consists of its vision, beliefs,

principles, and values. Leadership also includes hav-ing the right people at the right place at the righttime; communication; and people who are willingand able to be champions. ABM is being integratedwith these cultural characteristics and positioned as atool to achieve leadership.

The professional services environment that Acxiomoperates in is well defined. This environment includesa flat organization, franchised business units, empow-erment, ownership, accountability, boundaries, team-ing, and project/process management. The ABMinitiative was designed to link with these desired cul-tural characteristics. For example, the activity analysisportion of the implementation was geared to each ofthe franchised business units, and teams were formedin the units to define business unit activities, costs,cost drivers, and performance measures.

Insight• ABM was focused on the needs and requirements of

the business unit leader. Since some leaders and busi-ness units required more detailed information thanothers, the system was designed to provide the necessaryflexibility.

Associate development is a fundamental part ofthe culture of Acxiom and one of its values. Associatedevelopment is achieved through recruiting, educa-tion and training, compensation, peer evaluations,and recognition programs. Now, ABM is being inte-grated with associate development. Activity informa-tion and performance is being integrated into payraises, job classifications, job performance evaluations,and recognition systems.

Insights• ABM training is provided to all levels of the organi-

zation and is part of the new hire orientation train-ing program.

• ABM also is included as an integral part of all ofAcxiom’s process improvement training. For example,process documentation training links cost and activ-ity performance to the flow chart.

• Acxiom continues to drive activity-based thinkinginto the culture of the organization. For example,when recruiting, consideration is given to the activi-ties the recruited individual will perform and thelevel of skill required to perform the activity.

Customer focused products and service is basicto Acxiom’s culture and success. For Acxiom, thatmeans establishing partnerships with customers, pro-viding industry application solutions, retaining corecompetencies, and utilizing customer feedback.

Insight• ABM is being integrated with these basic cultural

characteristics by linking activities to the core com-petencies and using activity and cost information inthe partnering process with customers.

S U M M A R YAt Acxiom, continuous improvement is more than

an initiative, it is part of the culture and includes under-standing requirements, business planning, processmapping, ABM, measurements, benchmarking, andFADE (focus, analyze, design, and execution). So well


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embedded in the Acxiom culture, the acronym ABM issometimes used interchangeably with continuousimprovement.

Critical success factors and enablers for Acxiomincluded a business structure where activities are cus-tomer driven. At Acxiom, initiatives like RFE wereundertaken to create this structure. Associates wereempowered to make decisions based on the ABM dataand involved in establishing performance measures.At Acxiom, the goal was to create measures for associ-ates, not clubs for managers. Systems, which areupdated continuously and available on-line by users,provide customer driven feedback about activity andservices performance. Improved performance isreflected in compensation, rewards, and recognition. AtAcxiom, improvements and gains are shared with asso-ciates. ABM information is used in part to determinethe gains to be shared.


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United TechnologiesCorporation–Carrier

Industry Group: Discrete/Assembly Oriented Manufacturing

Best Practice Areas: Decision Support InformationMeasurementsLinkage to Improvement Initiatives

Management Style: Mildly Participative

Scope of Implementation: Multi-Operations

Site Data:Annual costs More than $ 500 million

Number of people 1,000+Number of activities 26-100

Number of products/services Over 10,000Number of resource drivers 6-10


Primary Applications: Product CostingProfitability AnalysisPerformance MeasurementCost Reduction


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ABM Reporting System: PC-based commercial ABM software.Mostly integrated with internal financialreporting and product cost systems Partlyintegrated with operating systems.Updated annually or as required for strate-gic decisions.

Results of ABM Efforts: Very significant changes to outsource activ-ities/processes and to reorganize/restruc-ture. Extensive dollar improvements wereachieved in product/service design, pro-duction, overhead support, andproduct/service profitability.

Critical Success Factors: Senior Management CommitmentStrong Focused Leadership OwnershipAdequate Cross-Functional ResourcesCredibility

B A C K G R O U N DThe plant site in McMinville, Tennessee, is one

of several large manufacturing plants for Carrier airconditioners. ABM at Carrier has tremendous sup-port by corporate headquarters in Syracuse—in fact,two managers from Syracuse joined the site visit inMcMinville. During the visit, the plant engineeringmanager and the plant controller accompanied theresearch team the entire day.

This ABM implementation covers multiple sitesand operations at Carrier. ABM was initiated in about1991 and covered the primary applications of productcosting, profitability analysis, performance measure-ment, cost reduction, capital justification, and busi-ness process re-engineering. Later, target costing, costestimation, and capacity utilization were added as pri-mary applications. Carrier Corporation lists its corecompetencies as designing and developing innovativeproducts and services, delivering a high quality of ser-vice, and providing cost effective, timely distribution.


The site visit included discussion and review inthe areas of decision support information, measure-ments, and linkage to improvement initiatives. Theaccomplishments together with insights gained arecovered for each of these areas.

D E C I S I O N S U P P O R T I N F O R M A T I O N

ABM has supported the drive to reduce complex-ity in the plant. Using ABM information and analysis,the McMinville site supported the purchase of inex-pensive dedicated equipment. Thus, some manufac-turing processes became more cost effective wheninexpensive dedicated equipment replaced flexible butexpensive CNC equipment. With dedicated equip-ment, the plant achieved fewer and less expensivechange-overs. WIP and cycle time also decreased.


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Insights• ABM was designed to support other corporate ini-

tiatives already in place, such as Just-in-Time (JIT)implementation.

• Certainly ABM, by itself, was not the primary reasonfor the shift to dedicated equipment. The primary ini-tiative was JIT, but ABM provided credibility to thenumbers that were used to justify the changes.Imperatives that require change often occur morequickly when the financial impact is highly visible.

The product design team used activity cost infor-mation to reduce the cost of new products. For onenew product, the design team brought the part countdown from 160 to 60 parts. Previously, engineeringprided themselves in developing unique, elegant parts.Now the ABM information showed engineers howthey could use activity cost information to design cost-effective parts. Their objective is to use existing com-ponent parts for the production of new products.Failing this, they attempt to leverage existing processesfor new designs. For one particular part, three designattempts were necessary before a new product met a tar-geted cost.

Insights• Product designers use the ABM information on a

routine basis. Once again, the visibility of cost infor-mation influences change.

• Product designers are part of an engineering teamthat includes manufacturing engineers. The teamworks with manufacturing to introduce products atthe lowest possible cost.

Activity-based information also is considered andused in outsourcing decisions. Two examples includesheet metal painting, which was outsourced to sup-pliers, and contracting with a supplier to runMcMinville’s non-production service parts warehouse.

From simply a material and direct labor stand-point, outsourcing the painting operation could not bejustified. ABC quantified the support costs associatedwith in-house painting and illustrated the cost effec-tiveness of making this change.

ABM analysis also illustrated the financial benefitsassociated with contracting with a supplier to run thenon-production service parts warehouse. The sup-plier staffs the warehouse and is responsible for pur-chasing, stocking, and scheduling service parts. Whenall of the support costs were included in the ABMmodel, transferring these activities to a vendor wasfound to be cost effective.

Insights• Intuitively, management was confident that out-

sourcing the painting operation was a good decision.Yet the site manufacturing engineer and the plantcontroller were convinced that without the hard ABMdata, management would not have supported thechange.

• Outsourcing non-production service parts and coppertubing helps management focus on its core compe-tency—designing and manufacturing state-of-the-art cooling systems. Also, many of Carrier’s suppliershave a lower cost structure (e.g., lower labor costs).

M E A S U R E M E N T SCarrier actively compares manufacturing costs

among its facilities. During the site visit, theMcMinville plant was dropping some product linesand adding others. The ABM information was used inat least two ways: (1) ABM reported relatively lowerproduction costs for some product lines at theMcMinville site, when compared with other Carriersites. Therefore, some of these products were moved toMcMinville. (2) ABM information helped McMinvillebetter understand product profitability and adjust itsproduct mix.

Process costs are measured across the Carrier plantsfor internal benchmarking purposes. Complexity costsare measured by dividing batch and product-sustainingcosts by total product costs. Complexity reductiontargets exist for existing products and new productdesigns. An activity dictionary with common processdefinitions is used among the Carrier plants. Thisenables management to compare processes and go afterreducing high cost areas.


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Insights• The complexity measures are part of a formal com-

plexity reduction program. Thus, supervisors devotemore time to managing their areas following com-plexity reductions and process improvements in the plant.

• Complexity cost measures are straight forward, directmeasures that everyone understands.

L I N K A G E T O I M P R O V E M E N TI N I T I A T I V E S

ABM at Carrier is linked to an overall corporateobjective of reducing product and process complex-ity. Product complexity is reduced by using commoncomponents and modularity. If common componentscannot be used, the next best thing is to use commonprocesses. Through the JIT initiative, Carrier devel-oped a process view of the organization and consid-ered “process management” as important as “productmanagement.” Material handling was recognized as amajor cost driver, and a modular design of the factorysimplified the work flow.

Carrier views complexity as a major cost driver.Therefore, it has instituted a formal complexity reduc-tion program. (Part proliferation is a problem. Forexample, it currently has 280 circuit breakers and 580fasteners.) ABM was linked to these goals and initia-tives.

ABM supports the move to reduce complexity.The activity cost information substantiates the finan-cial benefits of reducing complexity. Since ABM con-sists of costing processes and parts, the mapping ofplant processes during the JIT effort was beneficial.

The dollar savings associated with complexityreductions are monitored. Once a “critical mass” ofcomplexity reduction occurs, structural costs savings (oradditional capacity) are possible. The complexityreduction process has produced results and providedtools for future use, such as a preferred parts list.

Insights• ABM is viewed as a tool to support JIT. ABM pro-

vides a tool for cost and profitability analysis. Insome cases products were either dropped, or poten-tial business avoided because it appeared to be unprof-itable.

• Complexity was more a function of the number ofunique part numbers than the total number of partnumbers in the product.

• Employees throughout the site are very cost conscious.Other Carrier sites have closed, and they realize thatwithout improvements, the McMinville site couldclose as well.

S U M M A R YIn the current competitive environment, man-

agement at Carrier is very concerned about cost behav-ior and steps to reduce costs. Since Carrier is isolatedas a separate reporting unit to the investment com-munity, the stakes are higher. In this new environ-ment, ABM is viewed as an enabler for profitabilityimprovements at the manufacturing sites. It providesa tool management can use to channel their cost reduc-tion efforts. Cost management and cost managementreporting now has much higher visibility.


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Deere &Company

Industry Group: Discrete/ Assembly OrientedManufacturing

Best Practice Areas: Decision Support InformationMIS and Function Integration

Management Style: Empowers Workforce

Scope of Implementation: Multi Plants/ Operations

Site Data:Annual costs More than $ 500 million


Number of products/services Over 10,000Number of resource drivers 11-15


Primary Applications: Product CostingProduct Profitability AnalysisProduct Performance Measurement


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ABM Reporting System: Permanent (eight years), internally devel-oped product cost system. The system isupdated continuously for new part/productcost, monthly for cost information on prod-uct production, and annually to updateoverhead activities and rates.

Results of ABM Efforts: Significant changes to component parts,processes and to outsourceactivities/processes. Significant andextensive dollar improvement in distribu-tion.

Critical Success Factors: Management CommitmentDedicated project/implementation teamFully trained personnel

B A C K G R O U N DThe site visit at Deere & Company included the

corporate office and a manufacturing site, both locatedin Moline, Illinois. Product costing, which has alwaysbeen very important to the Deere organization, is asimportant today as it was when ABC was first imple-mented in 1988. Product costs are a strategic operat-ing metric within Deere, and the activity costinformation supports a variety of cost reduction efforts.

Recently, Deere has expanded its ABC scope toevaluate post manufacturing costs for its replacementparts operations. By considering these costs, Deere isable to measure “total part costs.”

The distribution paths for after-market parts isvery complicated. The parts are made either by a fac-tory or a supplier, and they can go to the Moline dis-tribution center, one of 11 parts depots, or directly todealers. Each route has cost implications. Deere wantsto move from a factory orientation to a total companyorientation. For all products, the product cost/priceratio is very important.

Profitable service parts represent 29 percent of thepart numbers; 71 percent of part numbers lost money.

One of the big problems with after-market costs ispart proliferation. The factory managers were notaware of the problem and thought that 75 percent ofthe part numbers were profitable.


The site visit included discussion and review inthe decision support information, MIS, and functionintegration areas of its ABM initiative. The accom-plishments together with insights gained are covered foreach of these areas.

D E C I S I O N S U P P O R TI N F O R M A T I O N

Deere has excellent buy-in from the other func-tional areas. Engineers use the ABM information dur-ing the product design phase. Cost informationsupports the selection of cost effective componentparts and processes. It also supports target costing.

Some production managers use ABC to monitoractivity costs for their area of responsibility. One pro-


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duction manager described how the activity informa-tion helped a consulting engagement. The engage-ment’s objective was to improve plant layout and tostreamline the manufacturing process.

Engineering has used ABC information to avoidadding costly product options that provide little inthe way of incremental value to the product. The ABCinformation provides an objective format to discussthe cost/benefit trade-offs of adding equipment options.

More accurate information about service partscosts is helping Deere improve many business processes.For example, the cost information helps Deere decidewhether to change the price, drop the product, requireminimum dollar value purchases, or sell the parts in apackage.

Insights• Users go directly into the system (on-line), see where

the high cost areas are, and define opportunities for costreduction. They have the ability to begin with rela-tively high-level activity costs and “drill down” tomore levels of detail. Users also have a simulationscreen to look for opportunities. Initially, in 1988, 50users queried the ABC system on a monthly basis. Inearly 1995, 800 users make inquiries and 90,000transactions are recorded per month.

• The ABC system contains detailed information aboutactivities (e.g., material handling, and its effect on costbehavior). To support a consulting engagement atone factory, “what if ” scenarios were used to developa new plant layout with better product flows. Thisengagement would have taken up to six months longerhad the activity and cost information from the ABCsystem not been available.

Target costing is an important part of the deci-sion support information. The process begins withsurveys to determine customer wants and the featuresfor which they are willing to pay. The engineers con-sider the cost benefit trade-offs in their designs whenthey evaluate part weights or use of common compo-nents. The team has detailed discussions about fac-tors that drive costs and what steps can be taken to

reduce those costs. They are attempting to estimate thecost of part attributes in their ABC model based onpart size and material movement, and handling.

Insight• Throughout the corporation, management is focused

on product costs. While product costing is an impor-tant activity, Deere has found that using the costinformation for cost reduction efforts is also useful.

For after-market or replacement parts, Deere isadding distribution-related costs to manufacturingcosts in order to develop total product costs (TPC).Eventually, it would like TPC for all products. (Byfocusing on product costs only, however, it ignorescustomer driven costs. For example, some small cus-tomers are more expensive to serve. Therefore, thecost of parts for these high-cost customers are aver-aged with the costs for the low-cost customers.)

Insights• Through ABC analysis for service parts, Deere better

understands the cost-benefit trade-offs for make vs. buyanalysis for service parts. Many of the low-volumeparts were out-sourced. Those that remain are pro-duced in a specialized part of the factory designedfor small volume runs (this improves costing accu-racy as well).

• Managers in the service parts marketing area cham-pioned the move to ABC for after-market parts.(Initially the ABC team developed post-manufac-turing costs for after-market parts on their own, butthe project failed, primarily due to a lack of cross-functional commitment.) They now have a cross-functional team that includes an engineer, who alsohas expertise in finance and ABC.

• In addition, Deere also implements cross-functionaltraining. For example, a member of the productdevelopment team at the Moline plant is an engi-neer with a considerable amount of training infinance and ABC.


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M I S A N D F U N C T I O NI N T E G R A T I O N

In general, Deere does not have a “traditional”cost accounting system. The corporate cost accountingsystem is ABC. The ABC system is the official sourceof standard costs and data used for inventory valua-tion.

For service parts distribution costs, however, thereare no current plans to embed this model into the cor-porate cost accounting system. Output from this inde-pendent model is available in DB2 tables. The decisionto go with ABC is strictly voluntary for the plant sites.Some sites feel as though they do not have the processcomplexity or the product diversity to justify the cost(man-days, processing) to implement ABC. Eventhough ABC is strictly voluntary for the factories, it hasbeen implemented at 11 sites, representing 75 percentof cost of goods sold. The remaining 25 percentincludes smaller sites with less process complexity andless product diversity.

Insights• Management accounting is now considered a value-

added activity. Prior to ABC, design engineers mis-trusted product costs. If a target cost was not being metduring product design, the numbers were down playedbecause they were not considered to be accurate. WithABC, the costing methodology is now believable, andif costs are too high, steps are taken to remove costsfrom the product.

• Design engineers now try to ensure that the value ofnew product features is justified by the additionalcost. They have increased the use of common compo-nents, removed weight, and made other improve-ments to take cost out of the process.

• The ABC system relies primarily on information thatis already available in the system.

• When necessary, the ABC model uses conceptual aver-ages rather than actual data. For example, the ABCteam for material handling consisted of accounting,computer systems, and engineering personnel. Initiallytheir terms were very detail-oriented and required aconsiderable amount of computer horsepower. It nowrelies on less data collection and uses more subjectivemethods. The team intuitively understands processcapabilities when computing the consumption ofactivities in the departments.

S U M M A R YClearly the ABC methodology is embedded at

Deere. This is unlikely to change, even if key man-agers leave the company. There are many reasons forthis. First, ABC is embedded throughout its account-ing systems. In addition, personnel throughout thecorporation are encouraged to take continuing edu-cation classes (as noted in a Business Week article). ABCis included in this training. Finally, the ABC infor-mation is used extensively throughout the corpora-tion.


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Electronic Data SystemsStrategic Support Unit


Best Practice Areas: Process ImprovementsLinkage to Improvement InitiativesMIS and Function Integration

Management Style: Participative

Scope of Implementation: Strategic Business Unit

Site Data:Annual costs More than $500 million

Number of people 1,000+Number of activities 1,001-9,999


Number of activity (output) drivers Over 100

Primary Applications: Product CostingProcess ImprovementBudgetingPerformance Measures


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B A C K G R O U N DThe EDS best practice site began with one

Strategic Support Unit (SSU), which was comprisedof eight large data processing centers in the UnitedStates and Canada. The expense budget was roughly$500 million annually. The success of the initialpilot and subsequent reorganizations have expandedthe scope to include small U.S. data processingcenters and also European, South American, andAsia/Pacific data processing centers. The currentscope of activity-based costing and managementreporting includes annual costs of $1.5 billion, ofwhich 70 percent is included in the ABMinformation reporting system.

The ABM initiative is focused in two areas. Thefirst area includes the primary ABM applications ofprocess improvement, budgeting, performance mea-surement, cost reduction, business process reengi-neering, and benchmarking. These applications aredirected towards providing information and datarequired to manage the processes and activities of theSSU. The second area of focus is on product (service)costing and cost estimation.

The most impressive part of the EDS installationis the information system used to collect and reportactivity-based management information. The detailrequired by operating personnel to affect processimprovement and measurement in the support areasrequired capturing and reporting data on approxi-mately 1,600 activities. Cost objects (service cost)were between 101-250. Over 100 activity drivers andoutput measures were required to trace activity costs tothese cost objects. To meet these requirements, EDSdesigned, developed, and installed a fully integratedinternal reporting and operating system, a permanentABM information system, and a data gathering sys-tem that is updated continuously.


The site visit included discussion and review inthe process improvements, measurements, improve-ment initiatives, MIS and function integration, cred-ibility/acceptance, and ease of use areas of their ABMinitiative. The accomplishments together with insightsgained are covered for each of these areas.

ABM Reporting System: Internally developed and fully integratedABM information system. Updated continu-ously.

Results of ABM Efforts: Moderate changes were made toprocesses, process steps, customer sup-port/service, and strategic focus.Extensive dollar improvements wereachieved in service profitability, servicedesign, production, and customer satisfac-tion.

Critical Success Factors: Leadership CommitmentDedicated Project TeamInformation TechnologyAccessibility of InformationLinks to Quality and Re-engineering


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P R O C E S S I M P R O V E M E N T SThe EDS SSU has achieved significant and con-

tinuous improvements through its use of improve-ment methodologies such as TQM, benchmarking,reengineering, and technology. EDS installed theABM information tool to drive and support improve-ment initiatives and to support the decision makingprocess. Individuals, teams, and managers use theABM information tool in process improvement ini-tiatives and decision making.

Insights• EDS placed emphasis on the systems aspect (collec-

tion and reporting) of ABM information. For theABM implementation to have credibility in an infor-mation service organization like EDS, activity-baseddata had to be available on a timely basis, valid andreliable, easy to access, clear and readily understood,and accessible at all levels of the organization. TheABM system developed and installed by EDS metthis operational requirement.

• In-house systems and systems development expertise, aswell as significant database expertise are an integralaspect of the ABM project.

• The existing improvement initiatives facilitated theacceptance of ABM information and the benefits ofthat information to support the existing systems.

• EDS’s culture understands and values information.

EDS introduced and implemented activity-basedbudgeting (ABB) with the SSU. ABB was first testedwithin the SSU by using activity-based informationto test the validity of existing budgets and staffing lev-els. Using estimates of activity outputs (based on vari-able volumes of estimated product and service usage)and historical activity-based unit cost information(average), the total cost resources were determined andcompared to the traditional budgets. Activity-basedactual and budget comparative reports are preparedquarterly and reviewed with management.

Insight• The relationship of activity outputs to product and ser-

vice usage are clearly understood.

L I N K A G E T O I M P R O V E M E N T I N I T I A T I V E S

EDS linked ABM to its quality improvementprocess and used ABM to pull all EDS improvementinitiatives together. EDS accomplished this by posi-tioning ABM as a tool to support its BPR, best-in-class, value analysis, benchmarking, and qualityinitiatives. ABM measurements were used as a changemechanism.

Insights• EDS positioned ABM as an operational/manage-

ment tool, not a financial tool.• Information from internal customer surveys was

linked to the ABM initiative and used to help identifyprocesses and activities that were important to thecustomer.

• Activities were classified as value added, redundant,or necessary and tied to the Cost of Quality.

• ABM was positioned as a tool to create value andnot just for cost control.

• EDS effectively handled and relieved the resistance,fear, and accountability for real ABM data.

• The use of the ABM tool was not forced. It was usedas part of compensation by linking job raises to activ-ity performance rather than as a club to intimidateemployees.


The ABM system is fully integrated with internalfinancial reporting, operating systems, and productcost systems. Automated interfaces between the generalledger, equipment/volume tracking, and humanresource systems feed the relational database. The rela-tional database provides on-line reporting options forproduct, quality, cost driver, process (activity), andvalue-added. The system is accessible to 428 users at 70sites worldwide. The system effectively meets the needsof diverse users, most of which are operating personnel.

Insights• The system provided the ability to use existing data

sources in a relational database (Informix).


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• The client/server system (Sun Server) was based inan on-line information environment with multi-platform access by Macintosh, DOS/Windows, andUNIX.

• The systems and system interfaces were developed sothat general ledger cost data and ABM cost dataalways agreed. At EDS, absent agreement, the ABMdata would lose credibility.

• Systems are updated continuously so that current andrelevant information is available when required.

• Extensive training programs were designed for use ofthe system.

• It is important to define the system requirements formeasurability so that ample room is available forexpansion.

• The system balanced the level of precision, detail ofreporting, and frequency of change so that informationis useful.

S U M M A R YThe ABM project sponsor and champion, Director

of the SSU operations, Dudley Wolf, attended the sitevisit meeting and offered his views on how he seesABM at EDS. His comments were as follows:• Successfully using ABM information requires the

right mindset. Existing mindsets may have to change.The mindset is one of managing activities as the focalpoint of cost management and not managing the costdirectly. Activities must be seen as the commondenominator.

• Getting people to use the ABM information can pre-sent frustration. In the final analysis, he concludedthat he was the problem. It is management that mustchange first. Management must request, review, anduse the ABM information. The information must beused to make value-based decisions.

• It is important to keep a balanced scorecard. TheABM information system must be balanced in thesense that the information can’t just be cost.Information about quality, customer satisfaction,cycle time, productivity, and effectiveness of activitiesis also required to balance the activity performancescorecard. Dudley is driving towards the use of ABM

information to include the customer and tie activ-ity performance to customer perceived value and to acustomer metric.

He also offered his views on what must be done toimprove and expand the use of ABM information atEDS. The effort involved to keep and update the sys-tem must be minimized.

More emphasis must be provided on current infor-mation. At EDS it is important to use the ABM infor-mation to drive future performance and not justdocument what has been done in the last three to sixmonths. Incentives must continue to be linked withthe ABM information. People do what they areincented to do. Keep the information relevant anduseful as ABM can create information overload.


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First TennesseeBank

Industry Group: Commercial Banking

Best Practice Areas: Process ImprovementsDecision Support InformationLinkage to Improvement Initiatives



Site Data:Annual costs $26-100 million




Primary Applications: Product CostingProfitability AnalysisPricing ModelsProcess ImprovementCapacity Utilization


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B A C K G R O U N DFirst Tennessee Bank (FTB) is the largest com-

mercial bank in Tennessee. In the late 1980s, man-agement at FTB was concerned about the value addedby the cost management group at the bank. In fact,they even considered eliminating this department.ABC was viewed as a tool by which the cost manage-ment group could provide relevant financial informa-tion to management.

When the ABM system was first implemented in1989, the primary applications were product costing,profitability analysis, and pricing models. Other pri-mary applications that came later included budget-ing, cost estimation, benchmarking, target costing,and capacity utilization. FTB lists its core competen-cies as customer service/support, quality services, andlow cost provider.


The site visit included discussion and review inthe process improvements, decision support informa-tion, and linkage to improvement initiative areas oftheir ABM initiative. The accomplishments togetherwith insights gained are covered for each of these areas.

P R O C E S S I M P R O V E M E N T SABM supported a reengineering effort to stream-

line bank operations. This effort reduced the cost ofpreparing bank statements and loan servicing, espe-cially for small value loans. Process teams becameresponsible for entire processes. They developedprocesses that utilized fewer steps with fewer hand-offs among workers.

Insights• Activity analysis illustrated the financial benefits of

reducing the number of inspections, the number oferror corrections, and the amount of paper move-ment and storage.

• Prior to ABM, FTB was viewed as a hierarchicalorganization. ABM helped promote a process view ofthe organization.

• The bank developed an employee retention program.(Employee turnover created many inefficiencies andinhibited the ABM effort.)


Business managers use ABM to support manytypes of decisions: (1) pricing, especially on bids for ser-vices; (2) accurate cost information improves FTB’s

ABM Reporting System: Product/service cost system updated onan annual basis. Minimal integration withoperating and financial reporting systems.

Results of ABM Efforts: Very significant changes for pricing strat-egy, product mix, and strategic focus.Significant/extensive quantified dollarimprovements in sales, marketing, prod-uct/service design, and product/serviceprofitability.

Critical Success Factors: SimplificationProject Champion Support


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ability to evaluate whether a service provided to a cus-tomer is worth the cost; (3) to move closer to a fee-for-service environment; and (4) make vs. buy-typedecisions (e.g., determine whether to use an externalservice provider).

Management used the ABM decision support sys-tem to improve its understanding of cost behavior andfocus its marketing programs. Low dollar value loans(which were not profitable) were given less emphasis.Even relatively high dollar value loans lost money after19 months because loans are amortized, which meansthe amount of interest earned falls while the cost ofservicing the loan remains constant. Small personaltrusts produced little return for the effort while largepersonal trusts were profitable.

Large corporate (employee) trusts, on the otherhand, are generally unprofitable. Corporate trustscontain many customer driven costs so they are difficultto manage due to employee record keeping and report-ing requirements. Adjustments are necessary whenemployees are hired or quit. Due to their complex-ity, large corporate trusts often are less profitable thanthe smaller corporate trusts.

Insights• The information was used to gain high profits through

product/service mix decision.• ABM cost information helps the bank determine

whether it should participate in new markets.

The expense of some activities was misallocated,which caused dysfunctional behavior. For example,prior to ABM the trust department was not charged forthe (internal) safekeeping of customer documents itheld. Therefore, trust would occasionally waive thissource of revenue for some customers. Yet once thedepartment was actually charged for safekeeping ser-vices, it was less inclined to give away the revenue.

Insight• The ABM effort targeted key areas in the bank that

needed better information for decision making.Through ABM the bank developed a defensiblemethodology to understand and explain cost behavior.


ABM is viewed as a way to support TQM andBPR. The activity analysis was used to streamlineprocesses, reduce errors through people retention,reduce cycle time, and improve customer satisfaction.Prior to ABM, FTB was viewed as a hierarchical orga-nization. ABM takes a process view (bank processesflow horizontally) and supports process improvement.

Insight• The ABM group continuously strives to give its inter-

nal customers “something they can use.”

The ABM department is considered to be a goodtraining ground for managers at the bank. Due to theprocess mapping-type requirements of ABM, work-ing in this department is an excellent way to learnFTB’s banking business. This helped create accep-tance of ABM throughout the organization.

Insight• Management recognized the value of ABM to the

bank. Managers who worked in the ABM depart-ment achieved visibility through the organization.


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General Motors ServiceParts Operations


Best Practice Areas: Decision Support InformationLinkage to Improvement InitiativesStrategyMIS and Function Integration



Site Data:Annual costs More than $500 million


Number of products/services 501-1,000Number of resource drivers Over 100


Primary Applications: Profitability AnalysisCost ReductionBusiness Process Re-engineering


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ABM Reporting System: PC-based commercial ABM software pack-age mostly integrated with existing internalfinancial reporting, product cost systems,and operating systems. Updated quarterly.

Results of ABM Efforts: Changes made in process steps and strate-gic emphasis. Quantified dollar improve-ments achieved in process steps, andproduct/service profitability.

Critical Success Factors: Top Management CommitmentFull-time Dedicated Resources

B A C K G R O U N DGeneral Motors Service Parts Operations (SPO),

headquartered in Flint, Michigan, provides replace-ment parts to GM dealers, non-GM distributors, autoparts stores, and mass market retailers. SPO’s primarymission is excellent service for the GM vehicle owner,not profitability. The level of service is determinedprimarily by its customers’ needs.

The primary application for ABM is product, cus-tomer, and channel profitability analysis, followed byprocess improvement. While identical parts that arriveat SPO carry the same initial product cost, the deliveredcost to the customer can be quite different. With theold system, costs were only attached to parts, not chan-nels or customers. Yet cost differences occurred basedon the quantity packaged, volume shipped, deliveryspeed, and number of returns. Now, SPO uses theactivity cost information to understand the most costeffective (and profitable) way to deliver products tothe customer.


The site visit included discussion and review inthe decision support information, improvement ini-

tiatives, strategy, and MIS and function integrationareas of its ABM initiative. The accomplishments,together with insights gained, are covered for each ofthese areas.

D E C I S I O N S U P P O R T I N F O R M A T I O N

To evaluate customer profitability, part and partfamily profitability, and channel profitability (dealers,distributors, parts stores, and mass retailers), SPO uti-lizes market based pricing and product mix decisionsthat are strategic in nature.

The ABM model is hierarchical and granularenough that it can aggregate costs according to product,customer, or channel. Costs are pushed down to thelowest level in the hierarchy—enterprise, market-related (advertising, such as car racing), channel related(terms), customer related (parts management, returns,sales support, complexity to serve), order related (someorder types, such as rush orders, are more expensiveto pick), part related, and material. This extensivehierarchy provides many options for profitability analy-sis based on a matrix of parts, channels, distributionmethods, and markets.


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Insights• The ABM effort is viewed as a “team sport.” A top

notch ABM team was critical to its success. Teammembers included finance, sales, operations, andinformation systems.

• Since parts distribution is primarily a customer sup-port activity, having a high-level sales manager asone of the project champions was critical.

• ABM is a high priority, and resourcing has been suf-ficient since the onset of the project.

• As the ABM model was being developed, the projectteam would work with users throughout the organi-zation to interrogate the model to ensure that it couldanswer key strategic questions.

• Rather than pursue new data, they used data thatwas already available. In addition, they limited thenumber of drivers and activities.


ABM demonstrated the need for SPO to improveprocess flows and take costs out of the value chain. Tolink ABM to an improvement initiative, SPO is usingthe information to develop a less complicated view ofservice parts operations. Prior to ABM, the accountingmodel was only semi-related to activities in the distri-bution process and provided limited information fordecision making. ABM was supported by an “enter-prise model,” which provided very detailed mapping ofprocess flows. The enterprise model was used to under-stand and cost activities for product costing. Interviewswere then used to validate the model.

Insight• By focusing on the primary activities that drive parts

distribution, the processes became more understand-able. Operations were broken down to a series ofactivities that were connected to cost objects.

S T R A T E G YAt SPO, ABM is an important tool to support

strategic decision making. SPO wants to avoid usingthe cost information and profitability analysis to “rev-

enue shed.” Instead it works with its customers onprogram changes to eliminate high cost/low valueactivities, and improve profitability.

Insights• During systems development, the active involvement

by users of the ABM information allowed the systemto sell itself. As a result, user requests for ABM infor-mation are overwhelming the ABM team.

• The ABM system has been designed to meet userneeds. Throughout the model’s development, opera-tional managers have maintained heavy involve-ment. For example, during presentations of costbehavior, the users were generally able to explain theoutput of the ABM system (it intuitively made sense).If the output could not be explained, the ABM teamwould research its methodology and make any neces-sary changes.


SPO’s ABM strategic cost management modelcan determine profitability by part, channel, or cus-tomer. For the previous system, costs would onlyattach to parts, not channels or customers. This exten-sive hierarchical model provides many options for prof-itability analysis based on a matrix of parts, channels,distribution methods, and market. SPO developedtheir ABM model in-house using the Microsoft Accesssoftware. ABM accounted for cost differences based onfactors such as the quantity packaged, delivery speed,and volume. Activity information was collected usingthe enterprise model and confirmed with interviews.Data is refreshed quarterly.

Insights• To support benchmarking, SPO maintains a common

data dictionary for all of their sites while maintain-ing control of the ABM system centrally.

• Most of the data used in the ABM system is alreadybeing captured by their information systems for otherpurposes.


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• There is a high level of acceptance of the ABM systemby the user community.

• Users were represented on the ABM team and inti-mately involved in the model development.

S U M M A R YABM is successful at SPO for several reasons. The

organization received tremendous management supportand resources as well as a dedicated cross-functionalteam. For SPO, in particular, ABM seems to be a goodfit due to the following:

• Non-material costs are a substantial part of the coststructure.

• SPO has tremendous flexibility with the way it deliv-ers products to its customers, based on the nature of itsbusiness,- Mix decisions—many delivery choices exist

according to channel and customer.- Choices about price, terms, product returns pol-

icy, and discounts.- Delivery alternatives—basis, overnight, VIP

(e.g., they will search their dealer network forparts and pay for delivery).

- Cost tradeoffs (e.g., if dealers maintain a mini-mum number of part numbers in inventory, theywill receive certain discounts).

- Packaging options—bundling, minimumamounts, delivery choices.

ABM is on track to become embedded at SPO asit successfully challenges and makes changes to thestatus quo. Initially it has worked on special requests,but this will be followed by standard reports and, even-tually, budgeting.


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IBM Endicott PanelManufacturing

Industry Group: Process/Recipe-Oriented Mfg.

Best Practice Areas: MeasurementCompetitivenessLinkage to Improvement InitiativesCompensation and BenefitsSupply Chain Management

Management Style: Participative

Scope of Implementation: Single Plant





Primary Applications: Performance MeasurementProject ManagementBenchmarkingEmployee Involvement


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B A C K G R O U N DThe plant site in Endicott, New York, which

manufactures printed circuit boards, lost its positionas a captive IBM supplier. IBM’s downstreamfacilities could buy from anyone; thus Endicottcompeted for this business through a biddingprocess. In 1993, Endicott also became a profitcenter. These two factors combined to create a senseof urgency for improvement initiatives.

A consolidation of printed circuit board manu-facturers is currently occurring in this industry due toimproved manufacturing efficiencies and customerdemands for fewer and smaller boards.

One key ingredient of Endicott’s strategy is topursue business external to IBM. If it can win externalcustomers, this will bolster its confidence as a long-term IBM supplier. Currently, 10 percent of its busi-ness goes to external customers, with a target thatapproaches 50 percent.


The site visit included discussion and review inthe measurement, competitiveness, linkage to improve-ment initiatives, compensation and benefits, and sup-ply chain management areas of its ABM initiative.The accomplishments together with insights gainedare covered for each of these areas.

M E A S U R E M E N T SABM supports IBM’s objective to stabilize the

workforce, reduce outsourcing, create extra capacity,improve yields, reduce cycle time, reduce materialcosts, and implement ABC. Endicott has reportedsavings of $5-6 million in material costs since theinception of the ABM program, which also supportsextensive benchmarking. Some benchmarks are specificto the PC board industry while others are generic formanufacturing organizations.

ABM Reporting System: Commercial ABM software package, fullyintegrated with operating systems.Minimal integration with internal and exter-nal financial reporting and product cost sys-tems. Updated quarterly.

Results of ABM Efforts: Significant changes were made to strategicfocus, product mix, processes and out-source activities. Significant dollarimprovements were achieved in production,product profitability, overhead support, dis-tribution, and customer satisfaction.

Critical Success Factors: Need to Reduce CostsManagement SupportTotal InvolvementDedicated Project Leaders


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Benchmarks come from many sources. Drillingcosts, a very specific benchmark, came from a sup-plier. Their industry inputs drilling costs, quality, andproductivity data into a “blind” database. IBM alsobenchmarks generic activities, such as the cost of infor-mation services. Information services costs average2.5 percent of sales at manufacturing firms, yet, theEndicott site was being charged 5 percent of sales by itscorporate office. Therefore, IS was targeted for costreduction. In addition, Endicott monitors customersatisfaction (quality, delivery, etc.) through customersurveys.

ABM translates activities into financial terms, thusproviding a common language for all levels of the orga-nization and keeping a focus on profitability improve-ment. Quality measures are taken daily to quicklyidentify quality problems and pursue root cause analy-sis. Once the cause is understood, and the responsibleparty is known, corrective action (whether internal orexternal) is taken. For example, Endicott identified aquality problem with chemicals early in the productionprocess. The ABC system provided credible cost infor-mation to support a claim to a vendor, which thenreimbursed IBM for all costs related to the defectivechemicals. Benchmarking helps direct improvementefforts. If it is already best of breed in one area,Endicott concentrates on areas where greater oppor-tunities for improvement exist.

Insights• Daily “core team” meetings were used to review qual-

ity, workflow, and any other open issues. Employees atall levels of the organization receive financial andnonfinancial performance measures.

• Endicott has been effective at narrowing the focus ofits performance measures to key areas that all employ-ees understand throughout the site. For example,they “talk about everything in terms of dollars.”

• The site manufacturing manager is one of the biggestproponents of ABM. He personally hired the managerwho implemented ABM.

C O M P E T I T I V E N E S SEndicott has achieved excellent quality, which is

demonstrated by its very low warranty expense (i.e., 0.6percent of sales vs. 3.0 percent for the industry).Instead of being a high-volume commodity shop,Endicott is a high-value, specialty manufacturer.Therefore, it has an extensive range of products-4,000part numbers with 1,000 currently in production.

Endicott felt the need to become cost-focused toimprove its competitiveness. For example, the ABMinformation was used to dollarize the impact of manyof its performance measures. To emphasize the impactof poor quality, scrap costs are based on lost revenue.

Insights• Endicott supplies it customers with engineering exper-

tise during product development.• An awareness throughout the site of the need for low-

cost, high-quality manufacturing.• A strong emphasis on growing the business as opposed

to cutting heads.

L I N K A G E T O I M P R O V E M E N TI N I T I A T I V E S

Within the last few years, Endicott instituted acontinuous flow manufacturing (CFM) program tostreamline its manufacturing processes. Initially, ABMwas viewed as a tool to cost activities and processes.Eventually, ABM took shape as an “umbrella” over allother improvement initiatives to support and measuretheir benefits.

Through ABM, Endicott has a disciplinedapproach to managing costs. It conducts daily meetingswhere it uses the ABM information to evaluate scrapand other operational issues. These “core group” meet-ings include members from operations, industrial andmanufacturing engineering, production control, andfinance.

To support the quality management program,scrap data is recorded by the operators directly intothe ABM system on a daily basis (which is linked to themanufacturing floor control system). If parts arescrapped on line, the operator will enter the quantity


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and the cause, (e.g., operator error) directly into thecomputer system. The ABM system will then cost thescrap according to its stage in the production cycle.

Insights• As part of the CFM program, process mapping-type

information was provided to the ABM team to facil-itate the ABM effort.

• Through CFM, Endicott developed a process viewof its organizational structure, thus “jump starting”ABM.

• The reports are displayed on a common manufac-turing reporting system that can be viewed by allemployees.

• By using sales dollars to cost quality, everyone talks thesame language. Employees relate to selling prices,and a sense of competitiveness has developed amongthe work teams.

C O M P E N S A T I O N A N D B E N E F I T SThe employees’ annual performance evaluations are

based on merit, which in turn affects compensation.They are influenced by the ABM performance measures(as an individual and as a team member). The evaluationscome from customers, supervisors, and peers.

Insight• The performance measure must be viewed as fair by

the employees. Therefore, they must understand theABM system.

S U P P L Y C H A I N M A N A G E M E N TABM is used to support make vs. buy-type deci-

sions. For example, some manufacturing steps, whichhad been outsourced, were brought in-house. Endicottpartnered with a drill bit supplier and reduced itsdrilling costs by 40 percent. This partner deliversinventory to the shop floor, re-sharpens bits, providestechnical support, and supports new product devel-opment. IBM has reduced the inventory and supportcosts associated with the drilling process. IBM alsohas been developing partnering relationships with bothinternal and external customers. The ABM informa-

tion is used to help them cost effectively engineer newproducts for customers early in the development cycle.

Through the partnering relationship, the drill bitsupplier now has an employee residing permanentlyon site. As Endicott develops new products, any specialneeds related to drilling technology can be commu-nicated to the supplier very early in the design process.Another benefit from this partnering relationship is areduction in product development time. Followingthe change in Endicott’s organizational structure (fromhierarchical to process teams), the site began to developnew products using concurrent processes instead ofserial processes. In one case, the product developmentcycle fell from two years to three months. This reduc-tion in time was critical to landing a new external cus-tomer.

Insights• Early involvement by suppliers in the design of new

products was critical.• The system involved frequent contact with customers

(both internal and external) about satisfaction withexisting products and new product designs.

• Customer feedback about quality problems parallelsEndicott’s policy to address any customer quality prob-lems that arise within seven days. It begins by exam-ining the process that caused the problem. If possible,it will either correct it immediately or develop anaction plan to correct its root cause in the near future.The customer must “sign off ” on the corrective mea-sure before closure. Usually there is immediate actionand a long-term action plan. All customer commentsare part of a performance measure system for Endicott.

S U M M A R YWhile most of the results discussed at the Endicott

site were quite good, one of the few problems was sys-tems related. ABM relies on the general ledger forfinancial information; however the reports are notavailable until 25 days after month end. (The operat-ing system, however, reports scrap and material usagedaily.) The ABC system links to the general ledger


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and the operating system to develop activity-basedcosts. Essentially, ABC interprets and explains theresults of financial reporting. The analysis shows bothactivity and product cost details. Differences in theline-by-line amounts sometimes exist, but the bottomline is generally explainable.

Profitability analysis is delayed by the generalledger reporting system. Much of the cost informationfrom the general ledger is not available until after clos-ing. If Endicott had this data on a more timely basis,the profitability information would help it becomemore responsive to requests for bids on new products,and it would help fine tune its product mix.


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Parker HannifanCompumotor

DivisionIndustry Group: Discrete/Assembly Oriented Mfg.

Best Practice Areas: Decision Support InformationMeasurementsLinkage to Improvement Initiatives


Scope of Implementation: Single Function

Site Data:Annual costs Under $25 million

Number of people Under 100Number of activities Under 25

Number of products/services 101-250Number of resource drivers Under 5


Primary Applications: Product CostingProcess ImprovementBudgetingPerformance MeasurementBusiness Process Re-engineering


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B A C K G R O U N DThe Compumotor Division of Parker Hannifin

employs 190 people, 60 of whom are in manufacturing.Manufacturing employs self-directed work teams andhas no supervisors on the shop floor. The division’sgeneral manager provided the plant tour and spentseveral hours with the project team members.Compumotor produces printed circuit boards that areused for motion control in motors. Compumotorshares a field sales force with four Parker divisions thatuse the same distribution network. It also uses dis-tributors for better market coverage. All ofCompumotor’s production is JIT, and many productsare customized according to each customer’s specifi-cations. Parker’s core competency is excellent cus-tomer service through very short lead times (five days)and very high quality.

In 1992, the competitive environment was char-acterized by low entry barriers, decreased sales prices,shorter product life cycles, and increased customerdemands for higher quality. Major improvement ini-tiatives had been implemented (see process improve-ments), but none of these programs addressed cost.The company has moved closer to a paperless factory(there are no routing, bills of material, or inspection

sheets). Cost information has had very little visibility,so ABM helped fill this void.


The site visit included discussion and review indecision support information, measurement, and link-age to improvement initiatives areas of their ABM ini-tiative. The accomplishments together with insightsgained are covered for each of these areas.


ABC supports pricing and mix decisions. To somedegree all products are customized, and this makesaccurate product costing critical. Engineers use theactivity cost information to support product develop-ment decisions. Design improvements are viewed asbenefiting the product throughout its life cycle. Aflexible ABM model with “what if ” capabilities sup-ports these decisions.

Some basic training in financial analysis is pro-vided at all levels throughout the organization. Costtools are now considered essential and all new hires at

ABM Reporting System: Internally developed ABM information sys-tem, updated monthly. Minimal integration.

Results of ABM Efforts: Moderate changes made to componentparts, processes, customer support, andrestructure/reorganize. Moderate dollarimprovements were achieved in productservice design and production/ manufac-turing.

Critical Success Factors: Better PerformancePerformance MeasurementsBetter Standard Costs


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Compumotor receive two days of training in finan-cial analysis. This training helps drive home the impor-tance of having a “cost focus” at the company. ABMalso helps diverse functional areas communicate infinancial terms.

Insights• Employees are selected very carefully. A primary con-

sideration is their ability to fit in with other teammembers. Therefore, before becoming permanenthires, new employees must work as temporaries onthe team.

• New ways to apply the ABM information such aspurchasing or product development are essential anddesired.

M E A S U R E M E N T SCompumotor monitors process costs on the shop

floor including crimping wires, and prepping parts.Since all products are customized, process costs aremore important benchmarks than product costs.Therefore, the ABM reporting system tracks processcosts on the shop floor. If a change in plant opera-tions (or any other factor) causes a process cost toincrease, corrective action is taken.

Metrics for the total cost of purchased parts aretracked. Compumotor built a “supplier cost model” byconsidering the total cost of purchased parts. TheABC supplier cost model develops a total purchaseprice cost by adding inventory holding costs, vendor-related costs, and quality costs to the purchase price.

Insights• The self-directed work teams in the plant are process

owners and empowered to make improvements basedon their own initiative.

• ABM reports have replaced (not just supplemented)other financial reports.

• The reward structure at Compumotor is carefullydesigned to avoid dysfunctional behavior. Rewards arebased on output for the entire shop as opposed to out-put for individual teams.

• Compumotor had to sell this methodology to its par-

ent company, Parker Hannifin. Parker Hannifinrequires purchase price reductions of 5 percent. Totalcost is now used versus just purchase price to meet thecorporate goals for reducing purchase price. If pur-chase price was the only cost it considered in the deci-sion process, the company might switch to vendorsthat are actually more expensive to buy from due tohigher quality costs, handling costs, and holding costs.


ABM is positioned as a tool to support the largercorporate initiatives of JIT, quality, and design formanufacturability initiatives. Process improvements aregenerally accomplished and attributed to these initia-tives. ABM provides cost information that is unavail-able to the improvement initiatives, and activity costanalysis has supported process improvements through-out the shop. Through the JIT program, teams wereestablished that had a process view of operations, anecessary condition for ABM.

Insights• The ABM implementation was easier because the

site had already successfully implemented other cor-porate initiatives that involved change. For example,radical changes were required for the JIT program—a completely balanced line with minimal WIP, mul-tiple skill sets, cross-functional training for eachemployee, and excellent quality.

• The team members on the shop floor are all cross-trained. Therefore, members can move from oneteam to another to balance the workload.Compumotor strives to break down barriers amongthe teams.

• Rewards are based on output for the site, not indi-vidual team output. Otherwise, team leaders mightbe reluctant to allow members to temporarily move toanother team. Personnel policies that result in higheroutput for the entire facility (global optimization)are encouraged, as opposed to those that only con-sider output for the individual team (local opti-mization).


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S U M M A R YABM is viewed as successful at the Compumotor

Division. During our site visit, a financial managerfrom an Australian Division of Parker Hannifin wasthere to evaluate the applicability of ABM to theAustralian location. The ABM facilitator atCompumotor also has conducted workshops at otherParker Hannifin sites in the United States.

After activity-based budgeting, Compumotor willuse ABC to analyze customer driven costs that arequite high. Customers require considerable amountsof technical support, and this support can be providedby either Compumotor or Compumotor’s distribu-tors. Furthermore, some distributors are much moreknowledgeable and provide much better support thanothers. Customers that buy from the weaker distribu-tors will make more calls directly to Compumotor. Aspart of its TQM program, Compumotor monitors,tracks, and analyzes all customer phone calls. Therefore,Compumotor would like the selling prices that itcharges distributors to reflect the level of service that isprovided to the final customers.


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PCS HealthSystems, Inc.


Best Practice Areas: Process ImprovementsDecision Support Information MeasurementsCompetitiveness




Number of people 1,000+Number of activities 501-1,000

Number of products/services 251-500Number of resource drivers Over 100

Number of activity (output) drivers Over 100

Primary Applications: Product CostingProfitability AnalysisCost EstimationPricing Models


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B A C K G R O U N DThe site visit for PCS Health Systems was in

Scottsdale, Arizona, where it employs 1,600 people.PCS, a division of Eli Lilly, processes prescription drugclaims for insurance and large self-insured companies.It strives to help its customers control prescriptiondrug costs by providing additional services beyondclaims processing. For example, PCS works with doc-tors to substitute generic drugs in place of expensivebranded products.

The evolution of ABM at PCS included productcosting and profitability analysis followed by activitycost analysis for process improvement and activity-based budgeting.

Line managers at PCS are organized with businessmanagers, responsible for sales and business unit prof-itability. New product managers are responsible fordeveloping new programs/services. They work closelywith the business managers on new ideas. Processmanagers are responsible for business operations suchas processing claims and producing membership cards.


The site visit included discussion and review inthe process improvements, decision support informa-tion, measurements, and competitiveness areas of its

ABM initiative. The accomplishments and lessonslearned are included in the following section.

P R O C E S S I M P R O V E M E N T SWhen ABM was implemented, the accounting

and management information systems were modifiedto account for processes, thus providing a horizontalview of the organization. Later, the organizationalstructure changed as well. PCS reorganized from afunctional organization to one based on processes.ABM was a major factor in the decision to reorganize.Prior to the reorganization, some process managersviewed ABM as a nuisance that provided little value.Following the reorganization (as well as training onthe ABM system), these process managers are cham-pions of the ABM effort. They can actually use theactivity cost information to make a difference.

PCS has reengineered many processes. Processimprovements have allowed PCS to handle consider-ably more volume with little increase in headcount.The organizational structure now contains “processowners.” They have responsibility for entire processesand are empowered to make changes. Prior to thereorganization, operations managers were responsiblefor only pieces of a process.

ABM Reporting System: PC-based ABM commercial information sys-tem fully integrated with internal financialreporting. Updated monthly.

Results of ABM Efforts: Extensive dollar improvements achieved inproduct/service profitability, product/ser-vice design, overhead support and cus-tomer satisfaction.

Critical Success Factors: Getting managers to own the information.Showing managers how to use the data tomake their jobs better.


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Insights• PCS strives to keep the users happy. Unless the process,

new product, and business managers feel they aregetting something useful from ABM, they will notsupport the system.

• Reviewing organizational process structure allowsfor greater understanding among users.


ABC is used to cost all new bids for services (bidsare an ongoing activity) and for the profitability analy-sis of the business units. To accomplish this, PCSdeveloped an actual costing system. All employees,from the president down, complete monthly timesheets. Time is recorded by activity on a spreadsheet.Based on actual costs in the general ledger, the ABCreports produce activity cost information. Laborreporting is thought to be accurate so labor assign-ments to the business units can be challenged by thebusiness managers. Standards are not used becausethe business environment at PCS is constantly chang-ing.

Insights• Prior to ABC, PCS felt as though it did not under-

stand profitability by business unit and that cost allo-cations were arbitrary.

• The users had to see a benefit from the ABC system.Prior to ABC, no one understood which products(services) at PCS were profitable. ABC producesaccurate cost information, and an ABC analysis isrequired for all bids.

• The organizational structure now assigns profitresponsibilities to business units. The business units areresponsible for their own sales and marketing activi-ties, and they bid on new customer contracts.Furthermore, cost tracing is now granular enoughthat the business unit can go to the process ownersfor an explanation of charges. Even though they willoccasionally challenge high cost activities, the account-ing system, based on actual costs, has a high degree ofcredibility.

• ABM provides cost information that is not availablethrough a reengineering program. PCS manage-ment felt as though the cost information was necessaryto show which reengineering efforts would be worth-while.

M E A S U R E M E N T SABM supports business unit profitability analysis

and provides process cost information. Both are usedto measure performance. Managers throughout thecompany continuously asked finance to develop betterways to measure results. ABM provided the tool.

Insight• The ABM team first developed an understanding of

the business including operations, management goals,and objectives. The ABC model was then designedfrom the ground up to support management’s needs.Also, the ABM group convinced management thatwhite collar workers could be measured.

C O M P E T I T I V E N E S SPCS offers insurance companies a “call back” ser-

vice where PCS works with doctors to control pre-scription drug costs. PCS employs trained pharmaciststhat call physicians and suggest replacing expensivebranded drugs with generic products. PCS’s infor-mation system will also track drug usage and high-light noncompliant patients such as ones who abuse ortake too much of a drug.

Insights• ABM quantifies the benefits of the call back program

to its customers. Having developed a track record ofsavings in this area, PCS uses the information to sellnew clients on the service.

• PCS has a dedicated staff for new program develop-ment. ABM gives this group a tool to quantify thebenefits of new program concepts.


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S U M M A R YABM is embedded at PCS. For product costing

and profitability analysis, PCS relies exclusively onABC. Some marketing managers have noted that theywould be unwilling to bid on new business withoutan ABC analysis.

ABM is also key to process improvement and costreduction initiatives. For several years the ABM systemhas calculated process costs. Yet the organizationalstructure was such that functional managers wereresponsible for only pieces of each process. Therefore,PCS reorganized to create process owners empoweredto affect change and improve their processes.


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Texas InstrumentsIndustry Group: Process/Recipe Oriented Mfg.

Best Practice Areas: Process ImprovementDecision Support InformationMIS and Function Integration


Scope of Implementation: Single Plant



Number of products/services 251-500Number of resource drivers Under 5

Number of activity (output) drivers Under 5

Primary Applications: Product CostingProcess ImprovementProfitable AnalysisCost Reduction


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ABM Reporting System: Internally developed and integratedprocess/product cost system. Updatedsemi-annually.

Results of ABM Efforts: Significant changes to product mix andcomponent parts/ process steps.Quantifiable dollar improvements in prod-uct/service design, manufacturing andproduct/service profitability.

Critical Success Factors: Support from Factory and Product Mgmt.Access to Quality Operational InformationSystems Support

B A C K G R O U N DThe two Dallas-based site visits included a trip to

Texas Instruments’ (TI) corporate headquarters anda Linear Wafer Fab plant. During the visit we dis-cussed three of TI’s accounting systems: (1) their “tra-ditional” accounting system; (2) CMS, a corporateABC system on their mainframe; and (3) a stand-aloneABM model used by the Linear Wafer Fab group. Thestand-alone ABC model was built on a factory capac-ity planning work station.

The CMS system has been in place for severalyears. It handles inventory valuation and standardcosting, but it is not used as an operational tool in theLinear Wafer Fab facilities. The traditional accountingsystem is no longer used by the groups using CMS or ABC.

Executive sponsorship for CMS was at a very highlevel with the CFO serving as the project champion. Across-functional team, which included operations,developed the CMS system. The ABC team has mod-ified the CMS system to capture process costs and sup-port the needs of operations.

The stand-alone ABC workstation model for theLinear Wafer Fab plant is much more operationallyfocused. The Linear Wafer Fab ABC group is cur-

rently trying to obtain the necessary resources to net-work their ABC model with the other business sys-tems.


The site visit included discussion and review inthe process improvements, decision support informa-tion, and MIS and function integration areas of theirABM initiative. The accomplishments together withinsights gained are covered for each of these areas.

P R O C E S S I M P R O V E M E N T SABM at the Linear Wafer Fab helped to quantify

and prioritize improvement initiatives including reduc-tions in diversity and unique manufacturing processingsteps. According to a product manager (who has prod-uct design and manufacturing engineering responsi-bilities), the plant is never short on profitabilityenhancement opportunities. These initiatives generallyimprove yield, or reduce processing steps throughredesigns. The products they develop have fairly longlife cycles, so cost improvement opportunities areimportant.


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Insights• Prior to ABC, diversity was often viewed favorably by

the engineers. They developed unique process stepsand products since they had little insight into theadditional manufacturing costs. Now ABC assignshigher costs to low volume wafers that use non-stan-dard processes. These non-standard processes are de-emphasized in favor of standard processes. Engineersalso minimize complexity by referring to a formalprocess diversity list.

• The product manager must establish a proper bal-ance between the cost trade-off of bringing products tomarket very quickly and taking longer to developcost-effective designs prior to product launch. Once theproduct has been launched, taking cost out of theproduct becomes more difficult.

• The plant has developed a better understanding ofcost behavior including the difference in product,batch, and unit-related costs.

• Through ABM, the cost of diversity now has muchmore visibility.


The corporate CMS model emphasizes inventoryvaluation and product costing. However, the stand-alone ABC workstation model for the Linear WaferFab group is designed to support operations (by mea-suring the cost of key activities and processes), productdesigners (by including “what if” capabilities to supportdesign to cost capabilities), and marketing (by pro-viding cost information about the products they wishto introduce.)

Prior to ABC, there was little financial incentive forproduct managers and process engineers to avoid devel-oping unique process steps. This was due, in part, tothe traditional product costing system, which spread thecost of diversity to all products.

Insight• ABC identified unique process flows and costed them

at a higher rate than standard processes. ABC thenassigned the entire cost of diversity to the responsible

product. Therefore, substantial cost subsidies wereeliminated, and product managers had financialincentives to simplify operations by using standardprocess flows. In TI’s semiconductor unit, processdiversity increases factory costs more than productdiversity.

TI built a capacity model to measure the cost ofnonproductive capacity. Nonproductive capacityoccurs through plant inefficiencies (plant responsibil-ity), and idle capacity, which results from unsold capac-ity (business responsibility). Given that TI was tryingto maximize output, the elimination of nonproduc-tive capacity was a priority.

Insight• At the ABC site, ABC is being aligned with the capac-

ity model, where the activity cost information is usedto help eliminate nonproductive capacity.

The Linear Wafer Fab plant has reduced processflows from 360 to 300. It also has dropped some low-volume products that were viewed as unprofitable. Insome cases, discontinued products were transferred toother TI facilities where they could be made more costeffectively.

Insights• The ABM information gives the planning and prod-

uct development departments a tool for selecting costeffective designs. In the past, they had a tendency todevelop “elegant” designs, due to the traditional costsystem’s inability to capture the additional cost ofproduct diversity and complexity. Common processesare now encouraged due to their lower costs.

• Based on market prices, the ABC model helps TIdetermine whether to bring a new product to market.If, based on current market selling prices, the productwill produce an inadequate profit, TI can adjust thelevel of diversity to meet a target cost or abandon thenew product introduction.


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The Linear Wafer Fab site built a stand-alone ABCworkstation model that has three levels of cost. The firstis base flow, which is a generic routing. Next is modulecost, which includes additional process steps that arenot in the base, but fairly standard. The last level isdiversity cost, which includes any other processes notin the base or module. Product diversity causes downtime due to product specific runs, which under-uti-lize batch capacity, and increases changeovers.

This tool helps product development engineersselect cost effective designs. The dynamic model sup-ports “what if” and “design to cost” analysis. For exam-ple, product features and the level of diversity can beadjusted to meet target costs. Common processes areencouraged due to their lower costs.

TI has abandoned its “traditional” cost accountingsystems that were used to develop standard costs andvalue work-in-process and finished good inventory.Yet TI has not abandoned its “traditional” financialreports, which report costs for direct labor, direct mate-rial, and overhead. TI is currently migrating toward asystem that will report the cost of major processes,with the capability to “drill down” and see the cost ofresources such as labor and supplies that support eachprocess.

Insights• The initial data collection necessary to build the

ABM model is not viewed as a problem. Maintainingthe ABM system is much more challenging than itsinitial development.

• Users require direct access to the ABM data and can-not rely on published reports alone.


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ValvolineCompany

Industry Group: Process/Recipe Oriented Manufacturing

Best Practice Areas: Decision Support InformationMIS and Function Integration


Scope of Implementation: Multiple Plants


Number of people 251-500Number of activities Under 25

Number of products/services 501-1,000Number of resource drivers 6-10


Primary Applications: Product CostingProcess ImprovementBudgetingProfitability AnalysisPerformance MeasurementCost Reduction


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B A C K G R O U N DValvoline, in Cincinnati, Ohio, has a multiple

plants/operations implementation, with 250-500employees and $251-500 million in annual costs.Primary applications have been for product costing,process improvement, cost reduction, inventory valu-ation, and cost estimation. Valvoline has been usingABM for approximately two years. Valvoline identifiedless than 25 activities, between 501-1,000 cost objects,and between six and 15 resource and activity drivers.Heaviest involvement has been from accounting &finance, manufacturing personnel, and operationsmanagers. While product costing was the originalgoal of the ABC initiative at Valvoline, this quicklyled to using ABM information to support continuousimprovement.


The site visit included discussion and review inthe decision support information, and MIS and func-tion integration areas of their ABM initiative. Theaccomplishments together with insights gained arecovered for each of these areas.


The organization became more aware of set-upand changeover costs from its ABM analysis andfocused on cost reduction that resulted in a reported 20percent improvement in productivity. It eliminatedblow-molding of bottles. The organization focusedon streamlining bottleneck operations, line speed andblending balance, and enhanced true operational effi-ciency.

Insights• Management supported the need to better under-

stand product cost and used ABC as a communicationtool.

• The Senior Vice President of Branded Group intu-itively understood that not all branded productsshould be costed the same but could not prove it, untilABM.

• Enhancement of operational efficiency was accom-plished by the analysis of activity.

• By focusing on branded complexity issues manage-ment gained important insights in its approach tomarketing.

ABM Reporting System: PC-based commercial ABM software pack-age. Fully integrated with internal financialreporting, operating systems, and productcost systems. Updated quarterly.

Results of ABM Efforts: Moderate changes to pricing strategy, prod-uct mix, processes, and strategic focus.Moderate quantifiable dollar improvementsin sales and marketing, product design,manufacturing and product management.

Critical Success Factors: Senior Management CommitmentFull-time Team Members with Operations Accounting ExperienceComplete Support of Plant Personnel


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ABC/ABM information is critical to the decisionmaking process at Valvoline. To help in this process, allconversion costs are developed with ABC data and allmanagement reports are produced with activity data.

Major capital investment decisions are justifiedusing ABC data. In fact, the decision to consolidatemotor oil operations in Cincinnati was ABC driven.Outsourcing and insourcing decisions have beenviewed in the context of ABC data. The decision toblend the antifreeze products (from a recent acquisi-tion) is an example.

Insights• The batch-related costs and the cost of product diver-

sity was disclosed through the ABC data.• Some of the medium and low volume products are no

longer left in the distribution channel, but are madeto order with longer lead time for delivery than pre-viously guaranteed. This enables Valvoline to reducethe total cost of product delivery and reduce the num-ber of changeovers.

• Daily, weekly, and monthly charting of activity data.What was thought to be an operation that was run-ning at nearly 85 percent efficiency was found to besub-optimal at 60 percent. With the ABC data analy-sis, it has improved to 75 percent efficiency.

• Until the introduction of ABC, bottle product wascommonly costed. Now private label product is rec-ognized to be distinctly different.

• The ABC data indicated that the private label busi-ness was contributing only 14 percent of earningsthat management had believed, based on the priorcosting system.

• Private label product is now viewed very differently,recognizing the added cost of short runs andchangeover.

Valvoline used ABM information in its decisionmaking process with its suppliers and customers toreduce the cost of the oil containers that cost morethan the oil. Valvoline worked with its vendors toreduce part proliferation, complexity, and adjustedshipping schedules to reduce cost for both parties.

Valvoline met with suppliers and explained the ABCmodel in order to develop a buy-in to the concept.

Insight• By sharing information, the supply chain partici-

pants understood and became more supportive of thesuggestions and decisions.


The organization downloaded general ledger datainto EasyABC software (now using Oros) and uploadedconversion cost information from ABC to productcosting. All U.S. plants are using ABC. The interna-tional locations are just now coming on stream. TheABC plant implementations are very systematic. Oneweek is devoted to downloading data, one week visit-ing the plant, and one week for uploading the system.

Insights• Valvoline possesses a high level of acceptance and inte-

gration with operational decision making and prod-uct management. Senior management would appearto have accepted the data as not only valid but alsoessential to the future well-being of the organization.

• Implementation is less than four weeks at any given site.

• All information is PC-generated—no mainframeinvolvement outside of downloading of data.

S U M M A R YThe Valvoline operation has done an excellent job

of utilizing the ABC approach to improving its under-standing of the operational complexities of the manu-facturing practice. It has not used the approach foranything except the shop floor environment.Operational complexity arises not in manufacturingitself, but in the variety of ways a product can be pack-aged and shipped. Run volumes have a significantimpact on the cost of the product.

BENCHMARKING CONSOR TIUM STUDY ACTIVITY-BASED … · in this report, include the following: ABM...

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Transcript of BENCHMARKING CONSOR TIUM STUDY ACTIVITY-BASED … · in this report, include the following: ABM...