Activity Based Costing At UPS
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Activity Based Costing At UPS UPS UPSDeveloped DevelopedABC ABCSystems Systemsto: to: l Link operating behavior to Product and Customer segment cost l Support existing and new product pricing decisions l Report consistent and reliable profitability results by product Operating Behavior Costs Profitability Company Value Activity Based Cost Overview Activity ActivityBased BasedCosting Costingat atUPS UPSisisaacrossfunctional crossfunctionaldiscipline discipline requiring requiringan anunderstanding understandingof ofour ourwork work activities. activities. • Identify the key activities within a function or process. • Measure the cost associated with the activities. • Assign costs to products, customers and processes based on the use of the activities. Collaboratively, Collaboratively,Finance Financeand andAccounting, Accounting,Engineering, Engineering,IT ITand and Operations Operationsproduced producedaaseries seriesof ofABC ABCmodels modelsat atUPS. UPS. Evolution of Activity Based Costing at UPS Markets Marketsand andtechnology technologywere werechanging. changing. Transportation needs were moving toward time definite, feature based services: l JIT was used to reduce inventory l Economy was moving from manufacturing to more service based l An information driven business environment was developing Evolution of Activity Based Costing at UPS UPS UPSresponded respondedby bydeveloping developingnew newbusiness businessstrategies strategieswhich which focused focusedon onmeeting meetingcustomer customerneeds needs l Detailed knowledge of our cost to serve by Product and Customer became a priority l The market drove the need to better understand specific segments of our business l A focus on “average” cost was no longer appropriate Activity Based Costing Overview Our Ouroperations operationsare areextremely extremelycomplex complexwith withaawide widevariety varietyof of service serviceoptions, options,operating operatingconditions conditionsand andsupport supportactivities. activities. Pickup Type Local Sort CPU lOn Demand •Late PM •Call Tag •ARS Customers l Shipper Location Regular Account Commercial Counters •Letter Boxes •Air Service Centers •Customer Counters l Central Sort Transport Hazardous Materials lIncompatibles lover 70 pounds lSmalls l Air/Internat’l l Standard Package Standard Package International Air lIncompatible •over 70 pounds •Drop •Hazardous Materials •Late P/U’s l l Ground Transport Predelivery Hazardous Materials lIncompatibles lover 70 pounds lTime Committed lMulti Package Stops l Standard Package Grounded Air packages lAir Movement lRail Movement lLayover Driver lContract Carriers l Delivery Delivery Location Time Sensitive Residential lCommercial lBldg Type lCODs lConsignee Billing l l Customers Pickup Location UPS’s Activity Based Costing Approach At Atthe thesame sametime, time,providing providinginformation informationabout aboutthe thepackage packagehas has become becomeaamajor majorpriority priorityand andhas hasincreased increaseddownstream downstreamactivities. activities. Collect Electronic Billing Detail Scan Package Scan Package Input Exceptions Capture Delivery Information Pickup Local Sort Package Sort Delivery Sort Deliver Shipper Origin Ctr Sort Dest Ctr Receiver Travel from Customer Capture Data On International Shipments Transport Package Movement Detail Transport Package Movement Detail Travel to Customer Transmit Delivery Verification UPS’s Activity Based Costing System UPS UPSsystem systemisisbased basedon ontraditional traditionalABC ABCin inthat thatitittakes takesdetailed detailed Functional FunctionalCost Costand andMaps Mapsititto toProducts Productsbased basedon onthe theActivities Activities that thatthe theProducts Productsdrive drive Pickup & Delivery Transport & Sort Information Services Pickup and Delivery Express Service International Service 1DA Transport and Sort 1DA 2DA Express Service International Service Deferre Grou Grou 1DA Letters Express Letters 1DA Information Services Systems 2DA Domestic Air International Service 1DA Letters Express Letters Deferre 1DA Packages Express Packages Grou 2DA Packages Expedited Packages Grou Domestic Ground Ground Service CWT UPS’s Activity Based Costing System UPS’s UPS’sABC ABCSystem Systemisisunique uniquein inthat thatititleverages leveragesour ourdatabase databaseof of work workmeasurement measurementand andpackage packagemovement movement detail detailto toimprove improve our ourunderstanding understandingof ofactivity activitycost costdrivers drivers l UPS has a substantial investment in Industrial Engineering l l l Work measurement studies have been performed on work activity at UPS as far back as 1921. These studies provide important insights into the content of activities and the rate at which products drive these activities. UPS maintains detailed package flow control systems l l How products move through our system provides important cost insights. Ready access to this data allows for frequent re-calibration of our models Activity Based Costing Overview The TheChallenge Challenge l l l UPS has a highly efficient network of shared assets that constantly adjusts to meet demand. Resources are shared across product lines making it difficult to identify unique cost differences. Analysis of UPS package flow models provides a framework to begin to answer such questions as: • What activities were needed to get the package to the final destination? • What information system resources were required? • What share of the activities and resources did the package consume? • What did these activities and resources cost? UPS’s Activity Based Costing Approach Our Ourability abilityto tomove movepackages packagesbetween betweenlocations locationsisisanother anothercore core competence. competence.Our Ourcapacity capacityto totrack trackaapackage’s package’smovement movement enhances enhancesour ourability abilityto toaccurately accuratelymeasure measureproduct productcost. cost. For Example: Customer in Marietta, Ga. sends a package to a customer in Asheville NC. Marietta Center Customer Pickup Pleasantdale Hub Charlotte Hub Asheville Center We Weknow knowthe theroute routethe thepackage packagewill willtravel, travel,the thefacilities facilitiesitit will willpass passthrough throughand andthe themode modeofoftransportation transportationused. used. Customer Delivery Activity Based Costing Overview UPS UPShas hasthe theability abilityto toleverage leverageextensive extensivework workmeasurement measurement and andpackage packagemovement movementdetail detailto tomeasure measureproduct productcost. cost. Marietta Center .53 hrs Asheville Pleasantdale Hub .02 hrs Customer P/U 4.19 hrs Charlotte Hub 1.4 hrs .02 hrs Customer Delivery Activity Based Costing Overview Airfeed Airfeedcost costare arebased basedon on Aircraft Aircrafttype, type,distance distanceflown flownand and number numberof offlight flightsegments segmentsrequired. required. Denver Gateway Atlanta Gateway 2.0 Block Hrs Marietta Ctr 4.0 Block hrs Louisville Gateway 1.0 Block hr Alamosa Fdr a/c Gateway Alamosa Ctr Insights Insightsfrom fromour ourABC ABCSystem SystemSupport Supportmany manyCurrent CurrentApplications Applications Performance Measurement View of cost and profitability of a division by product across the network. Planning & Forecasting Activity Based Forecasting to integrate financial business plans with profit objectives. Cost Reduction Efforts Database of cost information for internal cost comparisons and analysis. Pricing Tool to ensure appropriate pricing. Incentive Administration System Monitoring system to track performance by customer and account representative. Customer Performance Measurement Data mining techniques to segment customers UPS’s Activity Based Costing Systems: ABC ABCsystems systemssupport supportProduct ProductPerformance PerformanceReporting Reportingat atthe the corporate corporateand andoperational operationalbusiness businessunit unitlevel. level. l l l l l Generated monthly View by business unit and product Electronic report format Data allows multi period, product and/or business unit reporting Information in the ABC systems is continuously updated Has Hasbecome becomean anessential essentialtool toolfor formonitoring monitoringfinancial financial performance performanceat atthe theproduct productand andbusiness businessunit unitlevel. level. UPS UPScosting costingmethodologies methodologiesallow allowfor forthe thecreation creationof ofP&L P&Lviews views across acrossmultiple multipledimensions. dimensions. Product Next Day Air--Pkg Segment Middle Market View Customer ABC Customer TNT Customer… Total Profit XXXX XXXX XXXX XXXX Revenue PU Cost Del Cost Sort Feed Non-Op $ XXX XX XX XX XX XX ____ Profit $ XXX Entity Total cost/profit Regions XXXX Districts XXXX Processes XXXX Functions XXXX Total XXXX Customer Customer View Next Day Ground Internat’l Total Profit XXXX XXXX XXXX XXXX UPS’s ABC Systems help reduce cost throughout the value chain: Activity Activityand andCustomer Customeranalysis analysishelp helpus usdetermine determinethe themost most efficient efficientway wayto tominimize minimizecost costfor forboth bothUPS UPSand andthe thecustomer. customer. l l l l Focus operational improvement efforts on high impact areas. Change shipping behavior to minimize cost impact on UPS’s network. Modify distribution network to reduce total transportation cost. Integrate logistic solutions to help optimize benefits across the entire value change. Customer Strategy: Customer Customeranalysis analysishelps helpsdetermine determinethe themost mostefficient efficientway wayto to minimize minimizecost costfor forboth bothUPS UPSand andthe thecustomer customer • Change shipping behavior to minimize cost impact on UPS’s network • Modify distribution network to reduce total transportation cost • Integrate logistic solutions UPS’s UPS’sgoal goalisisto toreduce reducecost costthroughout throughoutthe thevalue valuechain. chain. Customer Strategy: Data Datamining miningtechniques techniquesare areused usedto toanalyze analyzeover over50 50million million records recordsso sothat thatprofits profitscan canbe beassociated associatedto toall allpackages packagesand and customers. customers. l Customer level profitability gives insights into trends affecting our customer portfolio. l Data mining techniques such as CART, CHAID, Self Organizing Maps, etc. are used to identify meaningful customer groupings. l Monitoring customer accounts has enhanced our ability to understand effects of various strategic initiatives. Invested Capital & Economic Profit We Weextended extendedour ourActivity ActivityBased BasedCosting Costingtechniques techniquesto tomeasure measure invested investedcapital. capital. • Invested capital is assigned to products based on unique usage of each asset type. • Results reflect widely varying degrees of capital intensity across ground and air operations. UPS UPSincludes includescapital capitalrequirements requirementsinto intopricing pricingand andgrowth growth strategies strategiesto toensure ensurepositive positiveEconomic EconomicProfit. Profit. In InToday’s Today’sCompetitive CompetitiveMarketplace, Marketplace,companies companieswill willnot notsurvive survive without withoutaafirm firmunderstanding understandingof ofproduct productcosts costs Cost understanding is a Core Strength at UPS l Cost is measured at a fine level of detail in our G/L system. l Detailed work measurement standards improve cost insights and encourage continuous improvement. l Combining cost detail and work measurement has given us a leading edge Activity Based Cost model. l This allows UPS to accurately measure financial performance and make effective decisions in pricing, cost control, quality improvement, reengineering, forecasting and customer relationship management.
