24 Business Focus
B
usinesses are a set of activities Cumulative Margin Cumulative Gross Margin
that combine processes to create
products and services for customers.
Cost of Supply
It is the effectiveness in performing
these processes, creating high value
at low cost, which marks out the more
successful organizations. Let us consider,
Lost Profit
for example, Company X, which sells
and distributes a number of premier
branded products through major retailers,
independent retailers and wholesalers. Its
Cumulative Product/Customers
purchasing methodology is to maximize
margin through volume purchasing to
attain preferential buying terms. Many of
Cumulative Net Margin
its customers may require value added
Figure 1: Analysis of cumulative profitability by customer or products versus the number of
services such as their own SKU numbers
products generated.
to be added or additional point of sale
packaging. If the company has no idea
which brands and customer combinations
are the best margin earners, how then is the theory of resource consumption
does it direct its sales force’s activities to in which activities give rise to cost, and
maximize margin and how can it tell which is the foundation on which business
“
By combining ABC
techniques with process
supply chain and business processes processes and costs can be properly
mapping, essential
add the most cost? It’s a tale typical of analysed throughout the value chain.
many organizations. Unfortunately, it developed something of
information for managing
a bad name in the past, largely because
a business can be
The answer to these questions is of accountants and consultants who
made more difficult by the fact that followed its textbook methodology to the
unlocked and help drive
many companies employ traditional letter and systematically over-analysed
better, more informed
accounting methods that focus analysis companies’ general ledgers through
on gross margin and calculate product hundreds and sometimes thousands of decision making.
costs using simplistic overhead increasingly insignificant activities.
recovery rates (revenue minus direct
Companies must make
costs). In fact, customers, products Employed latterly in a more pragmatic
decisions that continually
and distribution channels all consume manner and focusing on more frequent
different levels of resource from shared report tracking but of a much smaller
drive out lower unit costs
business functions such as sales and number of higher level activities, it is
of processes, remove
marketing, warehousing and logistics clear that the results of ABC techniques
as well as support functions such as IT can lead to significant improvements in ineffective activities
and accounts … and so any pricing or pricing strategy, customer management,
profitability analysis that stops with the product management and price
and determine how
calculation of contribution, fails to reflect negotiations, all of which can help
customers should be
the true cost of supply. Conventional improve the bottom line. In fact within
accounting and management reporting certain sectors such as banking and
segmented and serviced.
methods that fall into this trap do not telecoms it has become the de facto
provide sufficient insight into the real cost standard. When allied to process
“
dynamics in a business for comparing mapping, which identifies the various
different products and customers and, activities and interdependencies, it overall cost structure by as much as
as a result, businesses are not in control provides a particularly powerful overview 3–5%. An enhanced focus on higher
at a level of detail that supports effective of a business. margin and growth products and the
decision making. pursuit of better markets can translate to a
In an overview of activity based costing, 5–15% increase in revenue.”
An alternative way of driving supply Accenture reported on the impact
chain process improvements and that an ABC project can have on an By combining ABC techniques with
business profitability is through activity organization’s financial performance: process mapping, essential information
based costing (ABC) techniques. ABC “ABC/M can help to reduce a company’s for managing a business can be
Supply Chain Digital Launch 2007
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