Sensitivity Training for Activities Part 1On August 18, 2019 by Raul Dinwiddie
Hi. Alan Stratton here from Cost Matters dot
Com We’ve all been to sensitivity training to
recognize, appreciate, and potentially take advantage of the diversity inherent in business
and our workplaces. Another form of sensitivity training concerns activities we do every day
in business. In early Activity-Based Cost literature we find discussions about the level
concept. However, this early literature concerned product related activities and omitted the
critical customer dimension. Early literature described manufacturing and did not deal with
service businesses. Once expanded to encompass the customer dimension and perhaps other significant
dimensions, Activity Sensitivity may well be a better term that more easily describes
what is going on. The early Activity Level concept included
Unit, Batch, and Product levels in a hierarchy to express how much more of the given activity
is required with different production scenarios. A Unit level activity is performed once or
at a fixed rate for each output coming from the activity. Given that this terminology
originated in a manufacturing environment, it is easy to say that a unit level activity
is performed for each unit produced such as an assembly operation.
Much of manufacturing is done in batches to optimize setup and material movement. Setting
up a die on a punch press is an example of a Batch level activity. Regardless of the
number of units in the batch, the press must be setup and adjusted for the batch.
For an example of a product level activity, we move to product design and development.
Once a product’s design is completed, an unlimited number of units may be manufactured.
Only when the design changes would the activity be completed again. Then, once more, an unlimited
number of units may be produced. The final activity level has been called various
names including Business Sustaining. These activities do not vary with product volumes.
Typical examples are corporate executives and corporate services required to respond
to regulatory requirements. This is as far as the early Activity Level
concept went. But, what about activities having a customer interface? Are these not just as
important as production activities? Absolutely! Activity-Based Cost originated primarily in
manufacturing organizations. Now however, service organizations are rapidly recognizing
the benefits of understanding their costs also.
So, how would we expand this concept to customer facing activities whether for a product business
or a service business? Are there not activities that must be performed with each customer
order, service delivery, or shipment? Let’s call this an Order level, roughly equivalent
to the Unit or Batch levels. What about customer acquisition and relationship
management? It would seem that most sales activities vary more with the number of customers
or their importance than with the actual products or services sold to a given customer. In many
businesses, a sales person may call or visit a customer many times before obtaining an
order. In other businesses, a sales person presents a product or service portfolio to
the customer. The relationship is built around discovering customer requirements and then
matching these with one, or many of, the vendor’s offerings. Let’s call this a Customer level,
roughly equivalent to the Product level. After reviewing customer facing activities,
it should be easy to apply this concept to Channels and other significant dimensions
evident in a business. Once this concept is understood, it is easy
to see how powerful this is compared to strictly financial fixed variable cost analysis. Here
we have been observing how an activity is consumed. These observations are more operational
than financial in nature. They represent actionable classifications. On the other hand and as
a separate consideration, cost represents the resources required to perform an activity
and may be fixed or variable to the activity depending on how these terms (fixed, variable)
are defined at the time. Once understood and because of their operational nature, these
classifications are also useful in selecting appropriate activity drivers for activities.
Modern business is much more than manufacturing. The service sector has grown significantly.
Even the service components of manufacturing businesses have grown significantly. Just
as sensitivity training helps to break old paradigms, examining the sensitivity of activities
helps managers to better understand, manage and exploit their operational advantage for
better profitability. What is your experience with activity sensitivity
in your company? Please share below. When cost matters, profits soar. This is Alan
Stratton from Cost Matters dot Com THANK YOU