Common sense cost analysis
Activity based management program available to fluid power firms
By Ken Brack -- Industrial Distribution, 2/1/2000
Fluid power distributors looking to become smarter in how they determine costs and prices should consider an activity based management program that has been tailored for the industry. Working with an expert and early developer of ABM, Tom Pryor, the Fluid Power Distributors Assn. began hosting workshops on the "Fluid Power ABM System" in December. The next workshops will be held March 9-10 in Atlanta, Ga. and April 27-28 in Dallas, Texas.ABM is a systematic, common sense way to plan and control overhead and labor costs. It is based on the principle that activities consume costs, and it enables firms to define and report the activities, costs and outputs of each department, profit center or group of employees.
Traditional cost systems, by comparison, allocate costs based on direct labor, materials costs, revenue or other methods. As a result, those systems tend to overstate the cost of high-volume products and services, and understate low-volume costs, according to Pryor, president of Integrated Cost Management Systems in Arlington, Texas.
While ABM practices are not new -- they date back about 13 years -- this is the first time a program has been customized for fluid power distributors. The system also helps companies identify waste, analyze customer profitability, and document "that you're adding value," says Pryor. By using what Pryor calls activity accounting, firms analyze the cost of services and also determine improvement targets and how to organize employee improvement teams.
For industrial distributors facing tighter margins, "adding one percent on the bottom line is cherished," he says. "They're looking for practical tools to improve the bottom line and impact customer service."
Distributors who attend the workshops will also receive an ABM tool kit notebook, software, and follow-up consulting services.
Pryor says distributors in the food and health care industries have found success adopting ABM for their supply chains.
The Ralph Earl Co., a nearly $25 million distributor in Syracuse, N.Y., is one firm that plans to use ABM to help further a continuous improvement program. Susan Holliday, vice president of operations, says the company expects to do a pilot project with a group of employees who assemble pneumatic components and have already demonstrated their zeal to improve processes and reduce costs.
Holliday, who attended the first ABM workshop, says she left with a good understanding of the steps involved.
"We're blessed that we have people who are very involved with work they do ... but they don't have the tools to see everything in a complete fashion," she says. "That's where activity-based management will come into play. It will provide the information in the right format, to help them pinpoint areas that will be beneficial. This helps us get the whole picture."
Holliday believes distributors across her industry have little choice but to enact such programs. "In order to be a strong competitive player, we're going to need to understand our costs in a way that we have not understood them previously," she says.
According to ICMS, Inc. here are some telltale signs that your company may need ABM:
- Your employees are busy, but you have no idea doing what
- You're running out of space, working capital and overhead reduction ideas
- You're adding more products but earning less
- You know the cost of pencils, but not the cost to process an order
- Your employees offer to help improve profits, but you don't know what to give them
- You have the distinct feeling that everyone is working too hard to pay the bills
- You're drowning in computer data, but lack useful information to run the business.
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