Activity based management (ABM) may be described as a system that embraces and implements the application of costs on activities and processes in an organization with a view of achieving the managerial role of customer value and profit maximization. Basically, the system relies on the activity based costing (ABC) model to derive valuable market and cost information for application in strategic decision making process aimed at improving the business. Indeed, according to Tardivo and Montezemolo (10) are on the view that ABM generally uses the information provided by ABC for continues improvement of business, and its main purpose is to ensure that the company meets its goals or achieves a competitive advantage by “maximizing the operating structure knowledge” and implementing its business strategy, with control of operations along the value chain being the focal point.
Origin of ABM
Generally, the emergence of ABM as a management tool followed the limitations of the traditional methods which normally were based on the hierarchical structure of the organizations. However, in the contemporary organizational settings, many companies have shifted to the horizontal management structures, creating a need for the organizations to track and access information necessary for effectively and efficiently designing products that meet the customers’ requirements. Indeed, the introduction of the ABC costing model which focuses on allocating costs of products and processes based on activities carried out requires proper implementation, and in this case, ABM validates this information by “providing value analysis, cost drivers, and performance measures to initiate, drive or support improvement efforts and to improve decision making” (Anon 2). It is therefore prudent to state that ABM came as a result of the need by organizations to maximize the value of the customers and stakeholders through the modern and rapidly gaining popularity horizontal management framework that is activity-oriented.
Using ABM for Success
A successful company will require making pertinent decisions, more so in relation to resource allocation. In this case, relevant information is of paramount important to the management in order to ensure that performance of activities is of the right quality and value to the customers and the organization. Therefore, ABM makes use of the ABC information to manage the activities to the level that meets customers’ value creation and organizational needs. Basically, a successfully implemented ABM provides benefits such as identifying the redundant costs, analysis of value-added and nonvalue-added costs, measurement of activity-based performance, tracking the impact of product and process improvement efforts, providing accurate product and service cost based on allocation of resources and providing a better understanding of the cost drivers associated with each activity (Player and Keys p. 4). In this case, the success of ABC in an organization will require commitment of all members of management, more so the top management as this is a strategic decision, as well as having mutually agreed objectives that ABM strives to achieve.
Using ABM for success usually involves various stages as highlighted by McNeill and Singh 391-399); the first stage is the analysis of the activities in the organization, which involves “identifying the value-added and nonvalue-added activities, analysing the critical activities and making comparison of the performance of these activities with the benchmark.” Second stage involves improvement of the activities, which may include eliminating redundancies, rescheduling, selecting low-cost activities and sharing of the activities. The third and last stage is performance measurement, both financial and non-financial.
The above three stages are critical and should involve all the employees of the company, more so those who have a better knowledge on the activities. In addition, continuous training and consultations are important to ensure ABC process runs smoothly. This can be evidenced by the case of The Marmon group of companies based in Illinois, Chicago, which has successfully been using ABM for last one decade, with the major success stories being: beating competitors in terms of service level; making changes to products, capacity utilization and marketing; integrating specific jobs into one level for efficiency; cost saving as a result of outsourcing stampings and drawings of a manufacturing strategy; and an influx of customers due changes in product mix. Indeed, the company has established a separate Activity Based Costing and Management function specifically under the docket of the corporate controller to ensure the existence of a culture that focuses customer value and organizational effectiveness.
Activity-Based Management has become crucial in management of activities in organizations, especially when it comes to production of products and services that meet customer value and profitability of the organizations. In this regard, it is important that everybody in the organization understands the benefits of ABM and its implementation objectives in the value chain.
Anon. “Activity-based Management – An Overview.” Technical Briefing: Developing and Promoting Strategy. 2001. Web.
Mcneil, Gunasekaran, R. and Singh, D. “Activity-based management in a small company: A case study.” Production Planning & Control, Vol. 11, No. 4, 391 – 399, 2000,
Player, Steve and Keys, David. Activity Based Management: Arthur Andersen’s Lessons from the ABM Battlefield. NY, John Wiley & Sons, Inc. 1999. Web.
Tardivo, Giuseppe and Montezemolo, Giulia C. “Using Activity-Based Management to Achieve Excellence.” Journal of Financial Management & Analysis, 22, 1 p. 67, 2009.