Assume for the moment that you walk into a beauty or barber shop that has only two hair stylists. One has messy hair. The other’s hair is well groomed. Which stylist would you choose to cut your hair?
Your instinct is to select the stylist with the good-looking hair. But looks can be deceiving … the person with the messy hair cut the other stylists’ hair.
When implementing Activity Based Management (ABM), looks can be deceiving. Relying on instinct has led some ABM implementers in the wrong direction. Here are three examples to consider:
- Non-value activities look like the best cost improvement opportunity.But don’t be deceived. Most organizations would gain greater benefit from a focus on value. According to Howard Hendricks in his book Color Outside the Lines, it is human nature to be negative. Mr. Hendricks says, “If you’ve received higher education, you are probably even more critical than most. Why? Because you were trained to be! You were schooled in the art of critical That’s not all bad, but it can be limiting.”People viewing ABM reports for the first time tend to focus on the non-value activities (NVA). For the most part, this is because they’ve never seen waste dollarized. Focusing on NVA, however, can be limiting. Almost every organization I’ve worked with during the past twelve years has found twice as much VA than NVA, e.g. ICMS customers average 65% value-added activity cost. Most organizations have a greater opportunity to improve profitability by focusing on the improvement of value activities than non-value. When selecting activities to improve, encourage employees to improve both a value and a non-value activity in their department.
- Products look like the best target for Activity Based Costing (ABC). But don’t be deceived.We should not mistake products for solutions when creating an ABC system. My 79-year old dad had successful triple-bypass surgery this year. Reviewing the hospital invoice I noticed that two Tylenol tablets cost $12.00! Did this productreally cost $12.00? The answer is “No”. The hospital’s antiquated cost system had allocated nursing and pharmacy overhead cost to the product instead of the activities (i.e. Fill Prescription, Deliver Prescription, etc.) performed to provide my father a solution to his illness.When defining ABC cost pools and cost drivers, make sure you’ve got the correct cost objects. I recently provided onsite ABC coaching to an industrial parts distributor. Management’s initial interest was in ABC product costing. As we prepared to construct the ABC product cost model, I realized that many of the most expensive activities had little or nothing to do with the purchase and delivery of a part. Instead, many of the activities provided customers with solutions, not products. Examples of solution-based activities were “Assess & Define Customer Needs”, “Design System” and “Troubleshoot Problems”. Including these activities in ABC product cost would have resulted in the over costing of products sold to customers who don’t consume the solution-based activities. When implementing ABC, separate product activities from solution activities.
- Rest is typically considered non-productive time. But don’t be deceived.Rest can rejuvenate profits. Counter to what the culture would have us believe, rest is productive, not waste. We live in a restless age. A 1998 Reuters report claims that the average worker gets interrupted 169 times per day. Interruptions create tension. Tension leads to poor productivity, errors, employee turnover and often illness. To reduce tension, we need rest. Even God rested … “By the seventh day God had finished the work He had been doing; so on the seventh day he rested from all His work.” (Genesis 2:2-3)In their book The Fourth Frontier …exploring the new world of work, authors Stephen Graves and Thomas Addington state, “Rest itself is an essential movement of the rhythm of life. You can’t work well without rest, and you can’t rest well without work.” When reviewing Sandoz Agro ABM reports several years ago, I recall seeing an activity called “Tinker Time”. It was the policy of Sandoz management to encourage employees to spend several minutes a day simply resting and thinking about new ideas to improve themselves, their department and the company. Tinker Time is a creative interruption whose time has come.
In his best seller Rich Dad, Poor Dad, author Robert Kiyosaki says that Poor Dads teach, “Our home is our largest investment and greatest asset.” Rich Dads teach just the opposite … “A house is a liability, not an asset.” Kiyosaki challenges the reader to not be deceived by traditional thinking. When it comes to activity accounting, Rich Dad would likely say, “It’s not the numbers, but what the numbers are telling you.” Don’t be deceived by the first glance at your activity accounting numbers. Instead, pause and pursue the story your Activity Based Management numbers are telling you.