Page 6 - CIMA MCS Workbook November 2018 - Day 1 Suggested Solutions

CIMA NOVEMBER 2018 – MANAGEMENT CASE STUDY

Activity based management

Activity based management (ABM) makes use of the information produced under ABC to help
make better decisions, reduce costs and improve profitability.

For instance, once it’s known that a certain number of cost drivers are used for a particular
activity in a particular time period, it can be investigated whether production can be achieved
using fewer drivers. If so, then less overhead may need to be spent and costs could be reduced.

This could involve altering the production schedule so that larger batches of a product can be
made, resulting in the need for fewer batch set‐ups and lower costs for activities such as cleaning,
set‐up and testing.

ABC might also identify some activities that are not adding value to the business. Perhaps a lot of
time is spent moving work in progress from one part of a factory to another for its next stage of
production. Under ABM the business would investigate why this is and whether the factory can
be redesigned to eliminate this unnecessary activity and its associated cost.

On a longer term basis, ABM could involve the use of ABC principles to analyse distribution
channels and customers to determine whether some channels or customers are less profitable
than others. It may be, for instance, that airline customers take up a disproportionate amount of
the sales team’s time. The reasons for this could be reviewed and addressed to try and reduce
the costs of dealing with the airlines and improving their customer profitability.

Introduction of ABM may be costly. It may be that staff would need to be employed who are
experienced in this area and any benefits in terms of cost reduction would have to be weighed
against the cost of employing these staff.

2. KAIZEN VERSUS BUSINESS PROCESS REENGINEERING

Kaizen means improvement and when businesses adopt a Kaizen approach to improvements it
means they are aiming to make small, incremental improvements in their processes to improve
efficiency, wastage, costs or revenues.

Business process reengineering (BPR) on the other hand is where a process is completely
redesigned from scratch, leading to potentially a complete change in the way that things are
done.

Kaizen is perhaps more appropriate on a process that is already relatively efficient, where
undertaking a whole redesign would not produce enough benefit to outweigh the costs that
would need to be spent.

BPR may be more appropriate where large gains could be made or where small changes aren’t
really feasible, e.g. if a move is made from a manual labour oriented process to one that is fully
automated.

Kaizen changes can be made by individuals across the business. In a Kaizen environment,
anybody who has a suggestion for an improvement will be listened to and improvements that are
deemed viable can be relatively easily implemented, perhaps by the person who made the
suggestion.

56 KAPLAN PUBLISHING