Activity-Based Management: Enhancing Efficiency & Profitability - Research Paper

Introduction

Activity-based management is a field whose primary focus is on how activities are managed in an organization as a way of improving performance. Every organization wants to mitigate errors and perform in an optimal way, which is achieved by the use of activity-based management. The model involves an internal analysis of the organization's activities as a way of identifying opportunities to enhance profitability and efficiency. Tasks are classified into two; non-value added and value-added, and this enables the company to improve the value-added activities to achieve the goal of customer satisfaction. The profitability of each task in the company can be determined and enhanced with the help of a business based management method.

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Activity-Based Management Implementation

To reflect the organization's values and culture, integration of the central information systems of the organization with the activity-based management systems is essential. The organization is required to adopt a comprehensive approach in the implementation of activity-based management to achieve and sustain its benefits. Assessment of critical activities and processes is importation in the application of the activity-based management method to support the implementation plan development. Implementation for each significant segment can be accomplished at a time with the help of a building block method (Parker, 2016). The development of a reporting system and cost-effective data collection signals total completion of the implementation process. Implementation of this method can be of importance to the organization if the proper personnel accesses the right information. The reason is that the correct decision will be made that will enable the organization to improve its performance.

The implementation and maintenance of the activity-based management method involve several stages. The first stage involves training and motivating the company's staff to make them familiar with the activity-based management system and its functioning. Since the employees are the heart of the organization, motivating them will enable the managers to meet performance recording and productivity objectives (Skogland, 2017). The second stage in the implementation and maintenance of the method involves selecting a system that corresponds to the goals of the company. Existing management systems need to be separately evaluated once the activity-based management method becomes part of the company's operational culture. The third stage involves the selection of team members who will be responsible for maintaining the activity-based management system. Having external and internal consultants is essential because it will enable the company to achieve continuity of its activities.

The fourth stage involves maintenance of the system, ensuring that it is operating successfully. Supervision and communication of the business based management system is the last stage of the implementation and maintenance process. For successful implementation and maintenance of the system, there must be an establishment of an excellent connection between the dedicated staff and management (Sujova, Rajnoha & Merkova, 2014). Results of the structure must be regularly analyzed to have an understanding that will improve the decision making process and development of programs that are easy to maintain in the future. Successful implementation of the activity-based management method is an indicator of the company's increase in performance in the future.

The Principles of Activity Based Management

The use of an activity-based management method is a superb way of improving performance management and the quality of decisions made by the organization. The technique is still relevant due to its several principles it follows. The first principle is the identification of what causes the activities. The policy argues that services and costs are consumed by the operations performed by the employees, and doing away with a part of the staff does not reduce the cost of these activities (Thekdi & Aven, 2016). The second principle identifies the relationship between customers and operations. The degree in which the customer is satisfied concerning quality, delivery time, and the cost is evaluated. This is to facilitate activities improvement and to meet the customer's needs. The third principle involves joint management, which results in the creation of managerial teams and the establishment of administrative responsibilities. Joint management leads to the production of efficient, flexible, and straightforward managerial processes that facilitates the satisfaction of customer's needs (Leitner & Wall, 2015). The fourth principle is the culmination of performances, which involves benchmarking the activities to improve and obtain high returns.

The fifth principle is all about eliminating and minimizing non-value activities. The achievement of this policy results in resources being reallocated, and this enables the organization to improve and increase performance (Pryor, 2000). Disciplinary liability and cooperation is the sixth principle of the activity-based management method. The concept argues that the errors and causes of activities can only be detected if the departments in the company are cooperating (Kaplan & Atkinson, 1998). The cooperation will enable the departments to avoid and settle negative deviations relating to low quality and excess costs. Permanent improvement of the company's activities is the seventh principle of the activity-based management method. This is achieved by continuously analyzing the obtained results from the actions and processes, which results in the improvement of performances and maintaining the organization's competitiveness.

The eighth principle involves updating all the information and avoiding irrelevant data. The updated information is used as a basis for measuring performance. Identification of objectives is another principle of activity-based management method, which involves regularly checking the activities that increase production to achieve budget activities and the strategic plan of the organization (Phan, Baird & Blair, 2013). The last principle of this method is professional satisfaction, which argues that the effectiveness of staff activities can be achieved by rewarding them based on the results. Providing the necessary tools to the employees creates a favorable climate, which leads to performance increase resulting in the achievement of the desired outcomes. The application of these principles makes the activity-based management method an essential tool for achieving performance in the organization.

Outputs of an Activity-Based Management Information System

The use of an activity-based management method results in five key data outputs. The first output is the cost of business processes and activities, which involves assigning value to actions rather than reporting how cash is spent. The second information output is the cost of tasks that are not adding any value both to the customer and the organization. These activities are considered as waste, and the ability to identify such non- value-adding tasks is a valuable aspect to the management. This information output is essential to the organization because it creates an opportunity for improvements in efforts. Reporting information on the performance of activities is another crucial output of the activity-based management system.

Since the total cost is not enough to measure the performance of the operation, the structure must report on the quality, productivity, cycle time, and customer service to have a better judgment on the conduct of such activities. A scorecard for reporting on the improvement efforts can only be provided by measuring the actions performed (Thomas Johnson, 1991). Another critical information output of the system is the accuracy of the cost of products and services. The value of these services and products must be determined correctly to select the segment markets and pricing. Information about the cost drivers is the last output of the activity-based management system. The cost drivers play a determining role in the performance of tasks because of their ability to change the cost of such events. All these outputs promote the improvement of the decision-making process and management initiatives by providing data on activities operations and expenses.

Categories of Activity Based Management Application

The objectives of the activity-based management system are accomplished through two supportive applications, which include strategic activity-based management, which means performing the correct exercises and the operational activity-based management, which involves performing tasks in the right way. Functional activity-based governance improves operations efficiency and utilization of assets. This application mainly focuses on having things done the correct way and activities performed efficiently. Some of the examples of management techniques used in this application include total quality management, activity management, performance measurement, and business process reengineering (Gunasekaran, McNeil & Singh, 2000). The strategic activity-based management application attempts to increase the organization's profitability by enhancing the efficiency of activities. The main focus of this application is selecting the correct tasks for the operation, choosing profitable consumers, and elimination of events that are not important. Some of the examples of management approaches used in this application include consumer profitability analysis and process design.

Comparison Between Activity-Based Management and Traditional System

The main focus of activity-based management is on the tasks performed by the organization, and therefore it views the organization as a set of joined activities that add value to the end consumer. Its objective is to meet customer expectations while demanding a few resources from the organization. This is the reason why the activity-based management system has data regarding the reason for undertaking certain activities and the methods used to perform such activities (McChlery, McKendrick & Rolfe, 2007). In contrast, the main focus of the traditional system is on the categories of costs from various segments in the organization. Information provided to the managers by the conventional method is insufficient for making the organization's decisions. This makes the traditional system unsuitable due to the lack of detailed and more in-depth information.

Unlike the traditional system that focuses on the incurred cost, activity-based management only focuses on the relevant information when processing customer orders. The mode of reporting is different in the two systems where the traditional system report based on the departments and the activity-based management report based on operations. The ability of activity-based management to focus on activities allows the managers to make the correct decisions that improve the performance of employees resulting in high profits to the organization (Hughes, 2005). Activity-based management is considered to be better than the traditional system due to its detailed information concerning the activities and its ability to assign the value of tasks to the products concerning the demand of the product. Activity-based management provides information on all functions, whether value-adding or non- value-adding, unlike the traditional system. Information concerning the non-value adding events is critical in the organization because the managers can track such tasks and the cost involved. Production flow in the organization will be improved, and the price of production reduced while still maintaining the quality of the products.

Benefits of the Activit...