ABM

what is ABM

• use of information from ABC to improve business decisions by analysing, managing, and reducing activity related costs while enhancing customer value

• ABC tracks costs → ABM uses that info to make better decisions

why use ABM

allows firms to:

• identify and eliminate non value adding activities

• redesign high cost processes

• improve cost efficiency and value delivery

• supports decisions on product mic, pricing, customer relationships, and cost control

ABC vs. ABM

ABC does…	ABM uses that to…
assign overheads based on activity usage	identify where value is created or wasted
show product/customer specific cost drivers	improve product portfolio or pricing decisions
provide accurate cost per unit/customer	eliminate, reduce, or redesign costly activities
show activity level costs	support strategic cost reduction and value creation

analysing/commenting results

• if overheads are high or poorly allocated

  • ABM helps trace overheads to their root cause providing a clearer picture of product or customer profitability

  • suggestion:

    • adopt ABC costing to allocate OH more accurately

• product has high customisation/design effort:

  • ABM highlights that bespoke, low volume products absorb more design and admin cost → may not be profitable long term

  • suggestion:

    • redesign/simplify product to reduce customisation

• if customer service activities dominate:

  • customer facing activities [visits, support, returns] should be assessed using ABM to see if cost matches value delivered

  • suggestions:

    • implement self service tools/FAQs

    • reduce frequency of service visits/support interactions

• if products seem unprofitable:

  • ABM may reveal cost distortions from traditional costing

  • under ABC/ABM, some products may be more/less profitable than expected

  • suggestions:

    • reprice unprofitable products based on true cost

    • discontinue/scale down unprofitable lines

strategic uses of ABM

use ABM to:

• drop or improve low margin products

• adjust pricing to reflect cost to serve

• redesign costly, low value activities

• support process improvement and innovation

• improve budgeting and forecasting using activity volumes

• conduct customer profitability analysis

ABM helps firms shift from cost control to value creation

how ABM creates value

• improves product and customer profitability

• supports cost reduction without reducing customer value

• helps firms eliminate non value adding activities

• enables better strategic pricing

limitations

• difficult to identify all activities and drivers

• data may be unavailable or unreliable

• requires investment in systems and staff training

• cultural resistance - staff may be unwilling to change

• costs may not be avoidable even if product is discontinued [e..g. fixed overheads]

when ABM is most/least useful

• most useful when:

  • overheads are high

  • product variety or customer complexity is increasing

  • traditional costing distorts profitability

• less useful when:

  • products are standardised

  • direct costs dominate

ABM vs. other SCM techniques

technique	focus	ABM link
ABC	costing accuracy	ABM uses ABC data for decisions
LCC	total product life cycle cost	ABM supports cost control across stages
CPA	customer profitability	ABM helps trace cost to serve
TC	design to hit cost goals	ABM helps identify high cost activities to cut early