When it comes to improving profitability, the management and optimization of resources and processes (work/activities) is only secondary to design of strategy. However, management accounting courses, texts, and methodologies provide a confusing array of choices and create confusion. Let’s simplify the situation. Product or service costing and profitability is part of the issue, but about the entire organization- all resources engaged in any process impacts profitability.
Let’s discuss Resources first. Anything or anyone a company hires, buys, leases, etc. is a resource. Resources are the source of costs. Of course, they also generate all revenue. There are fundamentally two ways to manage resources:
1. Pay less for them, which includes eliminating them.
2. Make them more productive – produce more output or more revenue.
To be comprehensive, RCA uses the CAM-I Capacity Model which uses Theoretical Capacity. This means resources you own are available 24 hrs/day and resources you lease or hire are available for the full period of the agreement. Resources are used for 3 fundamental activities:
1. Productive – doing the activity you hired them to do
2. Non-Productive – doing a necessary, essential activity – such as, maintenance, repair, training,
rework, vacation, sick leave, etc. – but not specifically what you acquired or hired the resource
to do.
3. Idle - when there is no productive work for the resource to do. Idle time is often disguised as
non-productive work, and hidden from management for fear of losing resources or inviting
negative scrutiny. But isn’t an employee, supervisor, or manager's job to become more efficient
and create idle capacity? It's a leading indicator of process improvement and should be
celebrated and rewarded.
Activities or Work are what resources do. This leads to a chicken and egg question – which comes first? the resource or the activities? Clearly resources are acquired in anticipation of work and activity. But, once an operation is going, only reducing (or avoiding the acquisition) of resources saves money; changes in the quantity, type, and quality of work can lead to the reduction of resources.
Improving profitability requires you understand how the resources throughout your business contribute to the creation of profit. RCA calls this the operational model. It answers the questions about how resource quantities flow (or are consumed) throughout the organization. Resource capacities must be modeled. Some level of activity or work also needs to be understood and sometimes modeled. This may range from a basic – productive, non-productive, idle/excess – to a detailed process analysis useful if you are focusing on process improvement of a business process or area of the business.
Typically, the most positive approach to management and profitability is to focus on making existing resources more productive – How can sales and marketing personnel and their supporting systems and contracted support bring in more sales with the same resources? How can the existing production and support resources – people, equipment, buildings, etc. create more output – services or products? RCA can provide the insights to grow productivity - first with existing resources, then with new resources.
Productive time should be maximized by minimizing non-productive time, but also by expanding the capabilities of the resource – process improvement, knowledge, better systems, etc. You may be thinking that all of these require more resources and investment of resource time and money - and you are right. But process improvement and development is productive time. Excess and idle time should never be subject to negative consequences unless of course the resource has work that is not being done. As a leading indicator of improvement, the creation of idle time should be rewarded, then reinvested to grow the organization’s profit potential.
RCA provides comprehensive information on resource use and can incorporate various levels of activity or work modeling as required by a business’s strategic situation.