Activity Based Costing At UPS UPSUPS DevelopedDeveloped ABCABC SystemsSystems to: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 Costs Profitability Company Behavior Value Activity Based Cost Overview
ActivityActivity BasedBased CostingCosting atat UPSUPS isis aa crossfunctionalcrossfunctional disciplinediscipline requiringrequiring anan understandingunderstanding ofof ourour workwork 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, FinanceFinance andand Accounting,Accounting, Engineering,Engineering, ITIT andand OperationsOperations producedproduced aa seriesseries ofof ABCABC modelsmodels atat UPS.UPS. Evolution of Activity Based Costing at UPS
MarketsMarkets andand technologytechnology werewere changing.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
UPSUPS respondedresponded byby developingdeveloping newnew businessbusiness strategiesstrategies whichwhich focusedfocused onon meetingmeeting customercustomer needsneeds
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
OurOur operationsoperations areare extremelyextremely complexcomplex withwith aa widewide varietyvariety ofof serviceservice options,options, operatingoperating conditionsconditions andand supportsupport activities.activities.
Pickup Location Pickup Type Local Sort Central Sort Transport Predelivery Delivery
lCPU lHazardous Materials lHazardous Materials lOn Demand lIncompatibles lIncompatibles •Late PM lover 70 pounds lover 70 pounds •Call Tag lTime Committed lSmalls •ARS lMulti Package Stops l Air/Internat’l
Shipper Regular Standard Standard Ground Standard Delivery Location Account Package Package Transport Package Location
l Customers International l lCommercial Counters lGrounded Air packages Time Sensitive Customers lAir l •Letter Boxes lAir Movement Residential lIncompatible •Air Service Centers lRail Movement lCommercial •over 70 pounds •Customer Counters lLayover Driver lBldg Type •Drop lContract Carriers lCODs •Hazardous Materials lConsignee Billing •Late P/U’s UPS’s Activity Based Costing Approach AtAt thethe samesame time,time, providingproviding informationinformation aboutabout thethe packagepackage hashas becomebecome aa majormajor prioritypriority andand hashas increasedincreased downstreamdownstream activities.activities.
Collect Electronic Scan Package Capture Delivery Billing Detail Scan Package Input Exceptions Information
Pickup Local Sort Package Sort Delivery Sort Deliver
Shipper Origin Ctr Sort Dest Ctr Receiver Travel from Transport Transport Travel to Customer Customer
Capture Data On International Transmit Delivery Shipments Package Movement Package Movement Verification Detail Detail UPS’s Activity Based Costing System
UPSUPS systemsystem isis basedbased onon traditionaltraditional ABCABC inin thatthat itit takestakes detaileddetailed FunctionalFunctional CostCost andand Maps Mapsitit toto ProductsProducts basedbased onon thethe Activities Activities thatthat thethe ProductsProducts drivedrive
Pickup & Pickup and Delivery Delivery Express Service International Service 1DA Transport and Sort 1DA Transport & 2DA Express Service International Service 1DA Letters Express Letters Sort Deferre 1DA Information Services Systems Grou 2DA Grou Domestic Air International Service Deferre 1DA Letters Express Letters Information Grou 1DA Packages Express Packages Services Grou 2DA Packages Expedited Packages Domestic Ground Ground Service CWT UPS’s Activity Based Costing System
UPS’sUPS’sABCABC SystemSystem isis uniqueunique inin thatthat itit leveragesleverages ourour databasedatabase ofof workworkmeasurementmeasurementandand package package movementmovementdetaildetail toto improveimprove ourour understandingunderstanding ofof activity activity costcost driversdrivers
l UPS has a substantial investment in Industrial Engineering
l Work measurement studies have been performed on work activity at UPS as far back as 1921.
l These studies provide important insights into the content of activities and the rate at which products drive these activities.
l UPS maintains detailed package flow control systems
l How products move through our system provides important cost insights. l Ready access to this data allows for frequent re-calibration of our models Activity Based Costing Overview
TheThe ChallengeChallenge
l UPS has a highly efficient network of shared assets that constantly adjusts to meet demand. l Resources are shared across product lines making it difficult to identify unique cost differences. l 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 OurOur abilityability toto movemove packagespackages betweenbetween locationslocations isis anotheranother corecore competence.competence. OurOur capacitycapacity toto tracktrack aa package’spackage’s movementmovement enhancesenhances ourour abilityability toto accuratelyaccurately measuremeasure productproduct cost.cost. For Example: Customer in Marietta, Ga. sends a package to a customer in Asheville NC.
Marietta Asheville Center Center Pleasantdale Charlotte Hub Hub
WeWe know know the the route route the the package package will will travel, travel, the the facilities facilities it it willwill pass pass through through and and the the mode mode of of transportation transportation used. used. Customer Pickup Customer Delivery Activity Based Costing Overview
UPSUPS hashas thethe abilityability toto leverageleverage extensiveextensive work work measurementmeasurement andand package package movementmovementdetaildetail toto measuremeasure productproduct cost.cost.
Marietta Center Asheville
Pleasantdale 4.19 hrs Charlotte .53 hrs Hub Hub 1.4 hrs
.02 hrs .02 hrs Customer P/U Customer Delivery Activity Based Costing Overview
AirfeedAirfeed cost cost are are based based on on AircraftAircraft typetype,, distancedistance flownflownandand numbernumber ofof flightflight segmentssegmentsrequired.required.
Denver Atlanta Gateway Gateway Alamosa Fdr a/c 2.0 Block Hrs 4.0 Block hrs 1.0 Block hr Gateway Louisville Gateway Marietta Ctr Alamosa Ctr InsightsInsights fromfrom ourour ABCABC SystemSystem SupportSupport manymany CurrentCurrent ApplicationsApplications
Performance View of cost and profitability of a division by Measurement 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 Monitoring system to track performance by System customer and account representative. Customer Performance Data mining techniques to segment customers Measurement UPS’s Activity Based Costing Systems:
ABCABC systemssystems supportsupport ProductProduct PerformancePerformance ReportingReporting atat thethe corporatecorporate andand operationaloperational businessbusiness unitunit level.level.
l Generated monthly
l View by business unit and product
l Electronic report format
l Data allows multi period, product and/or business unit reporting
l Information in the ABC systems is continuously updated
HasHas becomebecome anan essentialessential tooltool forfor monitoringmonitoring financialfinancial performanceperformance atat thethe productproduct andand businessbusiness unitunit level.level. UPSUPS costingcosting methodologiesmethodologies allowallow forfor thethe creationcreation ofof P&LP&L viewsviews acrossacross multiplemultiple dimensions.dimensions. Product Next Day Air--Pkg Revenue $ XXX PU Cost XX Del Cost XX Sort XX Feed XX Segment Non-Op XX ____ Customer Profit $ XXX Middle Market View Customer View
Customer ABC XXXX Next Day XXXX Customer TNT XXXX Ground XXXX Customer… XXXX Internat’l XXXX Total Profit XXXX Entity Total cost/profit Total Profit XXXX
Regions XXXX Districts XXXX Processes XXXX Functions XXXX Total XXXX UPS’s ABC Systems help reduce cost throughout the value chain:
ActivityActivity andand CustomerCustomer analysisanalysis helphelp usus determinedetermine thethe mostmost efficientefficient wayway toto minimizeminimize costcost forfor bothboth UPSUPS andand thethe customer.customer.
l Focus operational improvement efforts on high impact areas. l Change shipping behavior to minimize cost impact on UPS’s network. l Modify distribution network to reduce total transportation cost. l Integrate logistic solutions to help optimize benefits across the entire value change. Customer Strategy:
CustomerCustomer analysisanalysis helpshelps determinedetermine thethe mostmost efficientefficient wayway toto minimizeminimize costcost forfor bothboth UPSUPS andand thethe customercustomer
• Change shipping behavior to minimize cost impact on UPS’s network
• Modify distribution network to reduce total transportation cost
• Integrate logistic solutions
UPS’sUPS’s goalgoal isis toto reducereduce costcost throughoutthroughout thethe valuevalue chain.chain. Customer Strategy:
DataData miningmining techniquestechniquesareare usedused toto analyzeanalyze overover 50 50 millionmillion recordsrecords soso thatthat profitsprofits cancan bebe associatedassociated toto allall packagespackages andand 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
WeWe extendedextended ourour ActivityActivity BasedBased CostingCosting techniquestechniques toto measuremeasure investedinvested capital.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.
UPSUPS includesincludes capitalcapital requirementsrequirements intointo pricingpricing andand growthgrowth strategiesstrategies toto ensureensure positivepositive EconomicEconomic Profit.Profit. InIn Today’sToday’s CompetitiveCompetitive Marketplace,Marketplace, companiescompanies willwill notnot survivesurvive withoutwithout aa firmfirm understandingunderstanding ofof productproduct costscosts
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.