Understanding Activity Based Cost Management
Firestorm is pleased to introduce one of our newest Expert Council Members, John Campi. John P. Campi is the founder and Managing Partner for the Genesis Management, LLC, an organization specializing in supply chain and cost management initiatives. Previously, he served as Executive Vice President and Chief Procurement Officer of Global Sourcing for Chrysler LLC where he was responsible for all worldwide purchasing and supplier quality activities. Mr. Campi is one of the founders of Activity Based Management (ABM), and worked with Professor Robert Kaplan in the 1980’s as an industry expert to help formulate ABM concepts.
Activity Based Management (ABM) is the discipline of identifying and evaluating activities that a business performs using those activities as the basis for carrying out a value chain analysis or re-engineering initiatives to improve strategic and operational decisions in an organization. Activity based costing establishes a relationship between total costs to serve, including overhead based on the activities necessary to support a process. Activity based management focuses on managing activities to reduce costs and improve customer value.
Financial reporting requirements dictate standard costing procedures to insure appropriate inventory valuation and income statement compliance with SEC, FASB and IFRS rules. However, this frequently leaves management with less than adequate information with which to make decisions. Activity Based Management applies activity based cost management techniques to the overhead structure of both large and small business enterprises that assist management in the determination of product, product line and distribution channel profitability reviews.
These techniques may be used to improve fragmentation of work effort that may greatly enhance the productivity and execution of an organization.
Activity Based Management helps to reduce business risks and complexity by analyzing activity structure which helps identify operational inefficiencies. Areas may include:
- Strategy – identify the components of the execution of your strategy that drive complexity and review the need for those components of corporate strategy as well as the drivers for success.
- Transparency – Using activity based management tools, provide transparency into business complexity. A business must identify complexity which adds value to the business as well as complexity that destroys value.
- Total Value Chain – The optimal amount of complexity is identified for the various aspects of a business. By using quantitative attributes (low cost) and qualitative characteristics (innovation, time to market, etc…) the optimal amount of complexity can be determined.
- Sustainability – In order to sustain the optimal amount of complexity, the correct infrastructure to support that complexity must be in place. This includes corporate rules, Corporate Performance Indicators (CPI’s), Key Performance Indicators (KPI’s), incentive compensation, information systems, business processes/rules and corporate communication.
The application of ABM to strategy allows a business to identify customers who bring more value to the business and therefore should warrant more of focus. This is a powerful tool to maximize the value chain of a business.
To learn more about Mr. Campi or ABM Contact us