Activities consume resources – people, materials and equipment – and this consumption can be measured. Activities are triggered by events, which can be counted, or decisions, which can be reviewed. Activities produce outputs – products and services, which can be counted and measured. Activities can be undertaken by different methods, which will vary the unit cost. Activities are linked together to form business processes. Understanding what activities are, what they cost, what drives them, what they produce, how they are done and how they are linked together is useful.
We have understood manufacturing activities in this way for years. We measure the consumption of direct labour and materials in making products. On average, however, direct labour, materials and components account for around two thirds of total costs in manufacturing businesses. The other, unmeasured, third is overhead activities and costs. In service industries, the ratio is the other way round – the unmeasured ‘overhead’ accounts for two-thirds or more of costs.
Overhead costs are the black hole in conventional management information systems. Activity Based Management (ABM) shines light into the hole. Knowledge of a business at the level of activities is the basic building block upon which new understanding can be built of where profits are being made and where they are being eroded.
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