Sunday, 26 April, 2009

Activity Based Performance Measurement (ABPM)

While surfing, I stumbled upon the slides presented during MIT Data Center Workshop on May 20, 2005 by Robert Laubacher of MIT Sloan. The topic is Activity Based Performance Measurement (ABPM). I found this topic interesting and hence made further search and browsing to make following notes:

ABPM can be used to measure value created by new technology or management intervention. It can assess business performance at the activity level and then aggregate these fine-grained metrics upward to the business unit and firm level. ABPM is based on two insights:

  1. Calculating the costs of an activity is a matter of decomposing it into constituent parts, determining the cost of each part, and aggregating those costs. The benefits of an activity usually arise from how it affects other activities in the value chain. For example, quality programs reduce product defects and so reduce costs associated with factory rework and staffing customer service units. Higher quality can also increase future sales, due to greater customer satisfaction and enhanced firm reputation.
  2. There are common patterns in the types of benefits associated with activities that have similar underlying characteristics. For example, checking the quantity of goods is an activity that takes place at many junctures in the retail supply chain. Quantity checks of this sort occur at the receiving dock of the manufacturer's warehouse, when shipments arrive from the factory; at the manufacturer's loading dock, when shipments are placed on trucks for transportation to the retailer; at the retailer's distribution center, when the truck arrives; and so on, all the way to the point where the consumer makes a store purchase, and the clerk checks the quantity of each item in the shopper's cart.

Using ABPM to assess the impact of a new technology like RFID involves four primary steps:

  1. Develop potential post-implementation scenarios
  2. Identify activities affected by the new technology
  3. Map the activities with vs. without the new technology
  4. Measure benefits and costs by comparing differences in outcomes of pre- vs. post-implementation activities

There are two types of benefits: localized vs. distant benefits. The benefits tied directly to the activities affected by new technology are localized benefits. Other benefits, by contrast, involve connections between activities directly affected and activities that occur within other units of the firm or even within outside firms. The distinction between localized and distant benefits is important because it shapes the extent to which a firm or business unit implementing new technology has direct control over achieving the full benefits of the technology. When most of the benefits are localized, the group implementing the new technology has a high degree of control over whether or not it achieves the benefits. But when many of the benefits are of the distant kind, the implementing group must rely on other business units or supply chain partners to achieve the full potential of new technology.

Though I do not feel I got the full understanding of ABPM, the insights and the other details associated with ABPM are nevertheless useful!

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