Using A Parametric Activities-Based Analysis For Better Business Execution

March 31, 2005
A tool to peer into the future and lay out a plan to get there.

Adam Garfein, Ph.D. is a partner with Afion, Inc. ( Anil Menawat, Ph.D. is the founder of Afion and the creator of pABF. They are currently writing a book on this topic and welcome your comments. pABF is a trademark of Afion, Inc.

Good managers are able to assess their current business situation rapidly through observation and facts, having the benefit of enormous amounts of data collected throughout the organization. They are adept at building mental pictures about the future and what it should look like. What has been missing are the methods and tools that allow managers to peer into their desired future and then look back to determine how to get there from where they are today. A parametric activities based analysis can provide a full understanding of an organization's capabilities, constraints and costs -- so the roadmap to the future is fully grounded in the reality of what is possible to attain.

A manager at a Fortune 500 Tier 1 auto supplier describes a recent experience with an underperforming manufacturing line. The line was dedicated to a single product and was designed to produce a certain number of units per hour, but actually produced about 20% less than expected. Numerous studies showed different causes. The engineering manager was beginning to suspect an uncooperative labor force as the studies found that the labor could work faster during tests. They also identified an unreliable welding station which led management to add another one for redundancy at a cost of about $400k.

Distrustful of the inconsistent findings and recommendations, the plant manager decided to conduct a parametric activities-based analysis. The dynamic analysis showed that the line could not produce any more as it was a fairly balanced and approaching maximum capability. The problem was structural in nature and not with the welder or labor force. Adding insult to injury, the purchase of a second welder raised the cost per piece by 4.4% with the increase in the invested capital.

Further investigation of the activities composition revealed that a minor line redesign that necessitated an additional $30k investment and two additional line workers would help recover from their initial actions. The redesigned line would only need to run 4.5 days per week instead of the current 6 days to meet demand. The cost per piece would decrease by 6.5% despite the additional capital investment and labor. This is a non-intuitive solution that would not be apparent without a parametric activities-based analysis.

The parametric cost estimating approach has roots tracing back to aircraft manufacturing challenges of World War II. The war created a tremendous increase in demand and planners needed a better technique for predicting costs. Much has been learned over the ensuing years and the parametric approach expands beyond the original costing focus, integrating dynamic activities-based process knowledge and resource information.

There is widespread agreement of the need to move beyond allocated standard costs -- the de facto costing structure in most organizations -- to describe activities based costs. This is done through activities based costing - although it is sometimes couched in other terms (see e.g., Lean Accounting: Novel Number Crunching, IndustryWeek, December 2004). However, the demand driven and dynamic nature of today's operational environment requires a forward looking approach that goes beyond activities based accounting to describe individual product costs at each process step.

The process concept of parametric based activities is similar to a value stream commonly found in lean initiatives without the "value-add" bias. The parametric activities based framework (pABF) defines a process as a structured activities composition irrespective of the purpose of the activity. The parameters control the definition and the behavior of a pABF process at any point in time. Unlike value stream or other such frameworks, the parametric nature lends a future-orientation to pABF. Changes in parameter values resulting from management decisions or other external factors describe the new process with full understanding of the capabilities, constraints and costs in the future.

As shown in the figure below, pABF complements but does not replace traditional forms of measurements and controls. The pABF extends them to produce dynamic forward-looking activities-based cost information grounded in product and process reality. One tool is a lagging indicator, quantifying historical performance, while the other approach is a leading indicator used for managing the future. When used together, they help managers make smarter operational decisions.

pABF is a Management Decision Tool
Reporting system that captures what happened, costs and profits
Allocation based costing in support of organizational structure
Variance analysis required to correct for the errors due to differences between the parameters on the ground and the basic for the allocation cost structure Allows management to shape the activities in response to new set of external and internal parameters
Activities based cost and capabilities analysis
Transcends organizational boundaries
pABF allows for testing of ideas before implementation and to conduct sensitivity analysis to gain insight and increase confidence

Are You Getting The Most Out Of Your Initiatives?

A manager at a global Fortune 100 manufacturer told us a story about their lean initiative. The company invested significant effort in developing present and future state value-stream maps. Corporate management expects each plant to execute against the plan, but they are struggling to meet the goals set forth in the desired maps. They are neither sure if the end result is even achievable nor how to get there. This is an example of a gap between the management expectations and the realities of the shop floor.

The pABF's capability to adjust parameters, at will, offers a natural "What-If?" quality to test the sensitivity of the results to parametric changes. You no longer have to guess, extrapolate from historical data obtained under different circumstances, or use correlative reasoning, such as rules-of thumb or guidelines, to describe what the future may look like. Companies are realizing that these approaches are not effective in complex settings where decisions are increasingly "financial-critical" for survival.

This activities based approach facilitates operational decision making about future performance because it enables managers to answer several critical questions prior to implementing any change.

  • Is an objective achievable and will it ever be profitable?
  • Will a proposed change have the intended effects?
  • What impact will a proposed change have elsewhere in the organization?
  • How do I transform operations from point A to point B? That is, what precise steps do I take to get to the desired operational destination?

The parametric approach is about equipping managers with the right tools to do their jobs more effectively, giving them more relevant forward-looking information to aid in making operational decisions. Your company's vision for what can be achieved is hollow if its viability and a path to realizing it cannot be assessed by managers prior to making operational decisions.

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