Definition:
Activity-Based Management (ABM) is a strategic approach that uses activity-based costing (ABC) to improve operational efficiency and profitability. It involves identifying and managing activities that add value to a business and eliminating or improving those that do not.
Key steps in ABM:
- Identify activities: Identify the key activities that drive costs and contribute to value within the organization.
- Analyze activities: Analyze the activities to determine their value-adding potential.
- Improve processes: Identify opportunities to improve or eliminate non-value-adding activities.
- Allocate resources: Allocate resources to value-adding activities and reduce resources allocated to non-value-adding activities.
- Measure performance: Measure performance based on key performance indicators (KPIs) that reflect value-adding activities.
Why is ABM used?
- Improved efficiency: ABM can help businesses identify and eliminate non-value-adding activities, improving overall efficiency.
- Enhanced profitability: By focusing on value-adding activities, ABM can help businesses increase profitability.
- Better decision-making: ABM provides a more informed basis for making decisions about resource allocation, pricing, and product mix.
- Continuous improvement: ABM encourages a culture of continuous improvement by focusing on identifying and addressing inefficiencies.
Example:
A manufacturing company might use ABM to identify activities that are adding value to its products, such as product design and quality control. By focusing on these activities and eliminating non-value-adding activities like unnecessary inspections, the company can improve its efficiency and profitability.
In essence, ABM is a strategic approach that uses ABC to drive operational improvements and enhance profitability.
