How might activity costs for Insteel differ from departmental costs?

Insteel Industries decided to implement ABM at the Andrews, South Carolina, plant. The ABM team analysed operations and identified 12 business processes involving a total of 146 activities. The ABM study revealed that the 20 most expensive activities accounted for 87 percent of Andrew’s total physical and people  resource of $21.4  million.
Activities were further classified into value added and non-value added. Nearly $4.9 million was spent on non-value-added activities such as reactive maintenance, dealing with scrap, moving materials, reworking products and managing customer complaints. Those activities, within the 20 most expensive, were targeted for cost reduction and process improvement.
The company estimates that within a year of the first ABM study, $1.8 million had been saved in quality costs, mainly through a reduction of scrap and reactive maintenance costs. Freight costs were reduced $555 000 in a year in the Andrews plant alone. Non-value-added activities were reduced from 22 percent of activity costs to 17 percent.
The ABM study prompted Insteel to start track-ing freight cost per pound shipped. This directed attention to ways in which these costs could be reduced. By changing the layout of boxes within each truck, the Andrews plant was able to ship 7400  pounds more per truckload. This represented a 20 percent reduction in freight expense.
When Insteel realized how much they were actually incurring in quality costs, the team probed more deeply into understanding better what was causing the quality costs to be incurred and for suggesting steps to reduce them. Insteel realized that certain foreign suppliers of rods were lower in price but supplied poorer quality rods that caused breakdowns in Insteel’s manufacturing process.
The lower price of those suppliers did not compensate for the quality costs. Insteel switched to higher quality rod suppliers. Insteel also realized that smaller diameter wire products were more likely to break and disrupt the manufacturing process. Insteel migrated its product mix to more large diameter wire products. Such initiatives led to reduction in quality costs from $6.7 million to $4.9 million in the following year. It is hard to estimate how much of these savings would have
been realized had Insteel not conducted an ABM analysis. The activity analysis gave it an appreciation of the scope and quantified the magnitude of the improvement potential, thereby allowing it to prioritize among various process improvement possibilities. Clearly ABM served as a focusing device by providing cost data by activities, directing attention to the top 20 activities, and by labeling some of them as non-value-added activities.