(1) Order-taking

This activity, which consists of presenting the enterprise’s product offering to customers/prospects and trying to get orders from them, is generally entrusted to commercial function.

(2) Planning production

Starting from the backlog of orders registered or predicted with a certain degree of probability, it is necessary to predict the quantity of materials or components to be supplied, all while taking into account suppliers’ delivery times and scheduling production with available resources (personnel, material).

(3) Purchases

The “purchases” function identifies potential suppliers based on criteria related to quality, price and provision deadlines. It negotiates prices with suppliers, allowing the supply function to place orders corresponding to the needs expressed by production.

(4) Supply

On the basis of the planning done in terms of quantity, and on the basis of indications from the “purchase” function in terms of price, the supply function is responsible for passing orders onto suppliers and then verifying that the orders received comply, which triggers the payments.

(5) Manufacturing

By using supplied materials or components as well as resources in terms of personnel and machines, the activity of manufacturing realizes requested products/services under the stipulated conditions related to quality, cost and deadlines. This goes for products manufactured according to customer orders or products in stock.

(6) Delivery/Billing

Manufactured products/services are then delivered to the customer in accordance with his order, triggering the billing.

(7) Invoice collection

Collecting the invoiced amount marks the end of the “product and service production” process, sometimes called the “supply chain”, or more explicitly “quote to cash”.

3.3.1. Result indicators

3.3.2. Activity indicators

3.4.1. ABB–ABC–ABM: a management tool to help make decisions under certain conditions

The basic underlying principles of ABC (activity-based costing) modeling turn this approach into a potentially tremendous tool for monitoring economic performance at a very operational level. Whether or not it becomes this tremendous tool depends on how we approach its implementation!

If we are complacent with allocating loads as appropriately as possible for activities and then products in order to calculate the costs, we are using an approach purely based on accounting. Though the allocation keys are sound, we will likely have more accurate costs than traditional approaches. However, we will still be far from a monitoring tool because the relation between these costs and the “operational performance levers”, which management can act on to manage future developments, still remain to be established.

Conversely, if the model relies on operational indicators that are representative of the process’ performance, management will be capable of setting “improvement objectives” in accordance with these indicators. Thus, the approach can serve to construct a budget consistent with the entirety of the managerial objectives, then to analyze achievements in order to highlight the performance discrepancies that the managers are accountable for.

If this is then used to establish “corrective action plans”, aiming to reach the predicted global performance planned in the budget, then management is equipped with a true tool for monitoring performance, and management control has a remarkable animation tool and a great help in decision-making.

The key factor of success in the approach’s execution is therefore designing the model from an ABB (activity-based budgeting) point of view and then using it from an ABM (activity-based management) point of view for managing responsibilities pertaining to performance objectives, the calculation of ABC costs is merely a result.

3.4.2. ABB–ABC–ABM: the logical sequence of implementation (ABB, then ABC, and then ABM)

A well-constructed ABB–ABC–ABM model highlights the resources consumed by a company’s products or services. It says a lot about what the resources are used for, the importance of the processes and the priority of products. Which products consume the most resources? How are the resources consumed by the processes? This information is not always easy to obtain, notably when resources are shared.

Answering these questions, the method appears as a decision-making tool. It helps arbitrate during planning and allows us to better prioritize allocations.

What is the logical sequence of operations required to implement an ABB–ABC–ABM model? First of all, we need to design a model based on the following:

1. 1) defining products and services, at the right level of granularity;
2. 2) studying processes homogenous enough with regard to the pursued goal;
3. 3) analyzing activities necessary for realizing “customer products/services”;
4. 4) identifying resources necessary for realizing these activities.

This model has to be designed and used from an ABB perspective in order to work out a forecast budget. This budget is constructed from sales or production forecasts. It integrates all the performance objectives related to the implementation of activities and resources that are necessary for realizing products. In an ABB approach, these performance objectives will be associated with:

• – “activity drivers”, which allow the volume of the activities to be deducted from the sales and production forecasts;
• – “resource drivers”, which allow the volume and valorization of the resources to be deducted from the forecasted volumes of the activities.

A budget constructed this way is the result of a negotiation concerning volumes to be produced and performance objectives. Thus, the management agrees on operational commitments. By proceeding in this manner, we avoid an approach based purely on accounting and costs calculation. Instead of doing accounting, we are constructing a management tool, which is not the same thing!

The logical next step after ABB is the forecast calculation of ABC. The same model is used to calculate the cost of the activities, products and services at all stages of the production process. Thus, we end up with standard costs and forecast margins.

The final step is ABM. Performance discrepancies between actual data and ABB objectives are analyzed in order to infer action plans. For this purpose, we need to gather real-world information of all kinds: quantities sold, sales revenue, quantities of semi-finished products/components/materials, hours of production, expenses by responsibility centers, etc. This information will be integrated into the model.

3.4.3. Using ABB–ABC–ABM as a tool for “operational management control”

In the classical IS pyramid, there are transactional systems at the base that handle the flows of information necessary to the enterprise’s day-to-day functions, which are ERPs, production management and accounting systems, etc. Up top are the Business Intelligence tools, the scorecards and the management consolidation dashboards to be found.

Between the two is operational management control. This is field-oriented, affixed to the enterprise’s product or service production processes. In fact:

• – transactional systems, by nature, do not handle forecasting matters. The forecasting systems manipulate data that are useless at the transactional level and run simulations that the transactional systems cannot run;
• – as for systems of reporting and management consolidation, they present themselves as multidimensional cubes. They are capable of aggregating data and analyzing it from many angles. They are also capable of performing a “drill-down” type of reporting that is necessary for a good understanding of what is going on.

To achieve this, it is essential to choose the right level of granularity. This choice is fundamental. In order to make decisions, we must define at what level of granularity we want to work. If the grid is too fine, we will get lost within details; however, if it is too large, the data may be inconsistent. We must find the appropriate granularity, which will emphasize, within all indicators of the model, the most important levers of performance. Modeling the enterprise’s processes by highlighting the key performance indicators and defining the right mesh adapted for decision-making are among the most important activities for an operational management controller, who unfortunately is not always prepared for handling these matters.

3.4.4. Approach to implementation and traps to avoid

The main trap to avoid is viewing the ABC approach only as an accounting method. Of course, it is more pertinent than other cost calculation methods because it relies on allocation keys that theoretically have a more operational significance. However, in this case, only allocating expenditures would already be known about, because they originate either from “actual” accounting records or from a budget that has been previously prepared by other methods.

As a matter of fact, the problem with this accounting approach is that it is always possible to imagine percentages for sharing charges. However, it is more difficult to allocate these charges in accordance with performance indicators! This difficulty, however, presents a fundamental advantage because the method, necessarily focuses on the essentials: the actual indicators that are truly operational and useful to the management.

The key to success therefore consists of constructing the ABC model within an ABB approach, meaning only operational indicators from which management can set objectives are retained.

Defining the ABC model within ABB logic means that the needs have to be calculated based on the sales forecasts (or provision of products/services forecasts), similar to the calculation done by the material requirement planning (MRP) system. Thus, the calculations are done in the “induction” way, meaning that what is produced requires (or induces) activities to be realized which will also induce resource consumption. Be careful to choose the right way, focused on management and not accounting!

With the calculation of full costs from the ABC method, we can ascertain that certain products are profitable and others are not. The temptation is to say: “We will get rid of the non-profitable products and focus on the profitable ones.” Questioning profitability is useful but be careful! All of the fixed expenses that make certain products non-profitable will apply to other products and lower their profitability if they remain present.

What instrumentation must be used so that exploiting this approach is not too time-consuming? This brings us back to the granularity issue. If the model was constructed with a granularity suitable for highlighting true performance levers, it is obviously essential to implement all the metrology tools necessary to gather the relevant information. Conversely, if the model goes into too many details compared to strict managerial needs, then the implementation of the corresponding metrology tools will cost far too much for a minimum benefit. This will not be “profitable” and the approach will be justifiably judged counterproductive to the enterprise.

Under the pretext that an ERP delivers results in real-time, it leads to the illusion that it is a decision-making tool. Even though we observe the fluctuations of an actual cost from minute to minute, what kind of relevant decision can be taken, if the reasons for these fluctuations cannot be identified (evolution of objectives/discrepancies vs. one or another indicator, etc.)? What types of action can be triggered if the managers responsible for the decisions that lead to the observed results remain unknown? The calculation of a budgeted standard cost, then the analysis of performance discrepancies relative to objectives which served to work out the budget, present numerous advantages to monitoring performance.

3.4.5. Links with processes

Processes have always been very present in industrial enterprise culture. They have been defined as “a sequence of activities, a value chain linking activities”, and process approaches were used without anyone even knowing it!

Total quality programs have also generated approaches for stabilizing the company’s processes. These process approaches are intended to reveal dysfunctions related to deadlines and hidden activity costs.

However, as sophisticated as it may be, it has always been difficult for management control to account for process optimization issues. It is, in general, more at ease with accounting and financial aspects than with operational approaches at the production floor level.

The ABB–ABC–ABM approach is a very powerful “tool” for management control by measuring the efficiency of processes, provided it is implemented correctly and in the right direction (management and not accounting).

This approach allows also calculating the actual cost of processes, which classical approaches struggle with. It is easy to know the cost of hierarchical structures in silos. However, the cost calculation of transversal processes requires identifying their activities and valorizing them via the resources that they consume. This is precisely what the ABB–ABC–ABM approach allows us to do, though under the condition that each of the actors (or group of actors) indicates the time spent on (and frequency of) each selected activity. Once again, the granularity is crucial to avoid falling into excessive detail that is potentially impractical. These full cost calculations will show that certain processes are not competitive or profitable compared with the competition. If so, they would need a vast reform through a BPR type re-engineering approach.

Since the objective is to provide products/services to customers under agreed upon CQFD (cost, quality, flexibility and deadlines) conditions, the notion of cost of products produced by the enterprise’s processes is obviously very present. Regretfully, the ABC approaches described in the literature skip the processes with a shortcut linking directly activities to products.

To illustrate the problem of activity versus process, let’s take for example a fairly simple activity: the computer hotline. Answering a call is an activity that impacts at least two customer processes: one of a technical nature: “provision of workstations”, and another of a functional nature: “provision of applications”. So the same activity “I answer a call”, does not represent at all the same thing in these two types of process. For example, for the “provision of applications”, this will have repercussions in corrective maintenance, while for the “provision of workstations” the impacts will rather concern the servers. The process gives substance to the activity.

In summary, Figure 3.6 shows, the ABB–ABC–ABM model must be the image of the operational process and its components (products/services, activities, resources) in an economic vision of the process in a “mesh” that is adapted for the decision-making of management.

3.6.1. Air France

Air France agreed to test the questionnaire and evaluate its maturity in terms of sustainable development. The following question sheet concerning the governance process was provided to illustrate the method.

The test was conducted by the authors through discussions with representatives from the company, to whom we are sincerely thankful. The maturity evaluations obtained in this way correspond to perceptions, which would, of course, need to be backed up with precise audits in order to be confirmed.

The company Air France, which is a world leading actor in three main professions (i.e. passenger air transport, air freight [cargo] and aircraft maintenance), has paid particular attention to sustainable development for several years. This attention ranges, inter alia, from societal innovations: the Foundation Air France’s action against deforestation, dedicated training, cooperation workshops with partners, etc.

In a more general manner, the importance of risk prevention and risk management is crucial in air transport – and vigilance is a duty. All stakeholders are involved in the day-to-day operations of the company, including sub-contractors who play an active role in terms of consolidating global performance.

Other stakes: maintaining continuity. If we take, for example, the IT sector, the business continuity plan (BCP) organizes the operation of a degraded mode of business: in case of dysfunction impacting a critical process, tests have been run previously in order to guarantee that the BCP remains operational.

Simplification is currently a main factor. As a whole, staff is invited to review any suggestions on the ground with the goal of providing concrete solutions.

Culturally, the business process approach is also present – this includes paying particular attention to interfaces between activities. Since performance contracts apply by hierarchical functions (the “silos”), the processes that combine those functions allow us to coordinate those contracts within the functions, namely during transversal review sessions.

In reality, the enterprise must above all assure operational service without ruptures or patches along the chain of the customer’s experience. That is, the transversal approach by processes constitutes a permanent reference.

Feedback from past experiences is of course, taken into account when defining performance contracts.

All throughout the year, management reviews monitor the progress of performance contracts and anticipate to avoid “bad surprises”. These reviews are led by steering instances that help inter alia to make choices regarding means and investments.

Performance contracts deal with the following aspects: flight safety, health and safety at work, customer quality, operational performance, economy, human resources, environment and sustainable development, food security, safety and IS.