Issues Related to the Implementation of Activity Based Management

This study highlights the major issues faced by organizations in implementing activity based management systems, including performance evaluation, supply chain management, quality management, and environmental sustainability.

Issues Related to the Implementation of
Activity Based Management
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Table of Contents
Introduction.................................................................................................................................................3
Overview of Activity Based Management...................................................................................................3
Issues of Implementing Activity Based Management..................................................................................4
Performance Evaluation...........................................................................................................................4
Supply Chain Management..................................................................................................................5
Quality Management...........................................................................................................................6
Environment Sustainability..................................................................................................................6
Stakeholders’ Role and long-term Sustainability.................................................................................7
Conclusion...................................................................................................................................................8
References...................................................................................................................................................9
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Introduction
In the rapidly increasing era of business, various innumerable organizations are increasingly
conscious of the strategies, techniques and decisions in regards to their products and services,
their performances and their share in the market. Therefore, organizations, specifically large
organizations have come up with implementation of activity based costs (ABC) and activity
based management (ABM) in order to critically assess the organization’s internal functions in the
activities that take place. However, as stated by Kim et al. (2016), implementation of such
projects and systems in organizations comes with a number of challenges. Therefore, this study
will bring to light the major issues faced by organizations in formulating such implementations.
On common grounds of assessment of organizations, the major issues identified are highlighted,
the challenges that poses as roadblocks for organizations to implement activity based
management will be discussed in this essay. In order to further discuss the issues in
implementation of activity based management systems, an overview will be presented. The essay
will unfold by elaborating on the issues in context to performances evaluation, supply chain
management, quality management and environmental sustainability of organizations. And
eventually bring to the understanding the wider insight of the study topic.
Overview of Activity Based Management
Activity based management is a comprehensive system that adds a process view to the cost view
of activity based cost. It involves using major sources of information with two wide objectives:
1) Improvement of decision making by provision of accurate cost information and 2) Reduction
of costs by supporting continuous improvement efforts (Tsai et al., 2015). Activity based
management is a cost accounting term where an organization’s management uses past production
activities as well as costs reports as a benchmark to balance current activities suitable to
organization’s goals. It is also considered as a system for continuous development and
improvement which can be utilized to enhance organization’s performance management.
Activity-based management is also inseparable with activity based costing and budgeting and is
said to be two main types namely; operational and strategic activity based management where
the former deals with works to enhance efficiency, low costs and asset utility. Whereas the later
refers to various ways an organization can sustain a competitive advantage in the market
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(Gurcanli et al., 2015). Activity-based management is said to have brought about radical changes
in organization’s cost management systems. Activity based management supports organization’s
business management by providing information to facilitate long-term strategic decisions about
certain organizational operations such as product mix and sourcing. Activity based management
allows product designers to understand the impact of various designs on cost and flexibility
(Phan et al., 2018). This type of management also allows insights into performances of activities
by focusing more attention on the sources of demand for activities and by allowing management
to establish behavioral incentives to improve aspects of business.
Issues of Implementing Activity Based Management
There are several obstacles pertaining to implementation of activity-based management in
organizations. One of the major issues identified is obtaining financial data from related
departments. Authorization is required for obtaining financial data. Another issues faced by
organizations in implementing activity-based management are non-involvement of employees in
the selection of organization’s projects and activities (Allain and Laurin, 2018). The employees
in the organizations must not be taken for granted while the executives consider taking up
activities. This is because the employees are the ones who know the strength of the organization
in-depth and are aware of the organization’s potential and the activities that can be successful
(Ryszko, 2017). The organization’s activity based management success is dependent on the
variation of activities the organization uses but on how relevant the variation of activities is
specific to the organization’s objective. To sum it up, the main obstacles in implementation of
activity-based management are vested on the incompetence of top management support in terms
of organizations’ operations. The constraints in technical resources and other sources such as
lack of adequate systems and IT, data collection and imbalance in the cost of implementation
creates issues in successfully implementing activity-based management (Rietzke et al., 2017).
Implementation of activity-based management is a major project that requires substantial amount
of planning, resources, numerous cost driving data, and other cost objects which is failing to
misinterpret, will cause a catastrophic loss to business.
Performance Evaluation
Performances measures must be identified and standards must be set to provide as benchmarks
for performance measurement. The performance in the activities undertaken by an organization
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must be evaluated in order to identify which activities are to be considered for future references.
The benefits of activity-based management are one of the most essential tools in organizations;
therefore, the evaluation of the performances is of mandatory (Saryazdi et al., 2016). Some of
the major analysis meters to evaluate organizations performances based on the activities taken up
are; cost of sales, employee’s costs, material resources costs and labor costs. The following
drivers are considered to be the major determinants for evaluating an organization’s
management. Activity based management are suggested to be used alongside performance
management improvement strategies such as Total Quality Management and Six Sigma where
the information provided can support in evaluating the organization’s performance (Arumugam
et al., 2016). In addition, identification of processes that requires improvement, provision of
cost justification for carrying forward the project and lastly monitor of profits of the projects
are necessary for assessing the performances in organization’s activity based management
(Arnaboldi et al., 2015). Since this activity management focus mainly on the internal operation
of the organization, it does not consider external factors of shifts in consumer demands or market
trends. Activity based management is mostly concerned with investigation and accurate
identification of which activities and processes costs much and where the financial profitability
can be furnished.
Supply Chain Management
Activity based management is the sole system that offers the instruments to correctly examine
the outflow involved in an intimately knitted supply chain. Supply chain management also
enables understanding not only of the total cost of ownership (TCO) but also how the costs
should be distributed (Boukherroub et al., 2015). The cost drivers in activity based management
systems are also dependent on the number of suppliers, number of products ordered and
expedition of deliveries. Therefore, the cost drivers that determine the functionality of the
activities are correlated, much rather intertwined for determination of implementation. The
activity based implication of efficiency is not potential of deriving the effectiveness with how the
buying function performs its conventional role of procuring supplies at minimum cost (Lambert
et al., 2017). The comparison between the activity based management’s sight of purchase and the
supply chain management model is far more evident. Any indifference between the two in works
and operations undertaken with the materials supplied for reduction of internal costs of
assemblage, inspection or handlings can be disrupted beyond its conceptual perspective
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(Boukherroub et al., 2015). Any unnecessary activities under activity based management project
that does not positively trigger occurrences of cost drivers in the practices will result in non-
value added expenditure.
Quality Management
As stated by Zheng et al. (2018), lack of quality management from the top concerned executives’
support in an activity based management implementation project is a primal concern for non-
implementation. It is identified that top management are of the view that activity based
management is just another costly technique and thus, finds this activity to be null for
implementation. Organization’s with managerial executives that put more concern in priorities
other than activity based management system is one of the reason it cannot be successfully
implemented. Since it is a huge project, it is time consuming, therefore most management are of
the say that it is not necessary to invest that big amount of time into activity based management
systems. In the words of Drosos et al. (2017), there is another severe issue in implementation of
the management system, which is the incompetence of internal project support, however to a
lesser extent. The project of activity-based management system relies on the managerial
executive who may not directly engage with the operations of the activities in the organization,
however, as the project head responsible to supply efficient support and influence in turning the
project into a success (Soares et al., 2017). Therefore, from the initial steps of project proposal,
the quality of management must be enthusiastic and determined in all manners to invert all
employees and workers energy and workability into the activities formulated for the activity
based management system.
Environment Sustainability
In growing pursuit of understanding and responding to environmental sustainability,
organizations develop an assembly of tools and strategies designed to examine environmentally
resource-intensified activities. A critical component of environmental management is ensuring
decisions in regards to managing an environmental sustainability initiative evaluation across the
organization (Rodríguez-Olalla and Avilés-Palacios, 2017). Activity based management is the
extension of practice where indirect costs are managed or presumably reduced with time. With
implementation of activity based management system, a more precise costs to products in terms
of activities and products may or may not mirror accurately the resources, however, activity-
based management allows careful tracing costs resulting in superior long-term decisions by
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alternative production resources that drives the indirect costs (Marshall et al., 2015). For
instance, an organization may identify resources in consumption such as greenhouse gas
emissions, related to the activities in the management. However, activities relating to
environmental sustainability can be high at cost. Accounting towards greenhouse gas emissions
has now become an evident commonness among large organizations (Sarkis and Zhu, 2018).
Therefore, numerous organizations are in pursuit of accumulating basic data necessary to execute
an activity based management analysis. For instance, Wal-Mart enforced carbon ratings on their
entire product lines asking its suppliers to adopt in becoming “greener” for which non-
compliance would result in delisting. The company’s supply chain network composes over
60,000 suppliers in various sectors. Most greenhouse gases regulations focus on concise report of
emission level. The economic integration behind regulation is to necessitate that organizations
internalize the complete social cost of GHG emissions in order to list these costs in their strategic
and tactical decision-making (Schaltegger and Burritt, 2018). Thus, despite of the race among
organizations to compete with one another and be listed among the prestigious firms of CSR
compliances, there are still numerous organizations that fail to implement activity based
management system due to the fear of costs associated with environmental sustainability
compliances.
Stakeholders’ Role and long-term Sustainability
Activity based management focuses on ways to redirect and improve the resources in order to
maximize the value created for stakeholders. The variables that influence stakeholders to take
part in projects and systems in organization’s activity based management are of six independent
variables- power, interest, urgency, legitimacy, proximity and network (Shinkevich et al.,
2016). In stakeholder theory, organizational management opposes free market regulation of
shareholder capitalization and promotes maximization of stakeholders. However, stakeholders
investigate through the dependent variables of identification, communication, involvement,
empowerment and risk control in order to play the role of mediator in the organization’s
management.
Conclusion
Based on the study, it can be drawn to the conclusion that organizations’ choice and use of
strategies and tools is complex in nature. The organizations across the globe are in a constant
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race competing among each other, therefore the choice of approach and techniques an
organizations chooses to implement must not only result in their yield but also in providing
competitive advantage. Activity based management system has been identified to compose of a
series of challenges in its implementation. Through performance evaluation, cost of sales,
employee’s costs, material resources costs and labor costs are determined, thus helping in
investigating the organization’s capabilities in terms of efficiency of management system. It has
been understood that unnecessary activities under the management project that does not
positively enhance the occurrences of cost drivers in the activities will result in non-value added
costs in regards to supply chain. Another major finding is the lack of top quality management in
support for the systems implementation, thus leading to non-implementation with no support or
priorities elsewhere given in the organization’s operations. Also this essay draws towards the
environmental impact in association with the implementation deriving that high cost is one of the
main reasons many organizations fail to comply in implementation.
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