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Activity-based management can be used by managers in identifying the scope for cost reduction. One approach is to consider a
‘hierarchy’ MLB Jerseys China , which means thinking about the structure of costs at different levels, starting
at the level of the units of output and moving up the organization to the level
of the entire service or production facility. For each level of costs the
manager asks: ‘What drives costs?’ Then the manager asks ‘How efficient is this
activity and can we manage these costs more effectively?’ Customers are
essential to an entity because they provide sales revenue, but there are also
costs associated with gaining and retaining customers. If the drivers of
customer-related costs are understood, then the costs can be managed more
effectively. Drivers of customer costs are:

• Location of customers. The distance and geographical spread of customers drives the cost of making contact,
communication and delivering to customers.
• Supply and delivery costs. If customers order small amounts of product frequently then there will be higher
costs associated with taking orders, making up delivery packages and arranging
delivery.
• Sales and promotion costs (including discounts and other incentives). These will be higher if there are more potential customers or new
potential markets for products. These costs will be lower if the business relies
largely on established customers making repeat orders.
• Quality costs. Some customers may specify standards of quality that cause additional costs to be
incurred. If the quality is not sufficiently high the customers may be
lost.
• After-sales service or warranty costs. Customers may have paid additional fees for after-sales service or repairs under warranty but it is
still important to control costs within that amount in order to avoid losses
while offering a competitive service. If the managers of a business understand
customer-driven costs they can make strategic decisions about the relative costs
of different types of marketing initiatives. One strategy might be to find a
small number of high-value customers and invest effort in customer retention and
loyalty. An alternative strategy might be to target larger numbers of
smaller-value customers and accept a higher rate of customer replacement. Each
strategy drives customer-related costs in a different way.

A Technical Briefing published by the Chartered Institute of Management Accountants (CIMA
2001) summarizes the activity-based management model as described by Miller
(1996). It explains that ABM has grown out of the work of the Texas-based
Consortium for Advanced Manufacturing-International (CAM-I). ABM thinking is not
confined to manufacturing businesses because activity-based thinking can equally
well apply to service businesses and not-for-profit organizations. The Technical
Briefing provides a summary of the circumstances that make ABM useful. It
explains that ABC becomes ABM when it is used to:

• design products and services that meet or exceed customers’ expectations, while making a
profit;
• indicate that improvements in quality MLB Jerseys Cheap , efficiency and speed are needed;
• guide decisions on product mix or investment;
• choose among alternative suppliers;
• choose methods of targeting markets and customers, and of providing delivery or service to customers;
• Improve the value of the organization’s products or services.
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