Alcoa and others blend operational, financial data with performance suite
by Staff -- Manufacturing Business Technology, 1/1/2006 12:00:00 AM
Is activity-based costing (ABC) set for a comeback? Popularized in the late 1980s by Harvard Business School's Dr. Robert Kaplan, the technique analyzes cost by looking at the activities that drive it, rather than treating cost—as management accounts usually do—as arising independently.
Armed with this information, the theory goes, companies boost profitability by tackling the real causes of cost, rather than its symptoms.
ABC's pizzazz, which has faded a little of late, may be about to return—thanks to efforts to automate integration of financial and operational data.
"Manufacturers want to deal with customers in the most profitable way," says Mark Stevens, a principal with Performance Cost Systems, an Indianapolis-based consultancy. "It's not about price. It's about making efforts in the best direction."
Stevens says performance solutions vendor ALG Software has inked global deals with Pittsburgh-based Alcoa and Stamford, Conn.-based International Paper. ALG is just one of a dozen or so vendors surveyed by the consulting firm to have an ABC tool built on an OLAP engine. The result is far greater granularity of analysis. For Alcoa, at least, it proved the deal maker. "Using OLAP and activity-based costing combined is giving [Alcoa] a multidimensional view of the enterprise," says Stevens.
Best-practice techniques in planning and budgeting, scenario modeling and metrics measurement, activity-based costing, and process optimization are brought together in something ALG call its Enterprise Performance Optimization (EPO) suite.
For Alcoa, the ALG suite costs and analyzes 325,000 production jobs a month, says Richard Barrett, ALG's senior VP of global marketing. Detailed transaction data bearing on machine capacity consumed by each sales order at each stage through production is extracted, and then rolled up into a total production cost previously unavailable, presenting a picture of profitability for product, plant, and customer.
"Many companies played with activity-based costing in the past, but are now pursuing it with rigor," notes Barrett. "Too many built data warehouses populated with transaction data, and then wasted a lot of time trying to cross-sell and up-sell without truly understanding if the customer is profitable in the first place."
