activity-based management in a small company sd

PRODUCTION PLANNING & CONTROL, 2000, VOL. 11, NO. 4, 391 ± 399

Activity-based management in a small company:a case study

A. GUNASEKARAN, R. MCNEIL and D. SINGH

Keywords activity-based management, SMEs, case study

Abstract. This paper deals with the application of activity-based management (ABM) in a small company. The projecttook place in G. E. Mustill, a company that produces machinesfor the photo framing industry. This project aims to develop anABM system for the company which leads to appropriateimprovement actions based on a make or buy decision aboutdi� erent parts of the machine, f̀our-head foiler’. Firstly, atheoretical framework for the design of an ABM system is devel-oped. Then, secondly it is used to improve the business perform-ance of four-head foiler manufacturing. The activities requiredto manufacture this machine are identi® ed and then quanti® ed

by their consumption of resources. The factors causing or driv-ing the cost (cost driver) of an activity in question have beenidenti® ed and used to identify the value-adding and non-value-adding activities. Also, some suggestions are o� ered to improvethe performance of the company using the ABM system.

1. Introduction

The analysis and cost of activities provide ® nancial andnon-® nancial information which is the basis for activity-based management (ABM). ABM makes this cost andoperational information useful by providing a value

Authors: A. Gunasekaran and R. McNeil, Department of Management, University ofMassachusetts, North Dartmouth, MA 02747-2300, USA, e-mail: [email protected],and D. Singh, Department of Manufacturing and Engineering Systems, Brunel University,Uxbridge, Middlesex UB8 3PH, UK.

A. GUNASEKARAN is an Associate Professor of Operations Management in the Department ofManagement at the University of Massachusetts, Dartmouth, MA 02747, USA. He has a PhD inIndustrial Engineering and Operations Research from the Indian Institute of Technology, Bombay(India) . Dr Gunasekaran has held academic positions at Brunel University (UK) , MonashUniversity (Australia) , the University of Vaasa (Finland) , the University of Madras (India) andthe University of Toronto, Laval University and Concordia University (Canada) . He has over 100articles published in journals, e.g. International J ournal of Production Research, International J ournal ofsystems Science, International J ournal of Operations and Production Management, Computers in IndustrialEngineering : An International J ournal , European J ournal of Operational Research, Logistics InformationManagement, TQM Magazine , Management Decision , Managerial Auditing J ournal , International J ournalof Advanced Manufacturing T echnolog y, International J ournal of Production Economics , J ournal of OperationalResearch Society, Enterprise Innovation and Change, International J ournal of T echnology Management,Technovation, Computers in Industry: An International J ournal , Total Quality Management, InternationalJ ournal of Quality & Reliability Management, International J ournal of Computer-Integ rated Manufacturing .He has presented over 50 papers in conferencesand given a number of invited talks in more than 20countries. He is on the Editorial Board of over 12 international journals that include InternationalJ ournal of Production Planning & Control , International J ournal of Systems Science , Computers in Industry: AnInternational J ournal , CERA , Technovation, J ournal of Product and Process Development, Log istics Inf ormationManagement, Business Process Management J ournal , Journal of Operations Management, Supply ChainManagement: An International J ournal , International J ournal of Quality & Reliability Management. Hehas edited special issues for a number of highly reputed international journals. Dr Gunasekaranhas been involved in several national and international collaborative projects that are funded byprivate and government agencies. He has supervised more than 40 dissertations and several indus-trial projects. Most of the projects are industrial based. Dr Gunasekaran is currently interested inresearching agile manufacturing, concurrent engineering, management information systems, tech-nology management, supply chain management, computer-integrated manufacturing, and totalquality management.

Production Planning & Control ISSN 0953± 7287 print/ISSN 1366± 5871 online # 2000 Taylor & Francis Ltdhttp://www.tandf.co.uk/journals

analysis, cost drivers and performance measures to initi-ate, drive or support improvement e� orts, and hence toimprove the decision-making processes. Cost AccountingManagement-International (CAM-I) de® nes ABM as `adiscipline that focuses on the management of activities asthe route to improving the value received by the custo-mer and the pro® t achieved by providing this value’ .This discipline includes cost drivers analysis, activityanalysis and performance measurements. ABM drawson activity-based costing (ABC) as its major source ofinformation (Berliner and Brimson 1988) .

The goals of ABC can be achieved by managing theactivities. It is important to realize that managing activ-ities is not a custodial task. Rather, it is a process ofrelentless and continuous improvement of all aspects ofa business. This involves a continual search for opportu-nities to improve which in turn involves a careful andmethodical study of activities (Kaplan 1984) .

In this paper, a real life example of the photo framingindustry, G. E. Mustill (GEM) , has been considered toexplain the application of ABM in a small company. Inthis project, an ABC system is used to accurately calcu-late the cost of the company’ s main product (four-headfoiler) and cost of di� erent subassemblies to a make orbuy decision. ABC helps to analyse di� erent activities inthe company and to di� erentiate between value-addedand non-value-added activities. The aim of ABM is toguide improvement e� orts of management in the rightdirection by providing accurate information aboutactivities.

The organization of the paper is as follows: section 2deals with a conceptual model for ABM. A case study ispresented in section 3 to illustrate the application of the

model in a small company. The conclusions are presentedin section 4.

2. Activity-based management

Each organization requires information to make deci-sions, set priorities, allocate resources and monitor theactions taken. ABC performs the arithmetic to provideaccurate cost information, and ABM is focused on usingthis information to manage activities. Improving businessbased on the information obtained from ABC is called asABM. ABM is a management analysis that brings the fullbene® ts of ABC to an organization. A conceptual modeldeveloped as shown in ® gure 1 is used to describe ABM.Di� erent stages of ABM in managing and improvingactivities are discussed in the following sections.

2.1. Analysis of activities

In this section, the details of the analysis of activitiesare discussed. The analyses of activities involve: ( i) iden-ti® cation of value-added and non-value-added activities;( ii) analysis of critical activities; and (iii) comparison ofthe performance of those activities with that of bench-marked.

2.1.1. Identif y value-added and non-value-added activities

Once activities are speci® ed and the cost of each activ-ity is calculated, the next step is to identify value-added

392 A. Gunasekaran et al.

RONALD MCNEIL received his undergraduate degree in England and graduate degrees in theUnited States. Ron was employed by a management-consulting ® rm and focused on the energy® eld with utility, petro-chemical and coal companies. He designed, managed and delivered organ-izational and management development programmes to a host of Fortune 500 companies. He alsohas held executive positions as president of a mining company and as Director of ManagementDevelopment for a consulting ® rm. In 1982 he entered the academic ® eld and progressed to atenured, full professor of management, Director of a Small Business institute, Director of largeGraduate Program in Business (a programme with over 600 students), and Associate Dean. In 1992he accepted the position of Dean of the College of Business and Industry at the University ofMassachusetts Dartmouth. He continues his strong ties with industry, the community and aca-demic associations. He has published and presented over 50 academic papers at regional, nationaland international meetings.

DALJ IT SINGH has completed his BEng (Production engineering) from Shivaji University, India.then he worked for about three years with Jindal Aluminium in Bangalore, India as a productionengineer where he was responsible for capacity planning, quality assurance and costing of products.Later he came to the UK and completed his MSc in Advanced Manufacturing Systems fromBrunel University. His areas of research interests are six-sigma process control, costing of productand kanban and kaizen.

and non-value-added activities. This judgement shouldbe made within the context of company-wide and well-understood de® nitions for the terms. A non-value-addedactivity is often de® ned as `an activity that can be elim-inated with no deterioration of product attributes (e.g.performance, functionality, quality, perceived value) ’(Miller 1992) .

Making non-value-added cost visible is one of themajor bene® ts of ABM, but also the most di� cult toachieve (David and Robert 1995) . Also, de® ning whatis value added versus what is non-value added can beproblematic. De® nition of a value-added and non-value-added activity is often confused and misunder-stood. Some think that non-value-added activity meanswaste, to others it might mean the cost of quality and toothers it might mean everything other than the labour.The reporting of non-value-added activities and costs canquickly become a people’ s issue because no one wants tobe labelled as performing non-value-added activities, e.g.labelling can easily be considered a threat to job security.Therefore, ABM should focus on the activities, not on thepeople who perform the activities.

Clarity and understanding between value-added andnon-value-added activities are achieved when peopleunderstand and accept the reasons why an activity isclassi® ed as non-value added or value added (Miller1996) . Most people perform their value-added analysisby simply designating an activity value added or non-value added. This level of analysis is insu� cient becauseevery value-added activity includes non-value-added

steps or tasks. A more thorough analysis should be under-taken to identify the potential for improvement in value-added activities. The following are a few examples ofnon-value-added activities in an organization.

. Machine setup is a non-value-added activity (as themachine is not producing anything while beingsetup) .

. Logistics in the factory is another non-value-addedactivity (moving a product does not make it morevaluable) .

. Inspection is a non-value-added activity.

. Stock holding is a non-value-added activity ( inven-tories do not add value to a product or customers) .

Rework is one of the non-value-added activities thatcan be found in any industry. Nevertheless, this activity isa value-added activity for an operator who performsrework on a job because he/she increases the value of aproduct by rework. Therefore, all aspects of an organ-ization should be considered while identifying value-added and non-value-added activities.

2.1.2. Analysis of critical activities

In a SME, generally the number of activities in abusiness may range from 10 to 200. It is not possible toanalyse all of them at once due to limited time andresources. The key is then to focus on the most critical

Activity-based manag ement in a small company 393

Analysis of Activities

Improvement of Activities

Performance Measurements

Identify value-added and Non-value adding activities, Analysis of critical activities,

Compare activities with that of benchmarked

Reduce time/effort required to perform an activity, Eliminate

unnecessary activities, Select low cost activities, Share

activities wherever possible

Financial, non-financial measures, Multiple

performance measures, Cost drivers, Eliminate

non-value adding activities

A

M

BPerformance Improvement

Figure 1. A conceptual framework for activity-based management.

activities that will add value to customers or help thee� ective operation of the business. Moreover, these arethe activities that provide the signi® cant opportunities forimprovement. The Pareto analysis can be used to deter-mine the critical activities. This analysis should be car-ried out separately for both the value-added and non-value-added activities. The activities can be ranked indescending order of cost and the cumulative percentageof the cost of all the activities can be calculated. Then, itcan be found that 20% of the activities causes 80% of thetotal cost, and those activities are worth analysing.

2.1.3. Compare activities with benchmarking

All activities should be compared with similar activitiesin another company or within the organization whichperforms the best in class. Benchmarking should be car-ried out for both value-added and non-value-addedactivities. Comparing an activity with a benchmarkedof good practice helps to determine the scope for furtherimprovement. The activities should be measured basedon factors, e.g. quality, lead-time, ¯ exibility, cost andcustomer satisfaction. Then, each activity should berated against an identi® ed best practice (Coburn et al.1995) .

A company with a number of di� erent departmentscan improve the e� ciency and e� ectiveness of each activ-ity by comparing similar activities of di� erent depart-ments. Obtaining information from other companies isquite di� cult. Therefore, benchmarking within the com-pany or with the best practice is mostly used in real-lifesituations. For example, on-time delivery of customerorders is an essential activity and it can be performedmanually. The best practice, however, uses electronicdata interchange (EDI) that costs less per transaction,has a lower error rate and provides a faster service.This clearly shows that there is room for improvementover manual order taking (Turney 1992) .

2.2. Improvement of activities

The following are some of the improvement strategies/methods that have been generally considered for improv-ing the performance of any organization using the infor-mation obtained from an ABC system.

2.2.1. Reduce the time or e å ort required to perform an activity

A key element of improvement is to reduce the timeand e� ort needed to perform an activity. This reductioncan come from a process or a product improvement. For

example, the time to set up a machine can be reduced byimproved training, eliminating con¯ icts in employeeassignments, placing tools and dies in convenient loca-tion, and changes in the product design. For example,a reduction of 90% in setup time is not unusual (Turney1996) . Reduction in time and e� ort may come not fromthe activity in question, but may be from the precedingactivity. For example, the defect rate of parts received bya machining activity is a cost driver for that activity.Improving quality in the preceding activity reduces thequantity of this cost driver and hence the overall e� ortsrequired by the machining process.

2.2.2. Eliminate unnecessary activities

Some activities are candidates for elimination becausethey are not valued by customers or not essential to run-ning the organization. It is possible, e.g. to eliminatematerial handling activities through changes to the pro-cess or products, e.g. reducing the number of compon-ents, using GT cells or even by outsourcing (Turney1996) .

There are a number of di� erent options to eliminateany unnecessary activities. In any organization, stepsshould be taken to ensure that all incoming materialsand parts are ® t for use. The parts can then be delivereddirectly to the shop ¯ oor as needed. For instance, changescan be requested in the vendor’ s production process toimprove quality, ¯ exibility and increase the responsive-ness. The parts that cause quality problems can be elim-inated by instilling the responsibility of delivering qualityproducts onto suppliers. Once these changes have beenmade, all the activities of a storeroom can be eliminated.Activities, e.g. material handling and inspection will bereduced automatically. Eliminating these activities willreduce the overall cost and the cost of products that nolonger use these activities.

2.2.3. Select low-cost activities

Designers of products and processes often have choicesamong competing activities. This o� ers a means for redu-cing cost by picking the lowest cost activity (Miller 1996) .A designer of a product may be able to specify the type ofactivity required for the assembly of a product.Depending on the design of components, several auto-matic assembly lines can be used for the assembly of aproduct instead of manual assembly of a product.

Each of these activities has a di� erent set of resourcesassociated with it. Manual assembly is a direct labouractivity. An automatic assembly, however, requiresequipment, software, skilled workers, and additional pro-


cess engineering and training. Because these activitieshave di� erent costs, the selection of an activity has animportant impact on the cost.

The process designer faces similar choices. For ex-ample, a part designed for machine insertion might alsobe inserted manually. A process designer may choose tohave the part inserted manually because a reduction inthe batch size makes it uneconomical to program andsetup an insertion machine.

2.2.4. Sharing of activities

If a customer has unique needs, it is necessary to per-form activities speci® c to that customer. However, if cus-tomers have common needs, it is wasteful not to servethose needs with the same activities. For example, prod-uct designers can use the common parts in new productdesigns. A common part is one which is used in severalproducts to perform the same function (e.g. a gasket usedin several car models) . The only parts that need to beunique are those that add product-di� erentiating func-tions as valued by the customers (Turney 1996) .

The activities associated with the common parts, e.g.part number maintenance, scheduling and vendor rela-tions, are shared by all products that use them. Thissharing increases the volume of parts produced eachtime when an activity is carried out, thus reducing thecost per part.

The process designer can also cut costs by grouping ofproducts into work cells. This is possible when productshave similar designs (members of a product family) andwhen the manufacturing process is su� ciently ¯ exible tohandle any di� erences in parts. The cost has decreasedbecause the products in the cell share activities, e.g.supervision, testing, training, scheduling, material hand-ling, storage and documentation.

2.3. Performance measurements

In an ABM system, performance measures includeboth ® nancial and non-® nancial measures, and aredesigned to in¯ uence the behaviour of cost management.A fundamental issue is that a single performance measurewill not re¯ ect all the aspects of a company. Managersmay require multiple performance measures even fromindividuals (Innes et al. 1994) . Generally, activitiesinvolve groups of employees, and the performance meas-ures therefore usually relate to the group rather than theindividual and to the process as well as the output orresult.

The ABM system uses cost drivers of a company’ sactivities as a basis for changing the performance meas-

urement system. In particular, some companies are con-centrated on non-® nancial operational performancemeasures to monitor the improvements in their businessprocesses. It is important to appreciate those performancemeasures which not only attempt to measure the per-formance, but also control and evaluate the performance,and motivate the people. The behavioural impact of per-formance measures is one of the most signi® cant aspectsof ABM.

Cost drivers, e.g. the number of purchase orders or thenumber of engineering changes, are used as a part of theperformance measurement system. Some companies usephysical measures, but others monitor the unit cost perdriver, e.g. the cost of a purchase order. Performancemeasures should be selected carefully and tailored tothe individual processes or organization. Each companymust consider the activities which are critical to its busi-ness success. Greene and Flentov (1991) suggest certaingeneral guidelines for selecting performance measures.

. The performance measures chosen should assist inmonitoring the progress of controlling activity costs.These include throughput time, and the number ofengineering changes and production schedulechanges.

. The performance measures selected should bereviewed periodically. As the business and the inter-nal and external environments of a business change,performance measures may have to also changeaccordingly.

. Everyone should be able to understand the perform-ance measures. These not only must be clearlyde® ned, but also the relationship to the company’ sstrategic objectives must be explained.

. The performance indicators relevant for one indi-vidual or group should not be too many.

. Daily operations should be managed on the basis ofthese key measures.

. The evaluation of employees should be linked to theperformance indicators selected.

. The selection of these performance indicators is acritical process and the success of this processdepends upon a sound analysis of the critical activ-ities for that particular business.

. Whilst activities-based approaches are not a pana-cea nor even an end in themselves, they do at leastrecognize the need to e� ectively manage the activ-ities of a business. This should be re¯ ected in theway the costs are reported and performance meas-ures are employed (Marrow 1992) . The analysis ofactivities as value added and non-value added is thebasis of ABM. The main task of ABM is to directimprovement e� orts in eliminating or reducing the


volume of non-value-added activities and improv-ing value-added activities.

3. Activity-based management at G. E. Mustill Ða case study

G. E. Mustill (GEM) is a small company with£ 0.5 million annual turnover. It employs about 20people and is located in Essex, England. The main prod-ucts of GEM are four types of machines (viz. sander,splitter, shaper and foiler) for the picture framing indus-try. The foiler and sander machines are produced indi� erent numbers of heads varying from 1 to 6. Theyproduce machines in standard speci® cations and accord-ing to customers’ requirements. The company manu-factures only 22% of parts of the machine in-house andpurchases 78% of parts from subcontractors and suppli-ers. The assembly of all these parts is the main activity ofthe company. The company works in a traditional wayand all activities are performed manually.

Information provided by an ABC system is used to ® ndthe opportunities of improvement in organization at theactivity level. The analysis of activities involves classi® ca-tion of activities into value added and non-value added,and then compare these with that of the world class com-pany or the best practices. Benchmarking with the bestpractice o� ers avenues for improvement in value-addedactivities. This also explains how management can usethe cost drivers as the performance measures and controlthe volume of cost drivers. The ideal cost object is `prod-ucts’ that are sold to customers. The cost of all activities iscalculated in a similar way to that of parts. The total costof a four-head foiler is shown in table 1.

. Marketing. The annual cost of marketing is £ 23 330which is divided equally between four types of

machines. Then, this amount is divided by eightbecause the annual sale of a four-head foiler iseight machines. Therefore, the marketing cost forthis product is £ 729.06.

. Inventory carrying cost. The cost driver for inven-tory carrying is the stock value. The total stockvalue in GEM is £ 20 000. For a four-head foiler,the stock value is £ 1600. Hence, the inventory car-rying cost for this machine is £ 491.20.

. Engineering support. The cost driver for this activ-ity is the time spent by the engineering supportsta� s for a particular product. For this machine, atotal of 80 h is spent by the engineering sta� andhence the cost of engineering support activity is£ 1480.

. Assembly. The assembly of the machine is per-formed manually. The cost driver for assemblyactivity is the labour hours and the volume of thecost driver is 82 h. This leads to the total assemblycost as £ 886.42.

3.1. Analysis of activities

ABC provides detailed information about the companyand its activities. This detailed information can be usedby the management to initiate improvements and deci-sion-making. The percentage cost of all activities is shownin ® gure 2. This shows that engineering support activitiescarry ¹22.21% of the total cost of all activities. In thetraditional costing system, there is no such informationavailable on this.

Once the cost of each activity is calculated, the nextstep is to identify the value-added and non-value-addedactivities. According to the de® nition of a non-value-added activity (an activity that can be eliminated withno deterioration of product attributes) , all activities are


Table 1. Cost of a four-head foiler.

Activity Cost driver Cost driver rate £ Cost driver volume Cost £

Assembly labour hours 10.81 82 h 886.42Material handling no. of movements 0.2 1020 movements 204.00Inspection no. of inspection 0.41 450 inspection 184.50Purchasing no. of orders 20.65 16 orders 330.40Marketing no. of product 729.06 1 729.06Inventory stock value 0.307 £ 1600 491.20Engineering support sta� hours 18.5 80 h 1480.00Personnel labour hours 0.64 470 h 300.80Misc. overhead labour hours 1.6 520 h 832.00Manufactured parts 1306.88Direct material 9773.0

Total cost 16 518.3

non-value added except activities, e.g. assembly, machin-ing and engineering support. Activities, e.g. marketing,personnel and purchasing do not add value to the prod-uct, but these are necessary and cannot be eliminated.Therefore, there are three non-value-added activities,viz. inspection, material handling and inventory.Figure 3 shows the percentage of value-added and non-value-added activities. It indicates that non-value-addedactivities are ¹16.18% of the total cost of activities.These activities can be eliminated without deteriorationof product attributes, e.g. quality, performance and func-tion. By using di� erent quality assurance methods, e.g.TQM, ISO9000 and dynamic process control, qualitycan be maintained during production and hence thereis no need for an inspection. Similarly, material handlingand inventory-related activities can be eliminated usingdi� erent methodologies and techniques, e.g. JIT, EDI,CIM and BPR.

It may not be possible to eliminate or reduce all non-value-adding activities at the same time. The key is thento focus on the critical activities which form a majorportion of the total cost. Figure 4 shows that the inven-tory carrying cost is ¹55.81% of the total cost of non-value-added activities. Therefore, activities related tocarrying inventory should be eliminated ® rst.

The cost driver for inventory carrying activity is thevalue of stock. The company should not maintain anystock in order to eliminate related activities. This couldbe possible by the introduction of just-in-time purchas-ing. At the same time, the cost of purchasing should beclosely monitored. The purchasing department will placemore purchasing orders to maintain the minimum stocklevel. If the company eliminates inventory-related activ-ities and increases the cost of purchasing activity, thenthere are no bene® ts in eliminating non-value-addedactivities.

Similarly, the cost of maintaining quality in processesshould be considered in eliminating the inspection activ-ity. Material handling activities cannot be eliminated atthe cost that is di� cult to justify. Sometime, non-value-added activities can be clearly identi® ed, but di� cult toeliminate completely. However, it is always possible toreduce the cost of these activities.

3.2. Compare activities with benchmarking

All activities related to the manufacturing of a four-head foiler should be compared to similar activities inother companies or within the organization.Benchmarking should be carried out for both value-added and non-value-added activities because value-added-activities include non-value-added tasks. Thecomparison of some of the activities of the companywith the best in class company’ s activities is presentedbelow.


Assembly

16.30%

Material handling

3.75 %

Inspection

3.4%

Purchasing

6.08%

Marketing

13.41%

Inventory

9 .03 %

Engineering

support

27.2%

Personnel

5.53%

Misc. overhead

15.3%

Figure 2. Percentage cost of activities.

Value-Added

Activities

83.82%

Non-Value

Added

Activities

16.18%

Figure 3. Percentage of value-added and non-value-addedactivities.

Inventory

55.81%

Material

Handling

23.18%

Inspection

21.01%

Figure 4. Cost of non-value-added activities.

. Purchasing. World-class companies have a directlink with suppliers and subcontractors by the elec-tronic data exchange (EDI) system, and it placesorders automatically whenever materials arerequired. This leads to a reduction in orderingcost, lead time and overall purchasing cost as com-pared with that of manual order processing. Hence,there is room for improvement in the purchasingactivity of GEM.

. Assembly. The assembly activity is performedmanually in GEM. Compared to an automaticassembly activity, there are many chances ofimprovements. The cost of automation should bejusti® ed based on the labour cost and responsetime including tangible and intangible costs andbene® ts.

. Material handling. There are a number of machin-ing stations in GEM, e.g. drilling, milling and turn-ing. The movement of materials between thesestations is the cost driver. It is possible to reducethis movement by using multipurpose machines(AS/RS, robots, AGVs) to perform various opera-tions. The movement of materials can also bereduced by changing the layout of machines.

. Machining operations (drilling, milling, turning,etc.) . GEM uses very old machines to performthese activities and these are labour intensive.Therefore, these machining operations can be com-pared with that of the CNC machine tools.Similarly, all the activities can be compared withthe best practices. Benchmarking at each activitylevel helps to determine the scope of improvements.

3.3. Performance measurements

In ABM, performance of GEM should be measured atan activity level, and performance measures include both® nancial and non-® nancial measures. The cost driversare performance measures for all activities. The volumeof the cost driver indicates the performance level of eachactivity.

For example, the cost driver for an assembly activity islabour hours. If labour hours required to perform theassembly activity increases, then this indicates that theperformance of the assembly activity is poor. If labourhours decrease, then the performance of the assemblyactivity improves which in turn leads to a reduction inthe cost of the product and hence an increase in the pro® tlevel. Similarly, appropriate cost drivers are performancemeasures for all identi® ed activities in the company.

From the analysis of activities, the value-added andnon-value-added activities are clearly identi® ed. InGEM, the inventory carrying activity is the major non-

value-added activity which should be eliminated.However, it is di� cult because the purchasing cost ofthe present system will increase as the company placesmore purchased orders with the objective to reduceinventories. Therefore, it indicates that the purchasingactivity should also improve. The comparison of this pur-chasing activity with the best practice (purchasing usingEDI) indicates the scope for improvements. ABM usesABC information to motivate the people in improvingand monitoring the performance of their activities.

4. Conclusions

Management practices and methods have been chan-ged over the last decade, and organizations are movingfrom managing vertically to managing horizontally.Activity-based costing and activity-based managementprovide cost and operating information that mirror thehorizontal view. ABC provides accurate cost informationand ABM uses this information to initiate improvements.ABC systems produce a large amount of information thatis used by the ABM. The costing at part level or sub-assembly level helps the management in a make or buydecision. The analysis of activities to identify value-addedand non-value-added activities and benchmarking at theactivity level direct improvement e� orts in the rightdirection.

In this paper, an attempt has been made to study theapplication of ABM in a small company. Firstly, a con-ceptual model is developed to describe the major com-ponents of ABM. Secondly, a case study is presented todiscuss the application of the model in a real-life smallcompany. The bene® ts of ABC and ABM can only beachieved if it is applied for the whole organization.Therefore, GEM should use activity-based analysis toidentify non-value-added activities (e.g. inventory carry-ing, material handling and inspection) , and then try toeliminate these activities by using the number of avail-able management methods and techniques. Also, thereare possibilities to improve value-added activities. Thecost driver of activities should be used to measure theperformance of activities.

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