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Commentary & Analysis

It's as Simple as ABC!

By Joel E.

By WhatTheyThink Staff
Published: November 24, 2003

By Joel E. Crockett November 24, 2003 -- Not long ago I had my eyes opened by a question I should have answered better than I did. A friend and I were hiking along a challenging trail near his office. “Joel,” he asked as we negotiated a particularly steep hill, “how does a company in our industry measure the value of an account?” My answer was a little too quick, maybe even glib. I was, after all, a bit, uh, breathless. “Well, Jim,” I responded, “I suppose by sales volume, profit margin, stability, potential, maybe even longevity.” “Does that mean that if two clients show the same basic sales history and cost sheet results, they're equally valuable?” he asked. “I guess,” I said hesitantly. I began to suspect I was being set up. “Let's sit down,” he said pointing to a couple of boulders. “What if one client totally trusts your sales rep,” he continued, “provides clean, accurate files, and is generally a pleasure to work with? What if another calls regularly to see where her job is, is often confused (or confusing) about what she wants, and continues to make changes right up to production? Is one ultimately more profitable than the other?” “I see where you're headed, Jim. Makes sense. If one customer keeps your sales rep busy with continually changing specs, asks for a half-dozen revisions on his estimates and keeps bugging your CSR when a job's in process, you're going to end up spending a lot more for sales and support to keep that customer informed and happy. You know we measure make-ready, running time, bindery work; things like that. That's how we get our budgeted hourly rates. But how do you measure all those behind-the scene activities like customer service?” “It's not necessarily easy,” said Jim. “But it can be done. And it must be done. Instead of taking the wildly varying sales and support costs for all your different clients, and averaging them out across all the jobs you produce, why not think about treating sales and customer support as a line item on your estimates? This will enable you to price jobs according the real costs incurred. Moreover, you can then think about how to reduce these costs. Look, Joel, this isn't my idea. It's a premise that's been around for years. It's called Activity-Based-Costing, ABC. It's used in other industries, and printers are beginning to explore its benefits, too.” And Jim gave me a website to check out, which I wrote down later: ( http://www.pitt.edu/~roztocki/abc/abctut o r/index.htm ). We finished our hike, both feeling good about the day, and I decided to learn more about Activity-Based-Costing. That afternoon I did some Internet searching and quickly hit pay dirt. The website Jim led me to is a great primer. Then I found the book Activity-Based Costing for Printers: An Implementation Guide, by G. David Dodd and William K. Lavelle, published by Point Balance ( http://www.po i ntbalan c e.com ) This book gets into deep detail about Activity-Based Costing and how to apply it to a printing business. It describes the hurdles and challenges to applying an ABC program, followed by a detailed implementation strategy. It's a worthwhile read with something in it for every type of printer. Here's an excerpt from the Point Balance web site that describes the book: “Activity-Based Costing for Printers begins by describing the powerful economic and technological forces that have brought the printing industry to a strategic inflection point and altered the competitive "rules of the game" for printers in fundamental and profound ways. Thebook then explains why traditional budgeted hourly rate costing systems cannot provide the kind of decision support information that today's printing company managers need to effectively address the complex issues of a new competitive age. Activity-Based Costing for Printers thoroughly explains the principles of activity-based costing and describes the benefits that ABC can bring to commercial printers. Most importantly, the authors provide a detailed roadmap to guide printing company managers in designing and implementing ABC systems. Activity-based costing is an essential management tool for twenty-first century commercial printing enterprises, and Activity-Based Costing for Printers is a must-have resource for learning how to master it.” Jim opened my eyes to something I'd not given much thought to. Now I'm curious to see if Activity Based Costing has real potential to make a difference. We're gonna take another walk soon. I think he's on to something.  



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