ABC or Activity Based Costing is a method of identifying costs used by major manufacturers, the US Government and the Armed Forces. Unlike the General Ledger developed in 1542 to add up transactions, ABC focuses on the activities that make up the costs of transportation, loading, delivery, unloading, maintenance, idling etc. By costing all these components one can then identify areas that are potential cost cutters. It takes the same numbers as the G/L but just looks at them differently. 

ABC looks at all activities in three basic colors. Green is productive activity such  as driving time. Red is unproductive such as waiting time and yellow represents idle such as trucks sitting in the yard. By analyzing a theoretical delivery we might see that sending a large truck to a delivery raised more waiting time (red) whereas sending a smaller truck decreases waiting time because of the delivery bays size at the destination can take the smaller trailer quicker. Although this sounds simplistic, you not only can reduce “red” time, but also idle or “yellow” time of the smaller truck. This type of analysis can reduce your costs substantially and at the same time could possible increase your customer service levels.

You can recruit your sales staff to help by asking them to report the stops that take the most time and work with your customers in reducing that time and in effect create more efficient routes and reduce your costs further.

Is versus Seems is an analysis method that forces the factual costing of all components of the activity. Sometimes we get caught up with what we think versus of what the facts are in that activity. We need to determine that actual costs of movement. Food distributors sometimes use transportation costs such as loading the truck  and attribute it to the warehouse. It is important to keep these costs where they belong for an accurate analysis.

Knowing actual cost will help you answer the following questions.

• Is it worth going to customer X even though he is further than most customers.
• If I need to cut costs can I do it without reducing my current service levels?
• How much more business do I need before I add that extra trailer or truck?
• Can we develop better routes to reduce red time which automatically reduces yellow time.

REMEMBER YOUR ABC’S