CASE STUDIES IN PERFORMANCE MANAGEMENT phần 6 pps

For instance, a basic ABC application is to determine theresource allocation, cost of activities, and the final cost of a product/servicewith a view of improving organizational performan

The final reporting enhancements (see Exhibit 6.6) enable the ability to tribute electronic reports to the data consumers and give users access the reportdata via the Internet.

dis-EXPERT WRAP-UP John Antos

What made this implementation sustaining? Other companies havespent millions of dollars on an ABC system only to scrap it Whatcaused their failures? The introduction to this chapter mentionedsome things this organization did to make the implementation a suc-cess Here we list some of the things it did after the implementation

• The marketing person used the ABC information to making keting decisions He knew this information was far more accurateand useful than the old way of doing things He realized that theABC information is not totally accurate, but it is much better thantraditional costing

mar-• The president took the ABC numbers to his monthly review ings He did not require his managers to review the ABC informa-tion, but he did ask questions that would have been hard to answerunless the ABC information for that location was reviewed

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Model

Data

Report Writer ETL—to report

data source

No capability

to produce year-to-date reports

Hard copy Reports to 4 Servicing Centers

Exhibit 6.5 Old Reporting Process

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• ABC reporting transitioned from monthly to quarterly This was abetter balance of value for the time invested in collecting the data.Managers now had more time to improve the numbers rather thanspending each month collecting the data.

• When the organization went private, it consolidated call centersfrom eight to four The ABC numbers were used to show whichcall centers were the most productive and least costly to operate.These more productive call centers were chosen to remain open

• When deciding where to move the activities from the closed callcenters, the ABC data were again used Those call centers thatwere most productive in certain activities received the workloadfrom the closed call centers Some activities were shifted in the re-maining call centers that stayed open, so that activities were per-formed by the most productive call centers

Even when the president, finance director, and director-levelABC Team person left the company, the ABC reporting continued.Many ABC projects have had similar challenges As long as thechampion remains with the company, the project continues All toooften, when that champion leaves, the ABC project stops

One of the keys to a sustaining an ABC project is to have goodABC software that can:

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ABM

Model

Data

Year-to-date results included

in extract

Analysis directly accessible via web-enabled client Second Option

Electronic Reports

to LSCs

Report Studio

Auto Data Extraction

Exhibit 6.6 Enhanced Reporting

• Minimize data collection so that much of the data are collectedautomatically from a variety of different systems (e.g., GL, humanresources, operations, etc.).

• Provide OLAP (Online Analytical Processing) This is the abilityfor executives and managers to look at data from different points

of view An executive might want to see how the unit cost data aretrending on average for all locations A call center manager maywant to see how the unit cost data are trending and how theycompare to other locations

• Marketing may want to look at parts of the data in order to makebetter marketing decisions

• Those who acquire loan portfolios might want to understand thecost differences in processing loans in different stages of their life

so they can more effectively buy a loan portfolio

• Users of shared service data need to understand what they arepaying for and how what they do affects cost

• Providers of shared service data need to use ABC data to better plain to users why their costs are going up and what users aredoing to increase cost

ex-• Executives need to understand the ABC trends so they can moreaccurately predict costs

• Executives need to see the data in a form that will better enablethem to set goals and strategies for their organization

Sustainability of an ABC system and use of the ABC data by ecutives and managers for decision making and improving opera-tions are true measures of successful ABC implementation

ex-ENDNOTE

1 CAM-I (www.cam-i.org) is an international consortium of manufacturing andservice companies, government organizations, consultancies, and academicand professional bodies who have elected to work cooperatively in a pre-competitive environment to solve management problems and critical businessissues that are common to the group

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7

SIERRA TRUCKS: TRUCKING ALONG WITH ACTIVITY-BASED COSTING/MANAGEMENT

Success seems to be connected with action Successful people keep moving They make mistakes, but they don’t quit.

—Conrad Hilton

Author’s Note: Sierra Trucks from ABC to ABM to ABB

Activity-based costing (ABC) is not magic It is just one of many tion systems to help managers make better decisions and assist in control-ling the processes to benefit the organization Can ABC be the prime agitator

informa-in the process of moderatinforma-ing new demand?

ABC will have an impact on the organization; however, this impact willdepend on understanding what ABC can do, and how it is used, and what thedesired outcomes are For instance, a basic ABC application is to determine theresource allocation, cost of activities, and the final cost of a product/servicewith a view of improving organizational performance and cost effectiveness.ABC is a management tool that will assist in enhancing the strategic direction

of the organization by providing information on activities and their costs.The next two cases provide an example of one organization’s journeyfrom the implementation of an ABC to an activity-based budgeting modelthat would support predictive day-to-day operational decisions or ad hoc re-quests effectively

The ABC model allowed Sierra Trucks to:

• Better align financial information with management accountability

• Improve product costing accuracy

• Establish financial measures for management decision making

• Directly link strategies to financial measures and operational mance metrics

perfor-• Improve the accessibility of performance measurement information

FOREWORD Alan Stratton

When we are not feeling well, we go to see a medical professional

In our examination, we describe our various symptoms; the sional pokes, prods, conducts tests, and asks additional questionsabout the symptoms we are experiencing Based on the symptomsand test results, the cause of the problem is identified and the ap-propriate treatment is applied

profes-Sierra Trucks is an excellent example of a company that was notfeeling well Most of its symptoms were expressed in cost measures.But rather than dismissing the symptoms as somebody else’s re-sponsibility, such as finance, everyone from Six Sigma Black Belts,

to operations, and to finance got involved in assessing the toms, poking and prodding to test the symptoms, and conducting

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After the ABC model was analyzed, it was necessary to take the nextstep in forward planning—that is, budgeting

This step followed the development of the activity-based budgeting(ABB) model for producing next year’s budget for additional programs andspace

This method is a natural extension of ABC and is the reverse of theABC model; that is, the budgeting process uses the south-to-north cost flow

as opposed to the standard north-to-south flow in the ABC model

Successful allocation of resources and cost effectiveness depend on theability of the organization to become more efficient in terms of the activi-ties that cause costs to be incurred—one of the most important benefits ofABC ABC contributes to effective resource allocation to enhance thestrategic direction/goals of the organization The ability of the organization

to improve resource allocation (in most cases budgetary constraints apply)and to reduce its costs, however, is affected by a time horizon also, as well

as by knowledge of how costs will behave with respect to cost drivers lected It is also important to be aware of the “unused capacities” in the or-ganization and to establish a process that identifies these capacities andattempts to reduce idle capacity as much as possible, thus increasing pro-ductivity, streamlining activities, and contributing to the reduction of costs

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analyses to confirm the cause of the symptoms Then, with a goodunderstanding of the problem, they applied the appropriate treat-ment and the company subsequently returned to good health.

INTRODUCTION

The activity-based costing/management (ABC/M) initiative has been tremendouslysuccessful not just at the Truck Business Unit but throughout Sierra Trucks Ac-cording to Sierra Trucks chief executive Jason Franklin, “The ABC/M initiativeprovides concrete support to our corporate strategies and goals to create share-owner value Without the comprehensive understanding of product and customerprofitability gained through ABC/M, we could not make the informed, essential de-cisions necessary to achieve our strategies.” There are three key areas where SierraTrucks has focused its efforts and that have had the greatest impact: providing in-formation for strategic decision making, motivating changes in behavior throughthe use of ABC/M information, and supporting operational excellence

ORGANIZATIONAL ISSUES

Midwest-based Sierra Trucks Corporation is the leading North American ducer of heavy- and medium-duty trucks and school buses Posting sales and rev-enues in excess of $9 billion, Sierra Trucks maintains its position as the leader inthe combined U.S and Canadian retail markets, achieving a 28.9% market sharefor its largest truck brand

pro-The company is a world leader in the manufacture of midrange diesel engines.Sierra Trucks is also a private-label designer and manufacturer of diesel enginesfor full-size pickup truck and van markets, as well as selected industrial and off-highway markets

Sierra Truck’s Truck Business Unit had a very typical organizational ture—strong functional organizations loosely tied together by a weak matrix struc-ture aligned along business lines Silo-oriented thinking prevailed Problems withthis structure were readily apparent—there was little accountability for business-line management to control cost, profit, or product decisions Sierra Trucks hasbeen working hard to reduce operating expenses, simplify truck designs, and re-structure manufacturing operations The company also introduced a new truckstrategy designed to increase profitability To accomplish these ambitious goals,

struc-it needed to significantly improve struc-its financial and performance information Thelogical solution was ABC/M

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CASE STUDY

To lead the ABC/M effort, a team was formed consisting of professionals fromother Fortune 500 companies with extensive ABC/M experience and finance pro-fessionals from Sierra Trucks The ABC/M team developed a new financial man-agement framework for the Truck Business Unit to support a move towardincreased management accountability for business lines

The objectives of the new framework were to:

• Implement the ABC/M solution

• Better align financial information with management accountability

• Improve product costing accuracy

• Establish financial measures for management decision making

• Directly link strategies to financial measures and operational performancemetrics

• Improve the accessibility of performance measurement information.Under the new framework, costs are no longer viewed as simply “fixed” or

“variable,” and three types of activity behavior have been defined that are critical

to performance measurement:

1 Transaction-related activities are all activities that vary with the number

of units sold or manufactured They are generally incremental with eachunit sold or produced

2 Business-line-specific activities are those activities that support a

busi-ness line, or group of models, but are not related to production or salesvolume

3 Business-sustaining activities are those activities that support all models

and business lines and do not vary with production or sales volume

Based on a new understanding of cost and activity behavior, the firm has solidated financial information into a new business-line income statement, whichadvances the use of financial measures in decision making Each measure isclearly linked to specific business decisions

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Results of ABC/M

ABC/M has helped lead the way to new thinking within Sierra Trucks The mation provided through the initiative has been used to support a number of crit-ical businesses decisions Sierra Truck’s Truck president cited the informationprovided by the new product income statement (see Exhibit 7.1) as the key enabler

infor-to a recent reorganization The Truck Business Unit is now organized more tightlyaround business lines—each with its own income statement and true managementaccountability The ABC/M data has played an important role in the negotiationswith several large customers, providing a fact base to ensure understanding ofwhat it will take to be profitable ABC/M profitability information was instru-mental in supporting the company’s necessary but somewhat unpopular decision

to exit a long-standing product market ABC/M revealed the true economics of thebusiness and allowed management to make a decision without doubting the fi-nancials When confronted with unfavorable economics for a necessary productline, management used the ABC/M data to support the decision to enter into a jointventure—enabling Sierra Trucks to continue to meet customer needs, but at aprofit

SIERRA TRUCKS: TRUCKING ALONG WITH ACTIVITY-BASED COSTING 113

Revenue

Direct Margin

investment decisions

Exhibit 7.1 New Activity-Based Income Statement

Partnering with ABC/M

The other major area of impact of ABC/M at Sierra Trucks is the delivery ofprocess improvement and cost reduction information to manufacturing facilitiesand other organizations ABC/M has been a catalyst for transforming the financeorganization from back-office bean counters to business partners This fact isdemonstrated by the ABC/M team’s partnership with Sierra Truck’s Six SigmaBlack Belt initiative The two initiatives are perfectly matched—a group chargedwith undertaking cost and quality improvement projects and a team charged withproviding fact-based financial information to support such improvements Al-though Six Sigma provides a system for addressing problems and developing op-erational improvements, ABC/M provides a means to identify opportunities andtrack the progress of improvements (see Exhibit 7.2)

114 SIERRA TRUCKS: TRUCKING ALONG WITH ACTIVITY-BASED COSTING

• Cost of poor quality

ABM Facilitates Analyses That Drive Operational Changes

competencies

Product A

Production Transaction Failure

Product B Total Truck

Exhibit 7.2 Opportunities for Improvement

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EXPERT WRAP-UP Alan Stratton

Many people think that they will run an ABC model, get results, andtheir work is done Sierra Trucks has shown that the work actuallybegins when the first set of model results is complete

Chapter 8 shows a progression of how a simple ABC cost agement project can blossom into a full-fledged activity-basedbudgeting model Today many organizations are seeing that the in-tegration of their budget into their performance management sys-tems will help their organizations drive change

man-Using ABM metrics will help the organization understand costs,aid in budgeting and planning, and support an improvement process

SIERRA TRUCKS: TRUCKING ALONG WITH ACTIVITY-BASED COSTING 115

In this case, Sierra Trucks decides to stop waiting until costs arespent before analyzing the impact of upcoming changes and possi-ble scenarios Sierra was well prepared for the change, as it hadsome excellent activity-based costing/management (ABC/M) model-ing and decision impact experience This prior experience provedvaluable as Sierra turned its vision from the past to the future Its pastefforts and historical cost models served to calibrate and documentits view to the future.

Early in the project, the activity-based management (ABM) methodology had

a firmly established record of success at Sierra With a mature and reliable ABMprocess in place, Sierra was able to analyze where it had been effective The op-erational managers were interested not in knowing what had already happened,

but in knowing what would happen, and being able to plan and predict the impact

of various product mix scenarios Given a new product mix scenario, the systemneeded to predict both input and output quantities and costs for resources and ac-tivities Then it needed to determine the feasibility of the scenario and optimizeprofitability by using resources effectively This is not a new problem but an issuefaced by every business

Sierra hoped to find a new solution to this old problem based on new nology As the discussions between ABC Technologies (now SAS) and Sierraprogressed, it became clear that the solution was not in a new set of software func-tions or programming, but in a new way of thinking about how a business modelcould be designed and constructed The technology was already there

tech-ORGANIZATIONAL ISSUES

Sierra’s initial ABM objective was to achieve breakthrough results in cost provement and strategic alignment Its goals were to better align financial infor-mation with management accountability, improve product costing accuracy,establish financial measures for management decision making, directly link strate-gies to financial measures and operational performance metrics, and improve theaccessibility of performance measurement information Initial efforts were suc-cessful Its sales, revenue, return on equity, and net income lifted, leading to thecompany receiving a major ABM award

im-Key success factors for ABM at Sierra were the breadth and depth of ration-wide ABC/M education, involvement, and information distribution Man-agers on the floor as well as in the boardroom were involved in the ABM modeldevelopment and validation process The result of management involvement waswell-understood ABC data that had a high level of credibility at all levels of theorganization Confidence in the ABM data allowed the organization to implementimportant decisions, such as product mix, based on the ABM data analysis.The pace of change at Sierra was a significant factor Rapid change is not easy

corpo-to achieve in an organization with a long hiscorpo-tory (Sierra traces its roots backnearly two centuries, to the start of the modern Industrial Age in the early 1800s.)Given Sierra’s long-established corporate culture, the high rate of acceptance ofABM, and the implementation based on its insights were noteworthy

Against this background, Sierra’s management reviewed both the ABM effortand the larger set of management information issues that faced the organization.Sierra had for some time realized that there were two sets of customers for ABMdata: strategic decision makers and operational decision makers

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The existing ABM implementation, based on historical data, supported thestrategic decision-making process effectively Because of the critical importance ofsome information that was not available to strategic planners without ABM, this as-pect of ABM had been consciously emphasized in the initial stage of implementation.Despite the operational content of the data, the existing ABM system did notsupport predictive day-to-day operational decisions or ad hoc requests effectively.Operational managers wishing to examine the future impact of certain kinds ofbusiness process changes did not find ABM support for these decisions, regardless

of their deep understanding of the ABM data The operational managers wanted to:

• View the impact of changes in the product mix on resources and activities

• Forecast the potential impact of future growth and new products

• Focus the annual budget cycle on activities and processes

• Plan using a tool that considered capacity constraints by resource and activity.Initially, the needs of the operational managers had taken a backseat relative

to the strategic decision-making requirements However, it was apparent that itwas necessary to meet more of the operational needs while maintaining supportfor strategic decision making For optimal performance, the organization needed

to meet both sets of requirements effectively

Sierra’s ABM lead Kelly Hobart said, “If we didn’t go through to the next step,

we ran the risk of ABM losing steam because it wasn’t meeting operational needs.”Sierra’s executive staff and operational management in the plants began topressure ABM management within Sierra to come up with a predictive activity-based budgeting (ABB) and planning solution

The next case study describes the response to this pressure Although rate confidentiality and the constraints of space dictate that not every detail can beincluded, this case study attempts to capture and report the experience with can-dor and insight

corpo-CASE STUDY Initial Efforts

Predictive ABC (sometimes called activity-based budgeting or activity-basedplanning (ABP), often combined as ABB/P) has of late been receiving increasingattention and press from ABC thought leaders

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