www.hbr.org
TOOL KIT
Many companies abandoned
Time-Driven Activity-
activity-based costing because
it did not capture the
complexity of their
Based Costing
operations, took too long to
implement, and was too
expensive to build and
by Robert S. Kaplan and Steven R. Anderson
maintain. Here s a way
"
around those problems.
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Many companies abandoned activity-based costing because it did not
capture the complexity of their operations, took too long to implement,
and was too expensive to build and maintain. Here s a way around
those problems.
TOOL KIT
Time-Driven Activity-
Based Costing
by Robert S. Kaplan and Steven R. Anderson
In the classroom, activity-based costing looks agement, IT, telecommunications, and other
like a great way to manage a company s lim- fixed resources) amount to $560,000. The ac-
ited resources. But many managers who have tual (or estimated) quarterly quantities of
tried to implement ABC in their organizations work in the three activities are 49,000 orders,
on any significant scale have abandoned the 1,400 inquiries, and 2,500 credit checks.
attempt in the face of rising costs and em- To build a traditional ABC model for this de-
ployee irritation. They should try again, be- partment, you would survey employees to esti-
cause the new approach we lay out in the fol- mate the percentage of time they spend (or ex-
lowing pages sidesteps the difficulties pect to spend) on the three activities and then
traditionally associated with large-scale ABC assign the department s resource expenses ac-
implementation by relying on informed man- cording to the average percentages you get
agerial estimates rather than on employee sur- from the survey. Let s say employees report
veys. It also provides managers with a far more that they spend (or expect to spend) about 70%
flexible cost model to capture the complexity of their time on customer orders, 10% on in-
of their operations. quiries or complaints, and 20% on credit
checks. This implies, under ABC, that each
order consumes $8 of resource expense, each
ABC Made Difficult
The roots of the problem with ABC lie in the inquiry $40, and each credit check $44.80, as
way people traditionally construct ABC mod- shown in the exhibit  Doing ABC the Tradi-
els. Assume you are analyzing a customer ser- tional Way. Armed with these figures, known
vice department that performs three activi- as the cost-driver rates, managers can assign
ties: processing orders, handling inquiries, and the costs of the department s resources to the
performing credit checks. The department s customers and products that use its services.
total expenses (the cost of the personnel, man- This approach works well in the limited set-
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Time-Driven Activity-Based Costing" " " TOOL KIT
ting in which it was initially applied, typically a exceed the capacity of generic spreadsheet
single department, plant, or location. Difficul- tools, such as Microsoft Excel, and even many
ties arise, however, when you try to roll this ap- ABC software packages. The systems could
proach out on a large scale for use on an ongo- take days to process one month s worth of
ing basis. In one large bank s brokerage data. For example, the automated ABC model
operation, the ABC data-gathering process re- for Hendee Enterprises, a $12 million fabricator
quired 70,000 employees at more than 100 fa- of awnings, took three days to calculate costs
cilities to submit monthly reports of their time for its 40 departments, 150 activities, 10,000 or-
allocation. The company employed 14 people ders, and 45,000 line items.
full-time just to manage the data collection, These problems have become obvious to
processing, and reporting. most ABC implementers. But a subtle and
The time and cost demands of creating and more serious problem arises from the inter-
maintaining an ABC model on this scale is a view and survey process itself. When people es-
major barrier to widespread adoption at most timate how much time they spend on a list of
companies. Since the systems that are put in activities handed to them, they invariably re-
place are updated infrequently (because of the port percentages that add up to 100. Few indi-
costs of reinterviewing and resurveying), the viduals report that a significant percentage of
model s estimates of process, product, and cus- their time is idle or unused. Therefore, cost-
tomer costs soon become inaccurate. What s driver rates are calculated assuming that re-
more, people waste their time arguing about sources are working at full capacity. But as we
the accuracy of cost-driver rates that are de- all know, operations often run at considerably
rived from individuals subjective beliefs rather less than their capacity. That means that the es-
than addressing the deficiencies the model re- timated cost-driver rates are usually much too
veals: inefficient processes, unprofitable prod- high. (Technically, they will be overstated by
ucts and customers, and excess capacity. the reciprocal of the capacity utilization per-
Traditional ABC models also often fail to centage: At 80% utilization, the rates are 25%
capture the complexity of actual operations. too high; at 67% utilization, the rates are 50%
Consider the activity  ship order to customer. too high.)
Rather than assume a constant cost per order
shipped, a company may wish to recognize the
The New ABC
cost differences when an order is shipped in a The solution to the problems with ABC is not to
full truck, in a less-than-truckload (LTL) ship- abandon the concept. ABC after all has helped
ment, using overnight express, or by a com- many companies identify important cost- and
mercial carrier. In addition, the order may be profit-enhancement opportunities through the
entered into the system either manually or repricing of unprofitable customer relation-
electronically, and it may be either a standard ships, process improvements on the shop floor,
or an expedited transaction. To allow for the lower-cost product designs, and rationalized
significant variation in resources required by product variety. Its potential on a larger scale
the different shipping arrangements, new ac- represents a huge opportunity for companies.
tivities must be added to the model, thereby Fortunately, simplification is now possible
expanding its complexity. through an approach that we call time-driven
As the activity dictionary expands either ABC, which we have successfully helped more
to reflect more detail about activities or to ex- than 100 client companies implement, includ-
pand the scope of the model to the entire en- ing those described in this article. In the revised
terprise the demands on the computer pro- approach, managers directly estimate the re-
grams used to store and process the data source demands imposed by each transaction,
Robert S. Kaplan ([e-mail]) is
escalate. Suppose a company has 150 activities product, or customer rather than assign re-
the Marvin Bower Professor of Leader-
in its enterprise ABC model, applies the costs source costs first to activities and then to prod-
ship Development at Harvard Business
in these activities to some 600,000 cost objects ucts or customers. For each group of resources,
School in Boston. Steven R. Ander-
(products and customers), and runs the model estimates of only two parameters are required:
son ([e-mail]) is the
monthly for two years. That would require the cost per time unit of supplying resource ca-
founder and chairman of Acorn Sys-
data estimates, calculations, and storage for pacity and the unit times of consumption of re-
tems, a software and consulting firm
more than 2 billion items. source capacity by products, services, and cus-
headquartered in Houston. Kaplan
Such expansion has caused ABC systems to tomers. At the same time, the new approach
serves on the board of Acorn Systems.
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Time-Driven Activity-Based Costing" " " TOOL KIT
provides more accurate cost-driver rates by al- ical is therefore about 25,000 minutes per
lowing unit times to be estimated even for com- quarter per employee, or 700,000 minutes in
plex, specialized transactions. total. Since we already know the cost of sup-
Estimating the cost per time unit of capac- plying capacity the $560,000 in overhead
ity. Instead of surveying employees on how costs we can now calculate the cost per
they spend their time, managers first directly minute of supplying capacity ($0.80).
estimate the practical capacity of the resources The capacity of most resources is measured
supplied as a percentage of the theoretical ca- in terms of time availability, but the new ABC
pacity. There are various ways to do this. As a approach can also recognize resources whose
rule of thumb, you could simply assume that capacity is measured in other units. For exam-
practical full capacity is 80% to 85% of theoret- ple, the capacity of a warehouse or vehicle
ical full capacity. So if an employee or ma- would be measured by space provided, while
chine is available to work 40 hours per week, memory storage would be measured by mega-
its practical full capacity is 32 to 35 hours per bytes supplied. In these situations, the man-
week. Typically, managers would allot a lower ager would calculate the resource cost per
rate say 80% to people, allowing 20% of unit based on the appropriate capacity mea-
their time for breaks, arrival and departure, sure, such as cost per cubic meter or cost per
communication, and training. For machines, megabyte.
managers might allot a 15% differential be- Estimating the unit times of activities.
tween theoretical and practical capacity to Having calculated the cost per time unit of
allow for downtime due to maintenance, re- supplying resources to the business s activities,
pair, and scheduling fluctuations. A more sys- managers next determine the time it takes to
tematic approach, perhaps, is to review past carry out one unit of each kind of activity.
activity levels and identify the month with the These numbers can be obtained through inter-
largest number of orders handled without ex- views with employees or by direct observa-
cessive delays, poor quality, overtime, or tion. There is no need to conduct surveys, al-
stressed employees. Whichever approach you though in large organizations, surveying
prefer, it s important not to be overly sensitive employees may help. It is important to stress,
to small errors. The objective is to be approxi- though, that the question is not about the per-
mately right, say within 5% to 10% of the ac- centage of time an employee spends doing an
tual number, rather than precise. If the esti- activity (say, processing orders) but how long
mate of practical capacity is grossly in error, it takes to complete one unit of that activity
the process of running the time-driven ABC (the time required to process one order). Once
system will reveal the error over time. again, precision is not critical; rough accuracy
Returning to our example, let s assume that is sufficient. In the case of our example, let s
the customer service department employs 28 suppose that managers determine that it takes
reps to do the frontline work and that each 8 minutes to process an order, 44 minutes to
puts in eight hours per day. In theory, there- handle an inquiry, and 50 minutes to perform
fore, each worker supplies about 10,560 min- a credit check.
utes per month or 31,680 minutes per quarter. Deriving cost-driver rates. The cost-driver
The practical capacity at about 80% of theoret- rates can now be calculated by multiplying the
Doing ABC the Traditional Way
This table provides a traditional ABC analysis for a customer service department for its first fiscal quarter. The percentage
of time spent on activities is determined from employee surveys. Once activity quantities are known or forecast, cost-
driver rates are used to allocate the department s costs based on customers utilization of the department s activities.
Activity % of Time Spent Assigned Cost Activity Quantity Cost-Driver Rate
Process customer orders 70%$392,000 49,000 $8 per order
Handle customer inquiries 10%$56,000 1,400 $40 per inquiry
Perform credit checks 20%$112,000 2,500 $44.80 per credit check
Total 100%$560,000
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Time-Driven Activity-Based Costing" " " TOOL KIT
two input variables we have just estimated. costs per time unit forces the company to in-
For our customer service department, we ob- corporate estimates of the practical capacities
tain cost-driver rates of $6.40 (8 multiplied by of its resources, allowing the ABC cost drivers
$0.80) for processing customer orders, $35.20 to provide more accurate signals about the cost
(44 by $0.80) for handling inquiries, and $40 and the underlying efficiency of its processes.
(50 by $0.80) for performing credit checks. Analyzing and reporting costs. Time-driven
Once you have calculated these standard rates, ABC enables managers to report their costs on
you can apply them in real time to assign costs an ongoing basis in a way that reveals both the
to individual customers as transactions occur. costs of a business s activities as well as the
The standard cost rates can also be used in dis- time spent on them. In our customer service
cussions with customers about the pricing of department example, a time-driven ABC re-
new business. port would look like the exhibit  ABC, the
Note that these rates are lower than those Time-Driven Way.
estimated using traditional ABC methods (see Note that the report highlights the differ-
again the exhibit  Doing ABC the Traditional ence between capacity supplied (both quantity
Way ). The reason for this difference becomes and cost) and the capacity used. Managers can
obvious when we recalculate the quarterly review the cost of the unused capacity and con-
cost of performing the customer service ac- template actions to determine whether and
tivities. In the exhibit  The Impact of Practi- how to reduce the costs of supplying unused
cal Capacity, time-driven ABC analysis re- resources in subsequent periods; they can then
veals that only 83% of the practical capacity monitor those actions over time. In some cases,
(578,600 of the 700,000 minutes) of the re- the information can save companies that are
sources supplied during the quarter has been considering expansion from making unnec-
used for productive work, and hence, only essary new investments in capacity. For ex-
about 83% of the total expenses of $560,000 ample, the vice president of operations at
were assigned to customers or products dur- Lewis-Goetz, a hose and belt fabricator based
ing this period. This takes care of the techni- in Pittsburgh, saw from his time-driven ABC
cal drawback of traditional ABC systems we model that one of his plants was operating at
mentioned earlier the fact that surveyed only 27% of capacity. Rather than attempt to
employees respond as if their practical capac- downsize the plant, he decided to maintain the
ity were always fully utilized. capacity for a large contract he expected to win
In the case of our customer service depart- later that year, for which he otherwise would
ment, the traditional ABC survey produced a have created new capacity.
work distribution of 70%, 10%, and 20% of the Updating the model. Managers can easily
employees time performing the department s update their time-driven ABC models to re-
three activities. But while that distribution did flect changes in operating conditions. To add
reflect how workers spent their productive more activities for a department, they don t
time, the fact that their total productive time have to reinterview personnel; they can sim-
was significantly less than their practical capac- ply estimate the unit time required for each
ity of 32 hours per worker per week was com- new activity.
pletely ignored. The calculation of resource Managers can also easily update the cost-
The Impact of Practical Capacity
This table shows the effect on cost assignment when we use rates based on practical capacity (700,000 minutes), assumed
here at 80% of theoretical full capacity. We can see that only about 83% of the customer service department s practical capacity
was actually put to productive use during the first fiscal quarter.
Activity Unit Time (minutes) Quantity Total Minutes Total Cost
Process customer orders 8 49,000 392,000 $313,600
Handle customer inquiries 44 1,400 61,600 $49,280
Perform credit checks 50 2,500 125,000 $100,000
Total 578,600 $462,880
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Time-Driven Activity-Based Costing" " " TOOL KIT
driver rates. Two factors can cause these rates By updating the ABC model on the basis of
to change. First, changes in the prices of re- events rather than on the calendar (once a
sources supplied affect the cost per time unit quarter or annually), you get a much more ac-
of supplying capacity. For example, if employ- curate reflection of current conditions. Any
ees receive an 8% compensation increase, the time analysts learn about a significant shift in
resource cost rate in our example increases the costs of resources supplied or the practical
from $0.80 per supplied minute to $0.864 per capacity of those resources, or about a change
minute. If new machines are substituted or in the resources required to perform the activ-
added to a process, the resource cost rate is ity, they update the resource cost per time unit,
modified to reflect the change in operating ex- or resource cost rate, estimates. And any time
pense associated with introducing the new they learn of a significant and permanent shift
equipment. in the efficiency with which an activity is per-
The second factor that can cause a change formed, they update the unit time estimate.
in the activity cost-driver rate is a shift in the
efficiency of the activity. Quality programs,
Time Equations to Capture
continuous improvement efforts, reengineer- Complexity
ing, or the introduction of new technology can So far, we have relied on an important simpli-
enable the same activity to be done in less time fying assumption that all orders or transac-
or with fewer resources. When permanent, sus- tions of a particular type are the same and re-
tainable improvements in a process have been quire the same amount of time to process. But
made, the ABC analyst recalculates the unit time-driven ABC does not demand this simpli-
time estimates (and therefore the demands on fication. It can accommodate the complexity
resources) to reflect the process improvements. of real-world operations by incorporating time
For example, if the customer service depart- equations, a new feature that enables the
ment gets a new database system, the reps may model to reflect how order and activity charac-
be able to perform a standard credit check in teristics cause processing times to vary. Time
20 minutes rather than 50 minutes. To accom- equations greatly simplify the estimating pro-
modate the improvement, just change the unit cess and produce a far more accurate cost
time estimate to 20 minutes, and the new cost- model than would be possible using tradi-
driver rate automatically becomes $16 per tional ABC techniques.
credit check (down from $40). Of course, you The key insight is that although transac-
then have to add back in the cost impact of tions can easily become complicated, manag-
purchasing the new database system by updat- ers can usually identify what makes them
ing the cost per time unit estimate, so the final complicated. The variables that affect most
figure may be somewhat higher than $16. such activities can often be precisely specified
ABC, the Time-Driven Way
This reporting template for time-driven ABC shows the customer service department s costs in the second quarter of operations.
Here we assume that the department processes 51,000 customer orders, handles 1,150 inquiries, and performs 2,700 credit
checks. The data reveal that the company supplied $85,120 worth of unused resource capacity during this period, representing
opportunities for savings or growth depending on the company s circumstances.
Activity Q uantity Unit Time Total Time Used Cost-Driver Rate Total Cost Assigned
(in minutes)
Process customer orders 51,000 8 408,000 $6.40 $326,400
Handle customer inquiries 1,150 44 50,600 $35.20 $40,480
Perform credit checks 2,700 50 135,000 $40.00 $108,000
Total Used 593,600 $474,880
Total Supplied 700,000 $560,000
Unused Capacity 106,400 $85,120
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Time-Driven Activity-Based Costing" " " TOOL KIT
and are typically already recorded in a com- three activities into a single departmental pro-
pany s information systems. To take an exam- cess, called inside sales order entry. The team
ple, let s assume a manager is looking at the learned that it took about 5 minutes to enter
process of packaging a chemical for shipment. the basic order information, plus 3 minutes for
In this situation, complexity arises from the each line item, and an additional 10 minutes if
potential need for special packaging and the the order had to be expedited. If the customer
additional demands of air as opposed to were new, 15 more minutes would be required
ground transportation. to set up the customer in the company s com-
Let s say that if the chemical is already pack- puter system.
aged in a way that meets standard require- Following the approach described earlier,
ments, it should take 0.5 minutes to prepare it the previous three-activity model was replaced
for shipment. If the item requires a new pack- by a single time equation:
age, however, the manager estimates, either Inside Sales Order Entry Process Time = 5 +
from experience or from making several obser- (3 × number of line items) + 15 [if new cus-
vations, that an additional 6.5 minutes will be tomer] + 10 [if expedited order]
required to supply the new packaging. And if This was straightforward to implement
the item is to be shipped by air, he or she since Hunter s ERP system already tracked the
knows (or can quickly determine) that it will number of line items for each order and in-
take about 2 minutes to put the package in an cluded fields that identified whether it was a
air-worthy container. rush order and whether the customer was new.
This information allows the manager to es- The model multiplied the estimated sales pro-
timate the time required for the packaging cess time by the departmental cost per minute
process: to arrive at the cost of processing each order.
Packaging Time = 0.5 + 6.5 [if special pack- Hunter could now obtain a more accurate and
aging required] + 2.0 [if shipping by air] nuanced estimate of its costs in the unit while
Many companies ERP systems already store simultaneously reducing the complexity of the
data on order, packaging, distribution method, process for gathering and analyzing the data.
and other characteristics. These order- and Hunter has since rolled out time-driven ABC
transaction-specific data enable the particular over all its operations. The results have been
time demands for any given order to be dramatic:
quickly determined using a calculation like the " Hunter has reduced the number of items
one above. tracked from 1,200 activities to 200 department
Thanks to this extension, the time-driven processes.
approach to ABC can capture the complexi- " Managers can add complexity to the
ties of business far more simply than the tra- model by simply adding new elements to the
ditional ABC system could, which might well time equations, which places less strain on
have had to account for varying transaction Hunter s accounting system than incorporating
times by treating each variant of the process new activities would.
as a distinct activity. Consider the case of " Cost estimates are now based on actual
Hunter Corporation (not its real name), a order characteristics and direct observations of
large, multinational distributor of scientific processing times, not on subjective estimates of
products, whose 27 facilities process more where and how people spend their time.
than one million orders each month to dis- " The new model is easier to validate.
tribute up to 300,000 different product SKUs Hunter can reconcile the total process time
to 25,000 customers. Its old ABC model re- that is, the total absolute time spent on all the
quired that employees in its inside sales de- activities tracked in a given period to other
partment (the salespeople handling phone measures of resources supplied, such as head
and Internet orders rather than dealing with count. If the total process time is lower than the
customers face-to-face) estimate each month time implied by the head count, for example,
the percentage of their time that they spend managers know that some of their unit time es-
on three activities: customer setup, order en- timates are too low or that people are not work-
try, and order expediting. ing to capacity. This validation is difficult with
With the time-driven approach, Hunter s traditional ABC, which is based on estimated
ABC team of analysts was able to group the proportions of time spent and rarely incorpo-
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Time-Driven Activity-Based Costing" " " TOOL KIT
rates idle or unused capacity time. the same procedures. You could probably
" Hunter s time-driven ABC model requires apply the same time-driven ABC model to all
only two people working two days per month of us. The chief information officer of another
to load, calculate, validate, and report findings, steel distributor, TW Metals, noted,  We were
compared with the ten-person team and three able to roll out our time-driven ABC template
weeks that were necessary to maintain the pre- model to all 36 of our facilities within three
vious model. Employees now spend time gener- months.
ating profits from the information rather than The ability of time-driven ABC to identify
just updating and maintaining it. and report complex processes in a simple way
The kind of rollout Hunter conducted is not also provides a powerful negotiation tool when
difficult to achieve. Time-driven ABC models it comes to dealing with customers. Wilson-
can be easily applied and customized for other Mohr, an industrial controls company in Hous-
plants and companies within an industry be- ton worked as a subcontractor to engineering
cause the processes they use are similar. Dave contractors (ECs) on the construction of cus-
Deinzer, CEO of Denman & Davis and presi- tom process-control systems for refineries and
dent of the North American Steel Alliance, chemical plants. Its time-driven model re-
commented,  For the most part, we are all vealed, for the first time, the high cost of engi-
pretty much the same& cutting, sawing, and neering change orders issued by the ECs to re-
finishing metal with the same equipment and place parts or reconfigure the design. In the
Strategic Change at Kemps LLC
Kemps, headquartered in Minneapolis, is a cases for small orders), how it delivered or- two low-volume products, and agreed to ac-
full-line dairy, that produces milk, yogurt, ders (commercial carriers or its own fleet, in- cept full rather than partial truckload orders,
sour cream, cottage cheese, and ice cream cluding route miles), and time spent by the thereby eliminating internal storage charges
products. Its customers are retailers and dis- driver at each customer location. The extra for Kemps. The changes produced immediate
tributors as large as SuperValu and Target time for changeovers to clean out allergens benefits of $150,000 per year, transforming
and as small as convenience stores. Kemps (such as nuts, eggs, soy, or wheat) used in cer- this unprofitable customer into a profitable
markets its products under its own branded tain ice cream products could now be accu- one.
portfolio along with products sold through rately assigned to those products. The model Kemps also used its time-driven ABC
private label and copacking contracts. Like also captured the extra packaging costs for model proactively to become the leading
most dairies, Kemps was experiencing con- special promotions and customer-specific la- dairy supplier to a national customer. Kemps
solidation in its customer base. It decided to bels and promotions. demonstrated that it could identify the spe-
shift from its former customer relationship The company soon learned it was losing cific manufacturing, distribution, and order
strategy willing to do whatever the cus- money with one of its customers, a chain of handling costs associated with serving this
tomer asked to a lower-total-cost strategy. specialty high-end shops, because of the low customer on the basis of actual order charac-
The new approach clearly required an accu- volume and high variety of products ordered teristics: DSD (direct store delivery) or ship-
rate understanding of cost by product and and the small just-in-time deliveries the ments to distribution centers, gallon versus
customer that Jim Green, Kemp s CEO, would chain requested. Kemp s vice president of pint deliveries, and volume and mix of prod-
use to instill a  low total cost culture sales called on the customer, explained the ucts. The time-driven ABC model facilitated
throughout the organization. situation, and offered three options: accept a an open, trusting relationship between sup-
As a critical component of the cost-to-serve price increase and a minimum order size; plier and customer that differentiated Kemps
model, Kemps implemented a time-driven eliminate its private-label ice cream, replac- from its competitors.
ABC system so it could track the costs of ing it with Kemp s standard branded product Kemps also became aware that some of its
changeovers in producing and packaging all that was already being produced in efficient, smaller convenience store customers had
its products and the costs of picking, loading, high volumes; or find another ice cream sup- been overordering and returning product
and delivering products to its diverse cus- plier. When the customer inquired why when the date code expired. To avoid the
tomer base. The model captured differences Kemps was making the change, the VP re- high cost of these rebates and returns, Kemps
in how the company entered orders from cus- sponded that after 25 years, Kemps only now offered these retailers a 2% discount if they
tomers (customer phone call, salesperson understood its true manufacturing costs and would manage their own inventories without
call, fax, truck-driver entry, EDI, or Internet), the impact of specialty production on its the return option. In this way, Kemps elimi-
how it packaged orders (full stacks of six margins. The customer accepted a price in- nated 95% of out-of-code returns, generating
cases, individual cases, or partial break-pack crease of 13%, agreed to the elimination of a net saving of $120,000 per year.
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Time-Driven Activity-Based Costing" " " TOOL KIT
driven ABC system.
Profitable Decisions at Banta Foods
Based on the data in its ABC model, Banta
This table details the opportunities for profit revealed by the introduction of
instituted a nonnegotiable minimum order
time-driven ABC and the estimated impact on total profits at a $155 million food
size, reduced the inventory of unprofitable
distributor. products, promoted sales of high-profit prod-
ucts, negotiated with customers either to re-
Opportunities Identified Total Profit Impact
duce the demand for high-cost services or to re-
Establish minimum order size 22%
price them, and offered incentives to its
Recover vendor rebate processing costs 21%
salespeople to increase the net profits of their
Conduct what-if profit analysis on new business 20% customers. It also renegotiated with vendors to
recoup the cost of processing customer rebates.
Perform vendor reviews 5%
The general manager of sales used the infor-
Total 68% (1.4% of revenues)
mation to transform his sales representatives
from order takers to consultants, helping them
past, Wilson-Mohr charged an EC only for the to create customers and territories that were
predicted materials cost changes resulting more profitable for Banta. He reports,  Sales-
from the change orders. Now it can also clearly people can now increase their gross profits not
itemize the cost of additional sales, design, en- by simply adding points to their margin but by
gineering, and manufacturing labor time con- knowing which items to sell.
sumed when implementing change orders, By accurately projecting the cost and profits
which makes it easy to recuperate these costs of proposed business, Banta has been able to
through price recovery. (For a detailed exam- take on new business that has increased reve-
ple of how time-driven ABC helps companies nues by 35% and generated immediate profit
manage customers, see the sidebar  Strategic improvements of 43%, with a further 25% yet
Change at Kemps LLC. ) to come through from future opportunities.
(See the exhibit  Profitable Decisions at Banta
Foods. ) Its performance has led to the distinc-
The Bottom Line
Over the past seven years, we and our col- tion of being named  Innovator of the Year by
leagues at Acorn Systems have successfully the industry journal, Institutional Distributor.
helped more than 100 clients introduce time- Over the past 15 years, activity-based cost-
driven ABC into their processes. Most have re- ing has enabled managers to see that not all
ported substantial improvements in profitabil- revenue is good revenue and not all custom-
ity that they attribute to the information gen- ers are profitable customers. Unfortunately,
erated by the new approach. Take the case of the difficulties of implementing and main-
Banta Foods, a Midwest food distributor with taining traditional ABC systems have pre-
revenues of $155 million from 17,000 SKUs and vented them from being adopted on any
5,000 customers. It operated on a razor-thin significant scale. Time-driven ABC has over-
net margin of about 1%. Historically, its profit come these difficulties, offering a transpar-
drivers were increasing the number of orders ent, scalable methodology that is easy to im-
taken per day, increasing aggregate revenues, plement and update. It draws on existing
and controlling aggregate expenses. databases to incorporate specific features for
Banta s time-driven ABC system, which was particular orders, processes, suppliers, and
fully implemented within 16 weeks, revealed customers. Activity-based costing is no
much more granularity in its expense structure longer a complex, expensive financial-sys-
by tying costs to products, orders, customers, tems implementation; the time-driven ABC
and territories. Managers learned that a $1,000 innovation provides managers with mean-
order, previously considered the smallest size ingful cost and profitability information,
to break even, could either be quite profitable quickly and inexpensively.
or a loss depending on the distance to the cus-
tomer, the location of the product in the ware- Reprint R0411J
house, the size of the order, the frequency of To order, see the next page
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ing of the customer all of which were incor- or go to www.hbr.org
porated in the algorithms in its new time-
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