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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’ Ricky Vaughn Jersey , 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 Omar Vizquel Jersey , 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 Mike Napoli Jersey , while making a profit;
• indicate that improvements in quality, 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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