Are you, or is any printer you know, using activity-based costing (called ABC)? Please let me know. I've been making a few inquiries and have drawn blanks thus far.
The reason for my interest stems from the number of reports I've reviewed from companies in other industries currently utilizing ABC. Many get good results with the cost techniques of this system. Why hasn't the method been used in printing? Or has it? Or is it? I don't know.
Each business has its own resources to use—capital, plant, equipment, inventories, raw materials, skilled people. These resources are consumed and recognized as costs, according to ABC theories. The result of this consumption is a product or a service. Consuming resources is caused by some "activity" taking place in the business to provide the product or service.
Activities, as resource-consumers, are called the cost "drivers." It is the "activity" that consumes resources, provokes "costs." ABC advocates suggest that we focus primary attention on these activities, the cost drivers, rather than on the costs themselves. If you want resource consumption to decrease—costs to decline—you look to the activities that brought about those costs.
Seems to make good sense, doesn't it? If we're determined to reduce our costs and make our business more efficient, we don't start out by dumping a resource such as experienced people, chopping "heads" as we say. Yet that's precisely the way many of us address cost problems.
Don't Treat the Symptom
"Treat the symptom rather than the disease" is the approach. At least it was the approach until the 1980s, when ABC began to develop. Concurrent with the growing adoption of ABC, we began "changing the business model," "reengineering," "outsourcing," etc. Which came first, the chicken or the egg? ABC or fundamental business change?
When they began analyzing by cost-drivers—the activities that consume resources—people began asking fundamental questions like:
- "Does this activity add perceived value to our product or service?" If not, eliminate or minimize it.
- "Is there a better way to do this activity?" Let's do it. "Can others do this better, more efficiently, than we can?" Outsource it.
- "Is this activity consistent with our core competence?" If not, sell it or spin it off.
- "Is this activity disproportionately consuming our vital resources?" Why don't we just stop it?
In each question, ABC analytic disciplines provided decision support for conclusive answers and action. ABC furnished the rationale for changing the business model, for shifting prevailing paradigms.
So, why haven't printers climbed aboard the ABC bandwagon? ABC seems to have reshaped much of the U.S. economy by effectively redeploying business resources. It appears to be a substantial contributor to the resurgence of Chrysler and many other companies. Major accounting firms have been promoting and installing it since 1988.
ABC is claimed by some to promote TQM (total quality management), SCM (supply chain management) and to be vital in progression toward ISO 9000 certification. So why, my friends, has printing lagged behind? Or has it lagged…?
My suspicion is that the marriage of production standards and costs, to set prices, has become a deadly fixation. We have our activity cost-drivers in hourly costs, which apply a resource-consumption rate to productive activities. But we're using cost-drivers almost exclusively as predictors on our estimating Ouija boards. Activity costs are "joined at the hip," as a Siamese twin of production rate guesses.
To become ABMs (activity-based managers), we need to distinguish "predictive" hourly costs used for estimating, as well as "analytic" costs used for tactical and strategic decision support. We need to multiply our hourly rates by actual performance far more than we do in most shops. Then we'd begin to look at jobs, job types, customer accounts, suppliers, cost centers, trends, yields—genuine internal analysis—wouldn't we? We'd quickly discover that some refined tuning of hourly cost rates is needed.
But there are additional drivers to consider. Take inventories and receivables as prime examples. These are working capital resource consumers. Different customer and supplier demands for service activities consume working capital at differing driver rates. ABC demands we identify the consumption drivers. Other examples are supervision, customer service, maintenance and quality control. How should we treat these for ABC? We can't log them by "job-identifiable" hours.
Tagging and Tracking
So, how do we practically tag and track cost drivers for these? There are ways suggested in the ABC writings. (See the book "Activity-Based Cost Management—Making It Work" by Gary Cokins.)
ABC has its greatest benefits, proponents say, in the treatment of business "overheads." In printing, we've mostly ducked that issue, haven't we? We hand off the problem to someone who uses square footage or average number of toilet flushes to "allocate" overheads.
Am I saying we can come up with statistical drivers for these items? I think so. We can...if we're willing to concentrate on the problem and recognize that we want relevance over precise accuracy to support our tactical and strategic decisions.
Why should we make the effort? Because electronic media, particularly the Internet and intranet, as well as the coming bandwidth explosion (marrying newspapers, catalogs, magazines, color printers, digital cameras, etc.) will radically tilt the level of our print playing field.
We can, we must and we will adapt. Maybe a good way of achieving that is activity-based costing. Shouldn't we think about it?
—Roger Dickeson
About the Author
Roger Dickeson is a printing productivity consultant based in The Woodlands, TX. He can be reached via fax at (281) 419-8213 or e-mail at roger@prem-associates.com.