The objectives of classifying resources and activities into the five categories are to create (1) accurate descriptions of how the organization performs its work and (2) the ability to trace the cost of resources acquired and activities performed to goods and services produced.
Methods for Identifying and Classifying Activities
Organizations generate their activitylists in a variety of ways, including these: Top-down approach. Some organizations use ABC teams of people at the middle-management level or above. The primary advantage to this top-down approach is that generating the activity dictionary is quick and inexpensive. A large consumer products company used this approach to develop activity dictionaries for many of its operations.' FirstDataCorporation uses a variation of this approach by slightly modifying a predefined (or boiler plate) activity dictionary based on years of experience with each business unit's processes.2 ,
Interview or participative approach. This approach relies on the inclusion of operating employees on the team and/or interviews with them. For example, PMI's ABC team wouldinterview production personnel to identify and understand the activities involved to produce the product. This approach is likely to generate a more accurate activity dictionary than is the top-down approach because individuals doing the work actually provide the information.
One danger associated with the interview or participative approach, however, is that employees might not disclose theiractivities truthfully if they are concerned about the possible effects of giving higher-level management specific information about what they actually do. Another danger is that employees might not recall their work processes accurately.
Recycling approach. Reusing documentation of processes developed for other purposes is possible. (That is, "Don't reinvent the wheel.") Many companies, for example, havesought and achieved ISO 9000 certification, which requires thorough documentation of their processes.3 Recycling this documentation into an activity dictionary, can be relatively straightforward.
PMI's Activity List
We now return to PMI to describe how the ABC team performed step 1 of the ABC process, identifying and classifying activities related to the company's products.
The ABC team decidedto start to establish a list of its activities using the recycling approach because the company had recently identified activities in the production process while preparing for ISO 9000 certification. The team rejected the top-down approach not only because information was already available but also because team members believed that input from all levels of the organization (including productionpersonnel) was needed.
See Exhibit 4-2 for the information for ISO 9000 certification used to list PMI's activities. The ABC team organized this list according to the categories just discussed (unit, batch, etc.). Exhibit 4-2 includes only major categories of PMI's total list to keep the list short; note that Exhibit 4-2 refers to "detailed sub activities omitted" in several places).
The firstdigit in the left column of the activity list or dictionary in Exhibit 4-2 is the most general activity (e.g., 1.), and the third digit represents the most detailed activity shown. Everything listed under activity 1 refers to unit-level activities and
1. Unit Level
1.1 Acquire and use materials for containers
1.1.1 Medium grade plastic pellets
1.2Acquire and use materials for baby-care products
1.2.1 High-grade plastic pellets
2. Batch Level
2.1 Set up manually controlled injection-molding machines
2.1.1 Set up manually controlled Injection-molding machines (detailed sub activities omitted)
2.1.2 Perform quality control of batches of product produced on...