Most businesses will admit to wasteful activities in core processes but separating the ‘wheat from the chaff’ and pin-pointing unproductive activities can be very challenging. Some proponents of activity based costing use the terms Value Added (VA) and Non-Value Added (NVA) to separate out those activities that are good for the business and those that are not, but Brian Plowman, FSN contributing author and expert on Activity Based Management at Develin & Partners suggests a different approach may be more illuminating.
In many instances, the terms VA and NVA are too coarse a definition of activities as the subtleties of how failures occur in processes and the impact of customer behaviours is largely invisible. Also, at a personal level, using the terms VA and NVA can be counterproductive when trying to analyse what is going on when talking to staff. If a situation is found where people are struggling against the vagaries of a process failure then it is hardly motivating to tell someone that for the last five years their job has been entirely non-value adding. The nature of process failures is that people do not come to work to cause them but have to deal with the consequences of failures, usually originating upstream in the process.
A more enlightening approach is to have three categories called core, support, and diversionary. The categories are defined as follows:
Core activities use specific skills and expertise and add real value to the business. Core activities are those that provide a necessary service to internal or external customers.
Support activities make it possible for core activities to take place. For example, a salesperson's time spent negotiating with a customer is a core activity. The travelling time to get to the customer is support.
Diversionary activities are caused by a process failure somewhere in the organisation. Such activities include correcting errors, chasing other groups for information, resolving queries and so forth. Diversionary activities have many causes including, for example:
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inadequate training;
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inadequate tools, procedures and systems;
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poor documentation;
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poor communications;
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poor quality suppliers;
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conflicting functional objectives and performance measures;
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inadequate understanding of customer needs;
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and poor customer behaviours.
Poor efficiency and effectiveness can only be eliminated by isolating the root cause of the problem. Frequently, failures cascade through a number of areas of a business picking up further diversionary activity and therefore costs. By identifying the source of failure and the associated diversionary activity costs, a key outcome should be to change the mix of core, support and diversionary activity within each area of the business. The requirement is to place more emphasis on core activity to enhance service quality, and so avoid diversionary activity elsewhere.
The question is; can these insights be coded into a model? An ABM database of activities identified to processes can be coded in order to show the proportions of core, support and diversionary activity as they track through processes. In a typical example a process started with poor order specification. The effect was compounded as each department attempted to overcome the difficulties created by the department upstream in the process. The delays created pressure from customers, leading to short-term prioritising of manufacture schedules and assembly, and excessive overtime working to meet deadlines. The final symptom that highlighted the crisis arose when production attempted to overcome the backlog of late deliveries. Working from pre-design sketches, production converted a whole order quantity of raw material into piece parts (aluminium vehicle panels). The customer, on visiting the plant, while delighted that the delivery dates would be met, was curious to know why the specification ordered was not being adhered to. Only a large discount persuaded the customer to take the vehicles as manufactured.
Unfortunately, the vagaries of process failure are always around us. Parts do not fit together every time on assembly, invoices have mistakes on them, specifications are incomplete, the computer breaks down, the materials are often inferior, and things just keep letting us down. The processes used are not capable of doing the job, and, if the process is not capable, then despite everyone’s best efforts the output will be of inferior quality. Only by working on the process can it become capable and its results stable and predictable.
The figure below is an example of how the salesforce and sales administration department of a manufacturer of office equipment used their time.
It was found that only 15 per cent of the whole department's activity was devoted to customer contact. For a typical salesperson, the core activity of 'selling' occupied only 50 per cent of the time spent with customers. The remainder was spent on a diversionary activity, dealing with queries and complaints about delivery performance. Other activities in head office, such as credit notes, special invoices, keeping statistics on the problems, and a substantial proportion of management and administration was driven by the same problems. Not surprisingly, the salesforce had little time to spend on new calls to win new customers.
When the process was investigated each link in the chain pointed to another link as the cause. The atmosphere was one of finding other departments to blame. In this case striving for functional effectiveness was the underlying root cause of the problem. Functional measures were driving everyone's behaviour. The salesforce were measured on numbers of orders sent in, with month-end panics being the norm. Production ran larger than necessary batches in order to improve machine running-time utilisation. Distribution’s standard costing variances were reduced by running full loads every time, even if this meant changing customer delivery dates. No end-to-end process measures were in place that related to the processes' ability to satisfy customers at lowest unit cost to the business.
By identifying the root causes of poor delivery performance, a substantial proportion of the salesforce's time was released, allowing it to focus on winning more orders. Time was also saved in sales administration; some taken as a cost saving, while some was re-deployed into dealer support, handling increased volumes and a new task of telesales.
ABM is key to quantifying the process perspective including the subtle nature of the activities being performed which leads directly to ways of making improvements.
