The purpose of ABC is to more accurately define the overhead and/or indirect costs associated with the manufacturing process and apply those costs to the product. It enables you to know exactly how much time and materials go into a product from all areas instead of just the ones that are obvious of great value to any organization.  It leads to more efficient processing in the manufacturing process, which in turn leads to greater profits through realization of cost savings.

In the past, cost accountants would add a percentage of expenses into direct costs as an allowance for indirect costs. (Wikipedia.org) With the advent of ABC, expenses are now more accurately defined and added to product lines appropriately. Although the process to define these expenses is sometimes tedious and costly, for some companies it provides an invaluable tool with which to measure the profitability of a product.

According to the OSD Comptroller iCenter website, which provides financial services information for the Department of Defense, there are four steps to ABC implementation:

1. Identify activities—perform an in-depth analysis of the operating processes of each responsibility segment. Each process may consist of one or more activities required by outputs.
2. Assign resource costa activities—thiis sometimes called “tracing.” Traceability refers to tracing costs to cost objects to determine why costs were incurred. DoD categorizes costs in three ways:
   1. Direct—costs that can be traced directly to one output. Example: the material costs (varnish, wood, paint) to build a chair.
   2. Indirect—costs that cannot be allocated to an individual output; in other words, they benefit two or more outputs, but not all outputs. Examples: maintenance costs for the saws that cut the wood, storage costs, other construction materials, and quality assurance.)
   3. General & Administrative—costs that cannot reasonable be associated with any particular product or service produced (overhead).
      These costs would remain the same no matter what output the activity produced. Examples: salaries of personnel in purchasing department, depreciation on equipment, and plant security.
3. Identify outputs—identify all of the outputs for which an activity segment performs activities and consumes resources. Outputs can be products, services, or customers (persons or entities to whom a federal agency is required to provide goods or services).
   
4. Assign activity costs to outputs—assign activity costs to outputs using activity drivers. Activity drivers assign activity costs to outputs based on individual outputs’ consumption or demand for activities. For example, a driver may be the number of times an activity is performed  (transaction driver) or the length of time an activity is performed  (duration driver). (OSD Comptroller iCenter)

As we can see the methodology behind Activity-Based Costing is sound, and can result in sometimes great savings to a company willing to take the time, effort and expense to implement a plan

We often think that learning the tools of any given program is enough. However, through extensive research and years of experience, we know that the failure of most programs is in the lack of support for and belief in the concepts of the process – it is not from a lack of technical know-how.

The culture of a company includes all employees in all departments and at all levels. It is their cumulative beliefs and attitudes about their work and their company.

While we often preach the importance of management support (and, yes, this is critical to success!), the fact is that for any program to work over the long-haul, everyone needs to have ‘buy-in’ to the process itself. This means that the first thing that has to change is the thinking – the culture. Creating a Lean culture is not something that happens overnight. It is a gradual change of attitude that comes when people believe in what they are doing. The following are six fundamental steps to achieving this state of mind. They are by no means all of the things that need to be done in your own company, but, instead, constitute the core values.

Six Basic Steps to Cultural Change

1. It begins with enlightenment. That is to say, everyone in the company must be informed of the concepts and reasoning behind the direction the company is taking.
2. People need to understand, not only, WHAT is coming at them, but WHY and most importantly, HOW WILL IT HELP ME?
3. Use as many methods of getting “the message” out as possible. (Formal meetings with the whole company and/or individual departments, newsletters, posters, video, etc.) Create an air of excitement surrounding the process or program.
4. Ask lots of questions to ensure that people understand what is going on and how a certain process works. LISTEN to the answers. Also, create an environment of open-communication by encouraging people to share their own questions or concerns.
5. Never “punish” people or yell if something is not going well or as planned. Instead, find out why it is not working and – together with that person or team – find a way to improve or correct the situation.
6. Finally, it is important to generate ideas from the source – meaning – go to the person doing the job, or using the tool, or running the machine, or driving the hi-lo, or filling out the form. THAT’s where you’ll find the knowledge in the company. That’s where you’ll find the improvements, changes and ideas that will, not only improve the company, but will help to create an environment of trust and caring.

The holistic approach is based on 7 different modules used to create a proactive approach to continuous business improvements.

1st Module- GAP Analysis allows you to take an overall view of the organization’s strengths, weaknesses and opportunities. It helps you examine where the business is and where it can be by looking at customer needs, performance problems and goals.

2nd Module- Lean Operating System (LOS) is a strategy that is for everyone in the company, from the janitor to the CEO. This module helps determine the company’s final destination by looking at the short and long-term goals and then defines how to get there by creating new ideas for the company that embraces change

3rd Module- Human Capital Development (HCD) shows how to prioritize people development activities so that the focus is on the most important core elements of any organization – “It’s People”. It shows how to apply key tools for developing people’s activities to perform toward achieving the holistic approach

4th Module-Business Process Optimization (BPO) helps with continuous improvement of productivity and eliminates any type of waste while creating simplicity and flexibility

5th Module- Continuous Improvement Toolkit (CIT) are the tools needed for success and improvement and how to use them effectively

6th Module – Financial Activity Management (FAM) allows you to analyze resource cost based on activities within the organization, to deliver cost competitive products

7th Module- Lean Sustainment Audit (LSA) is the evaluation of the business performances. It audits the performance and cost improvements achieved. This module also explains that this approach must be a way of life in facilities that is continuous

Together, all these modules can optimize business performance by discovering, documenting, automating and continuously improving business processes to increase efficiency and reduce costs.

For more information, feel free to visit our website at http://www.gdctbs.com/

Stay tuned next week as we get in more depth about the GAP Anaylsis