Activity based management (ABM) is a management model that uses the activity based costing (ABC) method to manage production and an organization.
The ABC method tracks costs of a business or department to the activities performed, and verifies how these activities are related to revenue generation and resource consumption.
The ABM method assesses the value that each activity adds to the performance of the business or department. While activity based costing is the technical process for review of the activities, tracking of costs and conduct of these activities for products and customers, the ABM makes use of the information generated by ABC to run a business.
The costs are not incurred, that is, they do not occur spontaneously, they are induced. The focus is on factors generating costs and to reduce or eliminate these factors.
Activities must be agile (shorter operating cycle) of lower cost and higher quality; focusing on reducing or eliminating activities that add no value. And also on doing the correct activity, instead of doing the activity in the right way.
Risk associated with the activity based management revolves around the fact that certain activities come with an implicit value, which is not shown through financial value added to any item. For example, a good working environment can play a part in retaining highly skilled employees, although may not be regarded as value adding under operational ABM.
ABM provides new sources and forms of information and analysis of the company. As a result, the fresh views on business develop and improve understanding of the behavior of costs by enhancing control over them.
The method acknowledges the complexity of products and services, and the relationships between the various activities undertaken to their production or execution.
The costs are related to the products according to the amount of resources consumed by the activities necessary to manufacture each product. The ABM changes how indirect costs are allocated to products, allowing to identify the causes of resource consumption. And identify opportunities for savings, as well as provide subsidies for pricing decisions.
Activity based management enables businesses to identify unprofitable distribution channels and the cost of unprofitable demand for customized products and extra services consumed by customers.
It enables the enhancement of the ability to create and add value, seek opportunities for cost improvement, eliminate or reduce inefficiencies, identify factors that generate costs and how to influence them, and also identify activities that do not add value.
The organizational analysis based ABM covers the following stages: analysis of activities and analysis of the value of activities;
The analysis of the business process through the ABM enables improved quality to the final customer, improving efficiency and creating competitive advantage. The scope of the analysis should allow the focusing of scarce resources on the most important areas of business. And there should be a control to determine when the scope is completed and should begin a new phase or new project.
As such the scope of analysis is defined as training and general awareness on the subject, definition of the company’s strategic objectives and selecting the scope of the analysis (in accordance with the strategic goals).