Excerpt from The Daily Drucker by Peter Drucker
Activity-based costing provides the foundation for integrating into one analysis the several procedures required to create customer value. With activity costs as a starting point, the enterprise can seperate activities that add value to customers from those that do not, and eliminate the latter. The chain of value-creating activities uncovered during value analysis is the starting point for analyzing the underlying process of value creation. Process analysis seeks to: improve the features of the product or service, restructure the process while reducing costs, and maintain or improve quality.
Process analysis in an automobile company involves designing and redesigning components and subfunctions in order to carry out each function at predetermined cost targets. For instance, the basic function of an automobile is to provide transportation, but secondary functions include comfort, fuel efficiency, and safety. Each of the functions and subfunctions require components or services that create value for the customer. Each also contributes to the quality of the automobile as well as to the cost. A process team is formed from personnel who perform the value-chain activities. This team often include suppliers and customers. The task of the team is to identify the functions the product or service is to perform and to analyze the components or services that go into each function with the objective of achieving value and quality objectives while meeting cost targets.
Action point: Eliminate activities that do not create value. Analyze the underlying processes of value-creating activities and redesign the processes if necessary to enhance customer value.