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To make profits given the present competitive environment and consumer focus on product price and quality, businesses must find ways to minimize costs. Costs can be reduced without reducing quality by decreasing the number of non- value-added organizational activities.
Process mapping can be performed to see all the VA and NVA activities that take place in the production of a product or the performance of a service. Value is added to products only during the times when processing (manufacturing company), performance (service company), or display (retail company) is actually taking place. Inspection time, transfer time, and idle time all add to cycle time and cost, but not to value. The proportion of total cycle time spent in value-added processing is referred to as manufacturing cycle efficiency.
A third category of activities, known as business-value-added activities, also exists. Although not wanting to pay for these activities, customers know the activities are necessary expenses incurred by a business to conduct operations. In addition to activity analysis, activity-based management is also concerned with finding and selecting activity cost pools and identifying the set of cost drivers that best represents the firm’s activities and are the underlying causes of costs.
Management should first investigate activities that reflect the major and most significant processes conducted by the company. These activities normally overlap several functional areas and occur horizontally across the firm’s departmental lines.
