What is ABM (Activity-Based Management)?

Using an Activity-Based Costing (ABC) system to improve the operations of an organization is Activity-Based Management (ABM) and a continuum of value. In the broadest terms, ABM aims to improve the value received by customers and to improve profits by providing this value.
The cornerstone of ABM is distinguishing between value-added costs and non-value-added costs. A value-added cost is the cost of an activity that cannot be eliminated without affecting a product’s value to the customer. Value-added costs are necessary (as long as the activity that drives such costs is performed efficiently). In contrast, companies try to minimize non value-added costs i.e. costs that can be eliminated without affecting a product’s value to the customer. For example, activities such as handling and storing inventories, transporting partly finished products from one part of the plant to another, and changing the set-up of production line operations to produce a different model of the product are all non-value-added activities that can be reduced, if not eliminated, by careful redesign/re-engineering of the plant layout and the production process. ABM is the application of ABC data (inputs and outputs) to manage product portfolios and business processes better. ABC becomes ABM (management) when ABC results/outputs are used to:-

• design products and services that meet or exceed customers’ expectations and can be produced and delivered at a profit

• signal where either continuous or discontinuous (re-engineering) improvements in quality, efficiency and speed are needed

• guide product mix and investment decisions

• choose among alternative suppliers

• negotiate about price, product features, quality, delivery and service with customers

• employ efficient and effective distribution and service processes to target market and customer segments

• improve the value of an organization’s products and services.