Activity-based management has brought about radical change in cost management systems. ABM has grown largely out of the work of the Texas-based
Consortium for Advanced Manufacturing-International (CAM-I). No longer is ABM's applicability limited to manufacturing organizations. The principles and philosophies of activity-based thinking apply equally to service companies, government agencies and process industries (CIMA, 2001). The acronym itself has evolved from ABC to ABCM (activity- based cost management) to ABM, and the application of ABC evolved from a manufacturing product costing orientation to a management philosophy of activity management applied in industries and organizations other than manufacturing (Mayank Jain, 2009).
By the way, where most business and enterprises conduct same from of budgeting and trend analysis to plan and forecast, many tools and techniques have evolved over the years to measure performance, control cost, and improve service. Some of these management tools include ABC, ABM, bench marking, process improvement, process reengineering, Total Quality Management (TQM) balanced scorecard, and six sigma. (Sameer Kumar and Matthew Zander, 2007). In health care today, activity based management (ABM), springing from the discipline of cost management, must deal with a multidisciplinary activity based cost (ABC), and activity based management system. It is much more accurate to visualize the ABC/ABM, model as "an economic model of the organization that integrates data from many information systems, financial and operational. Although the model presents greater opportunities for integration with strategic planning and continuous improvement programs (Judith J. Baker, 1998).
2.0 Activity Based Management
Activity Based Management (ABM) is a discipline that focuses on the management of activities as a way to improve customer value and profit. ABM are includes cost driver analysis, activity analysis, and performance measurement (James D. Tarr, 2004) (Anon 1, 2008).
This includes techniques such as Activity-Based Costing (ABC), focusing on cost allocation, and Activity-Based Budgeting (ABB), allowing companies to compile their budget in terms of activities expected to be performed (James D. Tarr, 2004). As a technique decomposing activities and processes and offering a view of how resources are actually used inside the company, Activity-Based Management allows companies to understand customer profitability of their services and products. It is a key component of the performance management architecture in many companies, and within various business domains, as it allows the improvement of the business processes and the increase of profitability (Keyrus, 2008).
ABM help companies them more advantageously in the market by providing accurate product and customer profitability information, and improve their internal capability and lower unit's costs. Furthermore, ABM is often seen as the preserve of the finance function. In fact, its real strength lies in providing genuinely usefull information for all function in an organization (Brian Plowman, 2001). The speed with which the change is happening in today's business area has taken on a particular force in the industry due to increased competition, intervention of statutory bodies on pricing, and the advent of new technologies and distribution channels (Rajendra Patil, 2009).
In the pricing of a policy the actuarial information provides the basic premium to that the organizational overheads are added ad-hoc. This is done mainly due to the unavailability of the relevant information. With the use of a relevant ABM model the same organization can get information on acquiring a customer, serving the requests, claims and closure of policy due to surrender or maturity payment etc. Let us see how an ABM model can provide sufficiently detail information of the overheads. The model calculates the cost of various transactions in the organization (Rajendra Patil, 2009)
Numerous companies are using ABM as a methodology to understand the efficiency of their processes and activities. Most of them are still using spreadsheet-based solutions though, which along time all show their limitations in terms of their ability to optimally maintain an ABM environment. The major risks related to these solutions include: high maintenance costs, the need for multiple data reconciliations, people's resistance to change, limited ability to perform what-if and scenario analysis, and limited security (Keyrus, 2008)
3.0 ABM varying degrees of success for work in companies
Activity based management (ABM) is now seen as an integral part of the decision-making framework and more and more enterprises are using it to identify true end-to-end product, customer or channel profitability. ABM's main advantage is that, by identifying company-specific performance measures, it focuses cost management activity where it will do the most good. These performance measures also improve planning techniques and the tracking of established goals (Anon 3).
ABM is the process of understanding, re-engineering, measuring and making decisions about activities to put an enterprise on the road to continuous improvement and excellence. It draws on the technique of activity based costing (ABC) to provide information to help make long-term strategic decisions about such things as product mix and supply source. If you understand how customers and products drive activities within the business and consume costs and resources, you can make informed decisions about improving margins and reducing costs (CIMA, 2004)
3.1 Improvement of management
ABM requires company-wide involvement. Many enterprises mistakenly believe that they can forego ABM and enhance shareholder value by downsizing. However, this can lead to some ill-informed, value-destroying decisions. That means no one else signs up to the improvement initiative (CIMA, 2004).
Perhaps one of the main reasons why managers undertake ABM projects is to cut costs, or more generally, to provide support for decision making at the strategic and operational level. Using activity based information; enterprises can make informed commercial decisions such as: Pricing their products and services more accurately. To identifying the most profitable groups of customers to be the focus of future CRM (customer relationship management) activities. To Identifying how to price sales coming from e-commerce against regular business. Providing detailed costing information as the basis for negotiating discounts with key accounts (CIMA, 2004)
3.2 IBM Industry
In 1994, IBM began reengineering its global supply chain to achieve quick customer responsiveness while keeping inventory at the minimum possible level. IBM's manufacturing sites are linked to tens of thousands of suppliers and distribution channels all over the world. A single product line may involve thousands of part numbers with multilevel bills of materials, highly varied lead times and costs, and dozens to hundreds of manufacturing and distribution sites linked by different transportation modes (Grace Lin, Markus Ettl, Steve Buckley and etc, 2000). Facing the challenges of increasing competition, rapid technology advance, and continued price deflation, the company launched an internal reengineering effort to streamline business processes in order to improve the flow of material and information. Achieving these goals would require the IBM operations research team's expertise in advanced mathematical methods for inventory control and supply chain optimization (Anon 2, 2008).
Early in the IBM team's efforts, its members realized that there were two fundamental keys to overhauling IBM's supply chain. First, they had to reduce and manage uncertainty to promote more accurate forecasts. Second, they had to improve supply chain flexibility to facilitate quick adaptation to changes in the marketplace. They focused on the intrinsic interdependency of an extended-enterprise supply chain, knowing their system would perform as desired only if it reflected the policies and processes used by its suppliers and channels, integrating their value chains with IBM's own. To support their effort, IBM developed an extended-enterprise supply chain analysis tool, the Asset Management Tool (AMT). AMT integrates graphical process modeling, analytical performance optimization, simulation, activity-based costing, and enterprise database connectivity into a system that allows quantitative analysis of extended supply chains (Anon 2, 2008).
Today's IBM is comprehensive, flexible and scalable change management tools well suited to meet this need. As part of the IBM Rational Team Unifying Platformâ„¢ suite, a set of integrated tools that span the full application development life cycle from requirements through testing, these two products are ideal for collaborative team environments and geographically distributed groups. IBM Rational Clear Case provides a wide range of software asset management capabilities including: Powerful version control, Transparent access to software assets, Flexible workspace management, Parallel development support, advanced build and release management (IBM, 2004). IBM Rational Clear Quest provides flexible defect and change tracking capabilities across the development life cycle, such as: Customizable, automated workflow support, including e-mail notification options, Comprehensive support for queries with extensive charting and reporting, Integration with Rational requirements management and test management tools for end-to-end change tracking (IBM, 2004).
4.0 Conclusion
Activity Based Management using The Model Approach goes far beyond Activity Based Costing in its usefulness. ABC certainly gives a better distribution of costs that traditional methods, but it still presents a financial view of the organization. ABM and The Model Approach, utilizing a powerful computer modeling tool like Net Prophet can provide a business decision making tool that can be used to manage and improve the business (James D. Tarr, 2004).
Activity Based Management should not be seen as the panacea to all cost management problems. It should rather be a natural progression of systems to improve management systems as a whole. ABM is seen as the information system that provides the cost and profitability of products or services while the management system entails the management events to reduce the cost and improve the perceived vale by the customer. The actions include factors such as utilization of machinery or resources, customer profitability, distribution channel effectiveness and other managerial issues (Carl Marx, 2009).
