• Multiple improvement philosophies exist, yet each may yield different results:
  • Activity Based Costing – focused on expense allocation
  • Six Sigma – focused on defect reduction. May not be so good for innovation of new processes
  • Lean – focused on eliminating “waste” and improving the “flow” or smoothness of the operation
  • ISO 9000 – confirms that a repeatable and documented process exists but doesn’t comment on degree of efficiency or quality in the process
  • Malcolm Baldrige NQA – provides a framework to evaluate an entire organization on a point system providing a baseline for improvement

In the past three decades, due largely to initiatives like TQM, Lean and Six Sigma, productivity among US manufacturing firms has nearly tripled. However, US service company productivity is up only 40%1. Problems with products in manufacturing are not the fault of the products – the root cause is in one or more of the processes that design the products. Service industries (i.e., insurance, healthcare, financial services, hospitality, real estate, etc) are pure process businesses and improvement philosophies identified originally in manufacturing can be applied across service industries as well. The question is which improvement principle/philosophy makes the most sense for your organization/industry and Why?

What follows are some high-level overviews of different improvement philosophies that highlight the unique characteristics of each approach, its origin and its intended purpose to use as a guide in determining which approach best fits your organizational needs. The philosophies reviewed include:

  • Activity Based Costing
  • Six Sigma
  • Lean
  • ISO 9000
  • Malcolm Baldrige National Quality Award (NQA)

Following these definitions is an At-A-Glance matrix that summarizes the key points of each measurement method. Key components of the At-A Glance include:

  • The origin of the method
  • Applicable service industries
  • Pros and Cons to each improvement philosophy

Activity Based Costing

In a business organization, Activity-Based Costing (ABC) is a method of allocating costs to products and services. It is generally used as a tool for planning and control. ABC helped to alleviate the arbitrary adding of broad expense percentages to all products (direct costs) to cover indirect costs. Unable to calculate the true costs of production at the product level, ABC was developed for manufacturing in the 70’s and 80’s. Instead of using broad, arbitrary percentages to allocate costs, ABC seeks to identify cause and affect relationships to objectively assign costs. Once costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for costly products.

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