Activity Based Costing At UPS

Transcription

1 Activity Based Costing At UPS

2 UPS Developed ABC Systems to: to: Link operating behavior to Product and Customer segment cost Support existing and new product pricing decisions Report consistent and reliable profitability results by product Operating Costs Profitability Company Behavior Value

3 Activity Based Cost Overview Activity Based Costing at at UPS is is a crossfunctional discipline requiring an understanding of of our work 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, Finance and Accounting, Engineering, IT IT and Operations produced a series of of ABC models at at UPS.

4 Evolution of Activity Based Costing at UPS Markets and technology were changing. Transportation needs were moving toward time definite, feature based services: JIT was used to reduce inventory Economy was moving from manufacturing to more service based An information driven business environment was developing

5 Evolution of Activity Based Costing at UPS UPS responded by by developing new business strategies which focused on on meeting customer needs Detailed knowledge of our cost to serve by Product and Customer became a priority The market drove the need to better understand specific segments of our business A focus on average cost was no longer appropriate

6 Activity Based Costing Overview Our operations are extremely complex with a wide variety of of service options, operating conditions and support activities. Pickup Location Pickup Type Local Sort Central Sort Transport Predelivery Delivery Customers Shipper Location Commercial Counters ❿Letter Boxes ❿Air Service Centers ❿Customer Counters CPU On Demand ❿Late PM ❿Call Tag ❿ARS Regular Account Standard Package International Air Incompatible ❿over 70 pounds ❿Drop ❿Hazardous Materials ❿Late P/U s Hazardous Materials Incompatibles over 70 pounds Smalls Air/Internat l Standard Package Ground Transport Standard Package Grounded Air packages Air Movement Rail Movement Layover Driver Contract Carriers Hazardous Materials Incompatibles over 70 pounds Time Committed Multi Package Stops Delivery Location Time Sensitive Residential Commercial Bldg Type CODs Consignee Billing Customers

7 UPS s Activity Based Costing Approach At At the same time, providing information about the package has become a major priority and has increased downstream 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 Transport Transport Travel to Customer Capture Data On International Shipments Package Movement Detail Package Movement Detail Transmit Delivery Verification

8 UPS s Activity Based Costing System UPS system is is based on on traditional ABC in in that it it takes detailed Functional Cost and Maps it it to to Products based on on the Activities that the Products drive Pickup & Delivery Transport & Sort Information Services Pickup and Delivery Express Service International Service 1DA 1DA Transport and Sort 2DA Express Service International Service 1DA Letters Express Letters Deferre 1DA Information Services Systems Grou 2DA Grou Domestic Air International Service Deferre 1DA Letters Express Letters Grou 1DA Packages Express Packages Grou 2DA Packages Expedited Packages Domestic Ground Ground Service CWT

9 UPS s Activity Based Costing System UPS s ABC System is is unique in in that it it leverages our database of of work measurement and package movement detail to to improve our understanding of of activity cost drivers UPS has a substantial investment in Industrial Engineering Work measurement studies have been performed on work activity at UPS as far back as 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 How products move through our system provides important cost insights. Ready access to this data allows for frequent re-calibration of our models

10 Activity Based Costing Overview The Challenge 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?

11 UPS s Activity Based Costing Approach Our ability to to move packages between locations is is another core competence. Our capacity to to track a package s movement enhances our ability to to accurately measure product cost. For Example: Customer in Marietta, Ga. sends a package to a customer in Asheville NC. Marietta Center Pleasantdale Hub Charlotte Hub Asheville Center Customer Pickup We We know know the the route route the the package will will travel, travel, the the facilities it it will will pass pass through through and and the the mode mode of of transportation used. used. Customer Delivery

12 Activity Based Costing Overview UPS has the ability to to leverage extensive work measurement and package movement detail to to measure product cost. Marietta Center.53 hrs Pleasantdale Hub 4.19 hrs Charlotte Hub 1.4 hrs Asheville.02 hrs Customer P/U.02 hrs Customer Delivery

13 Activity Based Costing Overview Airfeed cost are based on on Aircraft type, distance flown and number of of flight segments required. Atlanta Gateway Marietta Ctr 2.0 Block Hrs 4.0 Block hrs Louisville Gateway Denver Gateway 1.0 Block hr Alamosa Ctr Alamosa Fdr a/c Gateway

14 Insights from our ABC System Support many Current Applications Performance Measurement Planning & Forecasting Cost Reduction Efforts Pricing View of cost and profitability of a division by product across the network. Activity Based Forecasting to integrate financial business plans with profit objectives. Database of cost information for internal cost comparisons and analysis. Tool to ensure appropriate pricing. Incentive Administration System Customer Performance Measurement Monitoring system to track performance by customer and account representative. Data mining techniques to segment customers

15 UPS s Activity Based Costing Systems: ABC systems support Product Performance Reporting at at the corporate and operational business unit level. 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 become an an essential tool for for monitoring financial performance at at the product and business unit level.

16 UPS costing methodologies allow for for the creation of of P&L views across multiple dimensions. Segment Middle Market View Product Next Day Air--Pkg Revenue $ XXX PU Cost XX Del Cost XX Sort XX Feed XX Non-Op XX Profit $ XXX Customer Customer View Customer ABC XXXX Customer TNT XXXX Customer XXXX Total Profit XXXX Entity Total cost/profit Regions XXXX Districts XXXX Processes XXXX Functions XXXX Total XXXX Next Day XXXX Ground XXXX Internat l XXXX Total Profit XXXX

17 UPS s ABC Systems help reduce cost throughout the value chain: Activity and Customer analysis help us us determine the most efficient way to to minimize cost for for both UPS and the customer. 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.

18 Customer Strategy: Customer analysis helps determine the most efficient way to to minimize cost for for both UPS and the 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 goal is is to to reduce cost throughout the value chain.

19 Customer Strategy: Data mining techniques are used to to analyze over million records so so that profits can be be associated to to all all packages and customers. Customer level profitability gives insights into trends affecting our customer portfolio. Data mining techniques such as CART, CHAID, Self Organizing Maps, etc. are used to identify meaningful customer groupings. Monitoring customer accounts has enhanced our ability to understand effects of various strategic initiatives.

20 Invested Capital & Economic Profit We extended our Activity Based Costing techniques to to measure invested 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 includes capital requirements into pricing and growth strategies to to ensure positive Economic Profit.

21 In In Today s Competitive Marketplace, companies will not survive without a firm understanding of of product costs Cost understanding is a Core Strength at UPS Cost is measured at a fine level of detail in our G/L system. Detailed work measurement standards improve cost insights and encourage continuous improvement. Combining cost detail and work measurement has given us a leading edge Activity Based Cost model. This allows UPS to accurately measure financial performance and make effective decisions in pricing, cost control, quality improvement, reengineering, forecasting and customer relationship management.