Essay on Individual Research Paper Using ABM Techniques to Remain Competitive in the Twenty-First Century

This individual research paper discusses the topic Using ABM Techniques to Remain Competitive in the Twenty-First Century. It is not a secret that in order to remain competitive in the twenty-first century, it is necessary to use new concepts in the application of management accounting principles both in industry and in business. Activity-based costing will help to evaluate the cost elements of products and services in any organization. The paper discusses the history and present status of ABM. It also represents a thorough discussion of ABC and process value analysis. Moreover, the paper touches upon such ancillary concepts which are affected by the use of ABM as management of the value chain, total quality management, JIT inventory management, total customer satisfaction and computer-integrated manufacturing.

INTRODUCTION

     Nowadays, activity-based management plays an important role in any type of business as it focuses on the effective management of activities in order to make improvements both in customer value and profit. It is known that in many sectors of the US economy, there is a great necessity “to sustain and increase corporate profitability” in order to remain competitive and to win “more market share of the customers both nationally and globally”. (Plowman, 2001, p.5)

Moreover, activity-based management makes it possible to position the companies more advantageously in the present day market because it represents not only accurate product and customer profitability information but also it helps to improve internal capability of the companies and reduce unit costs.

THE HISTORY OF ACTIVITY-BASED MANAGEMENT

     It is known that in the 1980-1990s, traditional accounting including conventional costing, budgeting and management accounts could not show high results in supporting all the business decisions. There was also a problem with “technical development in management accounting”. However, great changes in manufacturing technology increased not only productivity but also quality of products. (Plowman, 2001, p.9)

Activity-based management developed from the improved costing methodology – activity based costing. In other words, activity based management uses appropriate cost information which is got by activity based costing. In 1960, General Electrics managers tried to improve the usefulness of accounting information which was related to control of indirect costs. The managers of that organization found that indirect costs were the results of so called upstream solutions. The work of the managers of General Electrics was one of the first examples of activity based management. (Cortese-Danile, 2002, p.1)

PRESENT STATUS OF ACTIVITY-BASED MANAGEMENT

Today, activity-based management is applied in manufacturing and different service companies, utilities and logistics, telecommunications and different government sectors. ABM helps to make improvements in businesses by means of measuring product and process costs as well as customer profitability. According to the statistical data, about 80% of the companies      which have already implemented activity-based management techniques in their business, prove the fact that these techniques are rather successful.

It is known that today, this method is “generally recognized as a more accurate and efficient method of determining profitability of different business activities”. (Miller, 1998, p.23)

One of the numerous examples of implementing of ABM is found the sphere of banking industry. For example, Midwest Banking, Inc. successfully implemented ABM in 1996. It proved the fact that ABM was “a revolutionary technique” in the banking industry. It provided the bank with all the necessary information to succeed in the 21-st century. Of course, a lot  of work have been done in order to achieve positive results. It was a so-called step by step process.(McGuire et al., 1998, para.3)

Thus, application of activity-based costing in the above mentioned organization included the following steps:

1. to gain appropriate support and direction of senior management;
2. to develop a direct link to other important goals and objectives of the organization which included “quality initiatives”.
3. To organize a team of managers from different departments who will take part in the process of implementation of the Activity-based costing project.
4. To develop a specific product line, or a so-called pilot project;
5. to organize a standard process which will be able to maintain important cost information.

It is clear that the above mentioned steps required a lot of time and efforts. However, today this method is vital for Midwest Banking, Inc. because it allows the company to remain competitive in the market. (McGuire et al., 1998, para.12)

There are a great deal of other examples of different companies and organizations which prove the effectiveness of activity-based management. Among them are Defense Logistics Agency, Phillips Petroleum, Acxiom Corporation, National Demographics and Lifestyles, Inc., Union Pacific Resources Corporation, Caterair International and many others. (Miller, 1998, p.21)