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Cost Modeling in Logistics Using Time-driven ABC: Experiences

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Article  in  International Journal of Physical Distribution & Logistics Management · April 2008

DOI: 10.1108/09600030810866977

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IJPDLM
38,3
172
Received 26 November 2006
Revised 28 January 2008
Accepted 31 January 2008
International Journal of Physical
Distribution & Logistics Management
Vol. 38 No. 3, 2008
pp. 172-191
q Emerald Group Publishing Limited
0960-0035
DOI 10.1108/09600030810866977
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0960-0035.htm
Cost modeling in logistics using
time-driven ABC
Experiences from a wholesaler
Patricia Everaert and Werner Bruggeman
Ghent University, Ghent, Belgium
Gerrit Sarens
Université Catholique de Louvain, Louvain-la-Neuve, Belgium and
University of Antwerp, Antwerp, Belgium
Steven R. Anderson
Acorn Systems, Houston, Texas, USA, and
Yves Levant
Université des Sciences et Technologies de Lille, Villeneuve d’Ascq, France
Abstract
Purpose – The purpose of this paper is to describe the experiences of a wholesaler with time-driven
activity-based costing (TDABC). Three research questions are addressed: How are complex logistics
operations modeled by TDABC? Does TDABC provide more accurate cost information than
activity-based costing (ABC)? How is TDABC cost information used?
Design/methodology/approach – Case study research was performed at a Belgian wholesaler.
Interviews were conducted. The cost and activity database was analyzed.
Findings – This case study illustrates that there are logistics operations that cannot be modeled
using a single cost driver, as is done with ABC. TDABC uses time equations to estimate the time spent
on each activity. The results herein show how the time equations can capture the different
complexities, by including different terms or interaction terms in the time equations. The database
analysis clearly demonstrates that TDABC provided more accurate cost information than ABC at this
case company. ABC oversimplified 64 percent of the activities, and misallocated 55 percent of all
indirect costs.
Research limitations/implications – This study is one of the first, investigating the experiences
with TDABC. The results are derived from analyzing all activities, at a single case company.
Practical implications – The study illustrates the technique of TDABC and provides a real
company example of time equations in logistics. The users declared the TDABC model very useful for
profitability reporting and profit management. The time drivers provided insight into the causes of
excessive distribution and logistics costs.
Originality/value – This paper complements current discussion on cost drivers and subtasks and
logistics costing.
Keywords Complexity theory, Belgium, Time study, Distribution management, Activity based costs
Paper type Case study
The authors are greatly indebted to the interviewees at the case company for sharing their
experience and insights. In particular, they want to express their gratitude to the CEO. Thanks to
Robert Kaplan, Ann Vereecke, Bart Delaere and Valerie Decoene, who provided valuable
comments on previous versions of the paper. Also thanks to the participants of the EurOMA
2005 conference (Budapest) for their useful suggestions.
Introduction Cost modeling
In today’s logistics environment, there is a tremendous need for accurate cost in logistics
information. In the relationship between suppliers and customers, cost knowledge is
essential. The overall profitability of a firm depends not only upon whether the sales
prices can recover product costs, but also whether this gross margin is enough to cover
the cost-of-serving the customer (Shapiro et al., 1987). The cost of serving the customer
includes order-related costs, plus specific logistic, selling and administrative expenses. 173
By knowing the cost-to-serve, companies can safeguard profitability, even in a very
competitive environment (Foster et al., 1996). However, this requires that the cost
model used is accurate and detailed enough to capture the many factors that influence
the cost of serving the customer.
Furthermore, many suppliers of large retailers contend that they are under high
pressure to perform an increasing number of functions, that the retailers previously
had performed themselves (Norek and Pohlen, 2001). For instance, retailers ask
suppliers to deliver small numbers of pallets to different locations; whereas, in the past,
one large shipment of pallets could be delivered to a central warehouse. Without
knowing all the details of the cost-to-serve, suppliers have little evidence to
demonstrate how shifting functions in the supply chain affect their profitability and
long-term survival (Cokins, 1999). Consequently, managers must know the unit cost of
products and the cost of customer service levels to use them during negotiations with
other members of the supply chain. Only by having detailed and accurate cost
information can suppliers succeed in realizing fair exchanges and profitable
partnerships (Themido et al., 2000; Lin et al., 2001; Norek and Pohlen, 2001).
Finally, we expect that the need for accurate and detailed cost information will
increase in significance in the near future, especially in the field of logistics, as the
global economy continues to become more competitive and focused on streamlining
logistics operations. Cost efficiency of logistic processes is a necessity, making the
accuracy and specification of cost models especially important.
In this paper, we describe the experiences of a Belgian wholesaler with time-driven
activity-based costing (TDABC), which is a new cost modeling technique introduced
by Kaplan and Anderson (2004, 2007). The study forms part of a large research project.
The wholesaler’s sales had been increasing over the last three years, but profit was
going down. The logistics costs, though considered fixed, had increased more rapidly
than the sales volume. Given that the gross margin is extremely low in this
highly-competitive industry, detailed and accurate cost information was vital to
survive. The wholesaler had started with an activity-based costing (ABC) model, but
soon discovered that ABC was not providing the appropriate profitability information.
The characteristics of the orders and the requirements of the customers caused
significant variations in working methods, which could not be captured by the ABC
model. The objective of this study is to illustrate the experiences of the Belgian
wholesaler with TDABC in modeling its complex logistics operations. In particular, the
objectives are as follows:
.
to trace how the wholesaler modeled complex processes in logistics by means of
the TDABC approach;
.
to assess how the cost information provided by the TDABC model at the
wholesaler was more accurate than cost figures provided using the ABC
model; and
IJPDLM .
to discover how the cost information provided by the TDABC model was used
38,3 for improved logistics decision-making by the wholesaler.

This study builds on the results of Varila et al. (2007) in the logistics literature, who
found variability in working methods at a Finnish electronic wholesaler. This
variability could not be captured by a single driver in an ABC model. Varila et al. (2007)
174 describe how the company implemented an automatic bar coding system, collecting the
actual picking times of the different orders. In our study, the Belgian wholesaler also
faced variability in the working methods, resulting in what we call “complex” logistics
processes. Contrary to the approach described by Varila et al. (2007), the picking time
of the orders was estimated at the Belgian wholesaler using a general kind of formula,
called a time equation. In this time equation, the time spent for picking of a given order
is modeled using the actual characteristics of that order, as will be discussed in the
Results section.
The paper is organized as follows. First, we briefly address the technique of
TDABC. Next, we discuss the research methodology; whereby we combined interview
data with quantitative analyses on cost data. Then, we describe the results, exploring
the time equations and the differences in accuracy between ABC and TDABC. The
results also will address how the TDABC information induced improved decision
making in this case. We end with concluding remarks.

Theoretical background
From volume-based cost systems to ABC
In reporting on the profitability of orders and customers, volume-based (also called
traditional) cost systems, allocate logistics costs to customers on the basis of
volume-drivers, such as units sold or sales figures (Cooper, 1988). However, operations
like sales order processing do not vary per unit sold, but are driven by the number of
sales orders that customers place. Customers who make frequent, small orders
generate more overhead costs than customers who make large orders less frequently.
With a traditional cost system based upon sales volume, the latter customer will be
assigned large processing costs, while the former will be assigned small processing
costs. Hence, using volume-based allocation rules leads to distortions in cost figures,
when companies face activities that are not driven by the amount of units sold.
Consequently, companies have switched to ABC systems (Pohlen and La Londe, 1994;
Themido et al., 2000; Lin et al., 2001).
ABC is a costing method that first assigns overhead costs to activities and then to
products, orders or customers, based upon their consumption of the different activities,
as shown in Figure 1 (Kaplan and Cooper, 1998). Designing an ABC model typically
involves the steps shown in Table I. For instance, for the “sales order processing”
activity, the total cost (payroll, depreciation and other supplies) equals e50,000. When
the “number of orders” is the activity driver and 1,000 orders can be processed, ABC
will come up with an activity driver rate of e50 per order. In calculating order
profitability, each order will be assigned e50 as order processing cost.

From ABC to TDABC

ABC uses a single driver rate for each activity. Hence, it is difficult to model
multi-driver activities. For example, order processing costs not only depend upon the
 Activity-based cost systems trace resource expenses to activities and use Cost modeling
activity cost drivers for tracing activity costs to objects.
in logistics
Resource Pool Administration

Resources expenses ...

Salary Depreciation ICT 175
Resource driver

Activities Ordering Sales

Order entry ... ...
material invoicing

No. of No. of No. of sales ...

Activity cost driver orders purchases

Activity cost driver rate =

total cost of the activity ...
$/order $/purchase $/invoice
total volume activity cost driver

Direct material
Direct labor Product Order Customer
Figure 1.
Activity-based costing
Source: Based on Kaplan and Cooper (1998)

Panel A: ABC
Step 1 Identify the different overhead activities
Step 2 Assign the overhead costs to the different activities using a resource driver
Step 3 Identify the activity driver for each activity
Step 4 Determine the activity driver rate by dividing the total activity costs by the practical volume
of the activity driver
Step 5 Multiply the activity driver rate by the activity driver consumption to trace costs to orders,
products or customers
Panel B: TDABC
Step 1 Identify the various resource groups (departments)
Step 2 Estimate the total cost of each resource group
Step 3 Estimate the practical capacity of each resource group (e.g. available working hours,
excluding vacation, meeting and training hours)
Step 4 Calculate the unit cost of each resource group by dividing the total cost of the resource group
by the practical capacity Table I.
Step 5 Determine the time estimation for each event, based upon the time equation for the activity Activity-based costing
and the characteristics of the event versus time-driven
Step 6 Multiply the unit cost of each resource group by the time estimate for the event activity-based costing
IJPDLM number of orders processed, but also on the type of communication medium used by
38,3 the customer (online versus a written document). Working with an average cost per
order of e50 thereby provides inaccurate cost information. One could suggest splitting
the activity into two activities, such as “order processing of online order” and “order
processing based upon a written document.” However, splitting inflates the number of
activities in ABC and creates difficulties in estimating the practical capacity for each
176 sub-activity.
In order to overcome the difficulties of ABC, Kaplan and Anderson (2004, 2007)
developed a new approach to ABC, called time-driven ABC. This new approach does
not assign resources and costs to the specific activities, as shown in Panel B of Table I.
The TDABC approach identifies the different departments, their costs and their
practical capacity. For logistics operations, the practical capacity is expressed as the
amount of time that employees can work, without overtime. By dividing the total cost
by the practical capacity, the cost per time unit is calculated. Costs then are assigned to
the order (or customer) by multiplying the cost per time unit by the time needed to
perform the activity, as shown in Figure 2.
The breakthrough of TDABC lies in the time estimation. The time of performing an
activity is estimated for each specific case of the activity, based upon the different
characteristics of that specific case. These characteristics are called “time-drivers,”
because they “drive” the time spent on a given activity. Time equations model how
time drivers drive the time spent on activity. In complex environments wherein the
time needed to perform an activity is driven by many drivers, TDABC can include
multiple drivers for each activity.
Consider again the example of sales order processing. Now, assume that the total
cost of the department is e57,600 (payroll, depreciation, other supplies) per week,
corresponding to a practical time capacity of 5,760 minutes (80 percent of the
theoretical capacity of 40 hours per week for three employees). Hence, the cost per
minute for this resource group is ten euros. The time required to process a standard
order is estimated to be three minutes. Order processing for new customers requires
registration, which requires an additional 15 minutes. Consequently, order processing
for a new customer takes 18 minutes, whereas 3 minutes for an existing customer. In
TDABC, the cost per order equals e30 for existing customers and e180 for new
customers. The time equation for this small example is given as:
Order processing time per order ¼ 3 þ 15if new customer

Through the inclusion of multiple time drivers, complex activities can be modeled
without expanding the number of activities (Kaplan and Anderson, 2004). Hence,
TDABC seemingly provides many opportunities to design cost models in
environments with complex activities, as in logistics and distribution companies,
hospitals, and servicing companies, in general. The second part of this paper will
further illustrate the experiences of a single Belgian wholesaler using TDABC for its
logistics activities.

Methodology
Case study research
The purpose of this study is to illustrate how TDABC can be used for modeling costs
in logistics. This purpose calls for a case study methodology, where the case is used
 Cost modeling
in logistics

177

Figure 2.
Time-driven
activity-based costing

as an illustration of an emerging theory (Keating, 1995). We combined qualitative

interview data with quantitative data analysis, which benefits the reliability of the
conclusions.

Site selection
The wholesaler was approached because we knew that the company had switched
from ABC to TDABC. One of the authors had a business contact with the CEO.
Although, the site selection was not random, it helped to overcome one of the greatest
practical difficulties of conducting case study research: gaining access to field sites
(Baxter and Gua, 1998). This company was attractive on a priori, objective grounds,
and would have been a top candidate in a purposive sampling approach, because it had
implemented the TDABC approach and already had been using TDABC cost
information for almost two years by the time of the interviews.
IJPDLM Data collection
38,3 Data were collected from a variety of sources, and included interview data, secondary
data and quantitative database data.
First, we conducted a first interview round with the managing director and the
consultant who had installed the TDABC system. Each interview took 120 minutes. A
second and a third interview of 90 minutes was conducted, both with the managing
178 director and the consultant, to double-check our findings. The following broad range of
questions was addressed:
.
Can you describe the company in terms of its history, strategy, products,
markets, customers and key figures?
. Can you describe the logistic processes?
.
How did TDABC model the logistic processes?
.
Why was the TDABC model appropriate?
.
Why was the ABC model inappropriate?
.
What major benefits have you observed since the implementation of the TDABC
model?

Second, we also studied company promotional brochures to glean full knowledge of its
products and environment. This secondary data helped us to triangulate the findings
on interview question one. We also analyzed a PowerPoint presentation, prepared by
the managing director for an international conference, to triangulate the findings of the
interview questions three to five.
Thirdly, we obtained complete access to the TDABC database, including the time
equations and cost data. The description of the activities helped us to triangulate the
interview data on interview question two.

Case findings
Background
The company is a Belgian distributor of plant-care products, with total sales of
62 million euros, a transportation fleet of 25 trucks, and a warehouse of 22,500 pallets.
The company has about 7,000 products, 7,000 customers, and 298,000 order lines per
year. The company employs 129 people, 57 of whom work in the logistics department.
The wholesaler was targeting three different customer groups (farmers, growers
and retailers), each requiring a separate sales approach. Farmers and growers were
approached via visits of sales representatives to provide technical advice on what kind
of products to use. In contrast, retailer-customers were approached by the account
managers to develop a complete package of products, integrated in displays, so that the
retailer could place the display (including a full range of plant care products) in the
retail store. Even within each of the customer groups, there were large differences in
terms of the number of order lines, the volumes ordered per order line, and the delivery
specifications. Some large retailers ordered each week, asking for weekly deliveries at
four locations; other retail customers ordered once for the whole season, a full truck
load delivered to one location. Also, suppliers ranged from local Belgian producers, to
European or even Chinese manufacturers. The various suppliers asked for different
working methods, in terms of ordering products and accepting products in
the warehouses. Similarly, there was considerable variation in terms of products.
The same kind of product was ordered, stored and delivered in different kinds of package Cost modeling
(re-usable containers, packs, pallets). Sales were seasonally dependent, with huge sales in logistics
volumes during the spring and summer months, and unused capacity of the employees in
the logistics and sales order department during the winter. Finally, products had very
short product life cycles, typically varying from a few months to one year.

How does TDABC model the complex logistic processes? 179

We received detailed descriptions of the working methods used at the wholesaler. The
characteristics of both the order and the customer determined the kind of working
methods that the employees needed to perform. This variability in working methods
resulted in what we called “complex logistics activities”. To answer the first research
question, we first provide one example of a complex activity at the wholesaler; then we
illustrate how the time equation was set up in the TDABC model. Next, we distinguish
among the different kinds of complexity and trace how the wholesaler dealt with these
complexities by means of the TDABC model.
Example. The example describes the drop-off operation used by the wholesaler’s
truck driver at a customer’s premises. These premises could be either a farm (for
farmers or growers) or a retail store (for retailers, small and large). We quote from the
description of the working methods found in the activity database:
Farmer/Grower routing: An order dropped at a farmer’s premises normally takes 5 minutes
per order, except when it is a first delivery. For firs delivery, the drop takes 10 minutes. When
the truck driver also has to take back returned goods, he needs an additional 5 minutes to
check the goods and to finish the necessary administration. When reusable containers have to
be taken back, the truck driver needs 10 minutes to check the labels. Delivery with cash
payment requires an extra 20 minutes per drop when delivered to farmers and growers.
Non-farmer routing: When the customer is not a farmer, the time per drop is 2 minutes per
pallet when the goods are delivered on pallets, and 1 minute per pack when delivery is in
packs. With some customers, there are important waiting times. At garden centers, the
waiting time is 15 minutes; at large retailers, the waiting time is 30 minutes per drop.
However, when the delivery goes to a hypermarket, the driver must wait 60 minutes.
Non-farmer customers also might have goods to take back. When an appointment has been
made, the goods already have been assigned a return code. In this case, loading of returned
goods only takes 3 minutes. When no appointment has been made, the driver has to call the
office to request a return code. This inquiry takes 30 minutes. Loading and checking empty
pallets takes 2 minutes. Cash payment for non-farmers requires 10 minutes (activity database
of the wholesaler).
The task description shows that the drop-off activity is composed of different subtasks,
such as waiting, unloading goods, commercial talk for first time delivery, calling the
office for a return code, loading goods-to-return, loading reusable containers, loading
empty pallets, and handling a cash payment. Hence, it is clear that the activity is not
driven by a single driver, like the number of drops. Furthermore, the quote also reveals
the variability that exists within the subtasks, which is caused by the provided
services.
Time equation for the example. Using time-driven ABC, the time equation could
fully capture the complicated structure of this activity. Using the notation provided by
Everaert and Bruggeman (2007), we can express the time equation of the example
above in a mathematical expression. For didactic reasons, we will make separate time
equations for drop-offs with a farmer/grower (equation (1)) and drop-offs with a retailer
IJPDLM (equation (2)). We combine them together into equation (equation (3)). In practice,
38,3 however, the drop-off working method was captured by a single time equation in the
TDABC-model, as shown in equation (4).

Delivery time per drop for a farmer or grower:

180 ¼ unloading þ commercial talk for first time delivery þ loading returned goods

þ loading reusable containers þ cash payment

ð1Þ
¼5 þ 5*X 2 þ 5*X 2

þ 10*X 4 þ 20*X 2

Delivery time per drop for a retailer:

¼ waiting for a quay þ unloading þ calling office for return code

þ loading returned goods þ loading empty pallets þ cash payment

ð2Þ
¼ 15*X 9 þ 30*X 10 þ 60*X 11 þ 2*X 7 þ 1*X 8 þ 30*X 3 X 12

þ 3*X 3 þ 2*X 13 þ 10*X 5

Delivery time per drop (for all customers together):

¼ X 1 ð5 þ 5*X 2 þ 5*X 3 þ 10*X 4 þ 20*X 5 Þ þ X 6 ð2*X 7 þ 1*X 8 þ 15*X 9 þ 30*X 10

ð3Þ
þ 60*X 11 þ 30*X 3 X 12 þ 3*X 3 þ 2*X 13 þ 10*X 5 Þ

¼ 5*X 1 þ 5*X 2 X 1 þ 5*X 3 X 1 þ 10*X 4 X 1 þ 20*X 5 X 1 þ 2*X 7 X 6 þ 1*X 8 X 6 þ 15*X 9 X 6

þ 30*X 10 X 6 þ 60*X 11 X 6 þ 30*X 3 X 12 X 6 þ 3*X 3 X 6 þ 2*X 13 X 6 þ 10*X 5 X 6 ð4Þ

with: X1, farmer/grower: yes (1) versus no (0); X2, first delivery: yes (1) versus no (0); X3,
returned goods: yes (1) versus no (0); X4, returned reusable containers: yes (1) versus no
(0); X5, cash payment: yes (1) versus no (0); X6, retailer: yes (1) versus no (0); X7, number
of pallets; X8, number of packs; X9, garden center: yes (1) versus no (0); X10, large
distribution center: yes (1) versus no (0); X11, hypermarket: yes (1) versus no (0); X12,
appointment is made, so return code is known: no (1) versus yes (0); X13, empty pallets
to return: yes (1) versus no (0).
Analysis of the complexities in the logistics processes. Studying the activity database
of the wholesaler, we found different kinds of complexities in logistics, which all could
be solved using the TDABC model.
.
Activities were not homogeneous and contained different subtasks, each having its Cost modeling
own driver. The drop-off activity, as described above, includes subtasks, like in logistics
unloading pallets, unloading packs, or loading reusable containers. These
subtasks are driven by different time drivers, such as the number of pallets to
unload, the number of packs to unload, or the customer returning reusable
containers. In the TDABC model, different subtasks can be included within a
single time equation, by including different terms in the time equation. For each 181
of the subtasks, a specific time driver could be selected.
.
The need for a given subtask depends upon the characteristics of the order or the
customer. This is what Varilla et al. (2007) calls the “variability” in working
methods. For instance, the commercial talk to the farmer was a subtask that only
was needed for a first delivery to a farmer/grower, which is a characteristic of
the order. By including a so-called “interaction term” in time equation (4), the
TDABC modeled under what condition the additional subtask needs to be
included. For instance, an additional 5 minutes is included in the time estimate,
when the order is a first delivery to a new customer. The first time delivery to a
new customer was traced by the ERP-system, so these data were readily
available.
.
The need for a given subtask depends upon whether another activity (or subtask)
has been performed. This is the situation wherein activities (or subtasks within
activities) are interdependent. In the example above, the subtask of calling for a
return code only is needed when no prior appointment has been made. The
TDABC model could capture the interdependencies between subtasks, by
including an interaction term in the time equation. The additional time of
30 minutes was added if the retailer had goods to return and there was no return
code available, as shown in equation (4).
.
Time drivers of subtasks depend upon the characteristics of the customer and the
order. For instance, unloading for farmers/growers depends upon the number of
drops, whereas for retailers it depends upon the number of pallets and packs.
TDABC modeled this kind of complexity by including two interaction terms
in the time equation. As shown in equation (4), for a drop-off at a farmer/grower,
the time equation estimates a time of 5 minutes per drop-off. For
retailer-customers, the unloading subtask was modeled as a function of the
number of packs and the number of pallets to unload. Depending upon the kind
of customer (farmer/grower versus retailer), the appropriate time driver was
selected in the TDABC model.
.
The time per unit time driver depends upon the characteristics of the customer or
the order. For instance, waiting for a quay to become free to unload the goods
was dependent upon the type of customer. For a garden center, drivers estimated
the waiting time as 15 minutes; for a distribution center; the waiting time was
estimated at 30 minutes; and for a hypermarket, an average waiting time of
approximately 60 minutes was required before the truck drivers could unload the
goods at the quay. As shown in time equation (4), the variable waiting times were
captured by the TDABC model by including different terms in the time equation.
TDABC successfully modeled the waiting time by including three interaction
terms in the equation.
IJPDLM In the example above, we found that TDABC modeled the reality of the company’s
38,3 complex working methods, by estimating the time spent in time equation (4). We found
similar kinds of complexity for other activities at the wholesaler, such as order
processing, receiving incoming goods, storing incoming goods, and picking goods
from the warehouse.

182 Is the cost information provided by the TDABC model more accurate than the cost
information provided by the ABC model?
With the ABC-model, the drop-off activity was modeled using a single activity driver.
The ABC model calculated a cost per drop-off. Hence, with the ABC cost model, each
drop-off was assumed to consume the same amount of resources. However, in reality,
the time that the truck drivers were busy dropping off goods was influenced by many
factors other than just the number of drop-offs. Waiting for a quay, unloading pallets,
unloading packs, calling to the office for a return code, and taking back returned goods
are just a few examples of the real time-drivers for the truckers. For profitability
analysis, management at the wholesaler found the ABC cost information (cost per
drop-off) to be too aggregated to be helpful in calculating the cost of serving a given
customer. Management found that the logistics operations were too complex to
simplify them in the ABC model using a single driver. In fact, the cost per single
activity driver used with ABC was not helpful, in terms of distinguishing between
customers asking for high versus low delivery services.
Analysis of the activity and cost database. In order to quantify the differences
between the TDABC and ABC models, we analyzed the activity and cost databases.
The activity database described each of the 106 activities, both in Acorn computer
language[1], as in words. The cost database provided total cost information for each
activity. Table II, Panel A, reveals a few lines of the activity database. To analyze the
activities, we wrote each time equation using mathematical representation, as
illustrated in equation (4). Panel B of Table I shows the mathematical format of the
time equations, as in Panel A. An overview of the general structures of the time
equations is provided in Table III. The mathematical representation allowed us:
.
to count the number of subtasks per activity (Table IV);
.
to count the number of time drivers per equation (Table V); and
.
to count the number of interaction terms (Table VI).

In the first analysis, we counted the number of subtasks for each activity. During the
interviews, top management mentioned several times that the strength of the TDABC
model was that it included more than one subtask in the time equation. As shown in
Table IV, out of the 106 activities reviewed, only 38 activities involved a single
subtask. The remaining 68 activities (64 per cent of the total number of activities) all
included two or more subtasks. About 30 percent involved two subtasks, and about 17
percent encompassed more than five subtasks. The previously-described example of
drop-off activity belongs to this last category. Let us now compare the TDABC model
with the ABC model. Only one subtask could be modeled for each of the 106 activities
within the ABC model. However, if we count all the subtasks in the TDABC model, we
discover that, in total, 330 subtasks are needed to perform the 106 activities. The cost
designers first tried to develop an ABC model with a separate activity for each of
these 330 subtasks, which resulted in an ABC model with 330 different activities.
Activity Drive to Driver variables

Panel A: Activity database with time equations at the wholesaler

Time equation in Acorn Explanation
1. Creation of new Product Number of new article codes IF (P_New ¼¼ “Y” 1, 0) * 10 The creation of a new article code takes
articles 10 minutes
2. Complaints Customer Number of credit notes because IF (CN_wrongprice ¼ ¼ Complaints handling because of a wrong
of wrong price “Y” 1, 0) * 10 þ price requires that one make a credit
.. note, and this takes 10 minutes
. Number of returned deliveries IF (Returned_Delivery ¼ ¼ For complaints handling because of a
“Y” 1, 0) * 15 wrong delivery, this takes 15 minutes
106. Orders to Supplier Number of purchase orders (5 þ IF (Supplier_language ¼ ¼ “D” Placing an order takes 5 minutes per fax.
suppliers 0, 7)*) Purchse_order However, for French speaking suppliers,
the preparation of the order fax takes 12
minutes in total.
Language of supplier (Dutch,
French)
Panel B: Analysis of the activity database
Time equation General formal
1. Creation of new Product X1 ¼ number of new article tper product ¼ 10 * X1 t j;k ¼ b1 X 1
articles codes
2. Complaints Customer X1 ¼ number of credit notes tper customer ¼ 10 * X1 þ 15 X2 t j;k ¼ b1 X 1 þ b2 X 2
.. X2 ¼ number of returned
. deliveries
106. Supplier X1 ¼ Number of purchase orders tper supplier ¼ 5 * X1 þ 7 * X1 X2 t j;k ¼ b1 X 1 þ b2 X 1 X 2
X2 ¼ 0/1 (0 if Dutch, 1 if French
speaking)
in logistics
Cost modeling

Activity database
183

Table II.
IJPDLM
Activities
38,3 Resources as Number as percentage
Time equation specifications percentage of total of activities of total

t j;k ¼ b1 X 1 45 38 36
t j;k ¼ b1 X 1 þ b2 X 2 10 18 16
184 t j;k ¼ b1 X 1 þ b2 X 1 X 2 5 15 14
t j;k ¼ b1 X 1 þ b2 X 2 þ b3 X 3 9 4 4
t j;k ¼ b1 X 1 þ b2 X 2 þ b3 X 3 þ b4 X 4 8 4 4
tj,k ¼ b1X1 þ b2X1X2 þ b3X1X3 þ b4X1X4 1 3 3
tj,k ¼ b1X1X2 þ b2X1X2X3 þ b3X1X2X4
þ b4X1X2X5 4 3 3
t j;k ¼ b1 X 1 X 2 þ b2 X 1 X 2 X 3 þ b3 X 4 þ b4 X 5 2 1 1
t j;k ¼ b1 X 1 þ b2 X 2 þ b3 X 3 þ b4 X 4 þ b5 X 5 1 2 2
Time equations with more than five time drivers and
more than five terms, on average 3,2 two-way
Table III. interactions and 0, 9 three-way interaction per
Overview of the time equation 15 18 17
equations 100 106 100

Time equations with Number of activities Activities as percentage of total

1 Task 38 36
2 Subtasks 33 30
3 Subtasks 4 4
Table IV. 4 Subtasks 11 11
Analysis of the time 5 Subtasks 2 2
equations in terms of More than five subtasks 18 17
subtasks 106 100

Time equations with Resources as percentage of total

1 Time driver 45
2 Time drivers 15
3 Time drivers 9
Table V. 4 Time drivers 9
Analysis of the time 5 Time drivers 7
equations in terms of More than five time drivers 15
different time drivers 100

Time equations with Resources as percentage of total

Table VI. No interactions 79

Analysis of the time Two-way interactions 9
equations in terms of Three-way interactions 12
interaction between time Higher order interactions 0
drivers 100
However, they soon came to realize that this model was not working out, because of the Cost modeling
detailed level of data gathering required for each of the 330 activities. In fact, the ABC in logistics
model only could be constructed for the 106 activities, while ignoring the fact that some
activities contained more than one subtaks. To conclude, if we compare the TDABC
model (106 activities) with the ABC model (106 activities), we discover that roughly
64 percent of the activities are oversimplified in the ABC model.
In our second analysis, we counted the number of time drivers for each equation and 185
totaled all indirect costs for each activity, as shown in Table V. We found that about
45 percent of the indirect costs of the wholesaler were modeled in TDABC by a single
time driver. Roughly 55 percent of all indirect costs needed more than one time-driver
to capture the reality of the complex operation being performed. Multiple time drivers
were needed, because of the different types of complexity, as illustrated in the drop-off
example above. The ABC system modeled each of the 106 activities with a single
time-driver, ignoring the true complexity of the operations. Hence, about 55 percent of
all costs were misallocated in the ABC model, as shown in Figure 3.
The third analysis involved counting the number of interaction terms. Table VI
shows that 9 percent of the time equations contained a two-way interaction term, and
12 percent a three-way interaction term. Together, all activities with interaction terms
represented 21 percent of the indirect costs. Again, 21 percent of the resources were
misallocated by the ABC model.

Does the TDABC information improve logistics decision-making?

Better understanding of the profitability of logistics service strategies. The TDABC
system provided the management team with profitability reports for each customer.
The results were “shocking”: 200 percent of the actual profits were from 20 percent of
the customers and 30 percent of the customers eliminated 100 percent of the actual
profits. The largest customers were associated with the largest losses, and this was due
to high service costs. For example, customers who requested deliveries four times per
week at four distinct locations, and for whom there were long waiting times at the
delivery points generated higher than average delivery costs.
Higher efficiency of the logistic process. The TDABC system also provided detailed
and reliable cost information with which to measure logistics performance. For each of
the key drivers, management identified the appropriate key performance measures,
which are shown in Table VII. Every month, the cost of all orders was calculated by the

45%

55%

Figure 3.
Resource allocation under
ABC, compared to
correctly allocated under ABC misallocated under ABC TDABC
IJPDLM Key drivers of profitability
38,3
Profitable customer portfolio
Loyalty of profitable customers
186 Efficient warehouse operations
Efficient logistics
Efficient purchasing
Table VII. Efficient customer service
Performance measures Balanced product mix
based on TDABC
Key performance measure
Profit per customer
Percent revenue from customers . three years with a positive
margin
Percent profit from customers . three years with a positive
margin
Allowed hours/hours paid
Allowed time consumption/hours paid
Number of suppliers of products with negative profitability
Cost to serve customers
Percent of SKUs with a negative margin
Profit generated from new products (, two years in portfolio)

TDABC model at a detailed level and aggregated per customer, per product and
per supplier.
Also, supplier profitability could be calculated as a key measure of efficient
purchasing. Purchasing and logistics managers could see which part of the company
profit was generated by products delivered by each individual supplier. Finally,
capacity utilization data (hours used versus hours paid) were used as the basis for
measuring the productivity of the warehouse and the logistics resource centers. The
general manager perceived that, in their complex and dynamic environment,
productivity could not be measured by basic measures, such as the number of orders
picked per full-time equivalent. The required time per order depends upon the type of
order and the service level provided to the customer. By using time equations with
TDABC, the required time per individual transaction could be calculated, using the
characteristics of the individual order and the individual customer. For the logistics
manager, it was crucial to manage the logistics operations efficiently. For him,
the challenge was to balance the resource supplied (employee time capacity) with the
resources required by the order and customer mix within a particular month. Hence,
efficiency of logistics was measured by the ratio “allowed hours” to “paid hours” per
department.
Improved profitability management. Analysis of the customer profitability
information led to the following new initiatives to enhance profitability:
.
renegotiating contracts with high-loss customers;
.
exerting greater sales efforts towards profitable customers;
.
renegotiating contracts with suppliers;
.
introducing minimum order value policies;
.
introducing new maximum discount policies; and
.
optimizing delivery routes.

For instance, simulations were made of high-loss generating customers, to see how
much could be saved on logistics costs. The various simulations made it possible for
negotiations with clients to be held in an open way with the intention of achieving a
win –win solution.
 Improved capacity planning. Analysis of the capacity utilization reports suggested Cost modeling
several organizational changes, and led to a better balance of capacities supplied in logistics
and demanded in the departments. Regularly, changes in order and customer mix
caused significant changes in capacity requirements. TDABC continuously reported
underused and overused capacity among its employees. This information helped
logistics managers to rapidly identify unbalanced resource supplies in the logistics
activity chain, and to reassign employees from underused to overloaded departments. 187
Opportunities for internal benchmarking. TDABC also facilitated logistics process
improvement by comparing the time equations in the different warehouses. Consider,
for example, the activity of “manual picking.” With TDABC, this activity was
considered the same for all the warehouses. However, the time estimates differed
between the four warehouses. In some cases, there was a very logical explanation for
these differences; for instance, because of the different distances that the fork-lift trucks
must travel. For other subtasks, it became clear that some warehouses worked more
efficiently than others. Synergies then were created by passing on best practices from
more efficient to less efficient warehouses.
Higher involvement of sales and warehouse managers in profitability management.
The TDABC model provided specific, manageable data for costs and profitability
analysis, not only for managers, but also for all operational employees and sales
people. The sales and account managers, as well as all sales representatives, received
insight into the profitability of their clients. Logistics and warehouse managers
acquired detailed insights into the costs and efficiency of their processes. This not only
created greater profit and cost awareness, but also increased their interest in the
reasons for the low profitability of certain clients. Some representatives had the
perception that their largest clients were the most profitable, and were surprised
to see the actual, contradictory profitability figures. Consequently, the TDABC cost
information was questioned initially; but, when the controller revealed the reasons for
the high cost-to-serve for certain clients, as calculated using the time equations, the
level of acceptance of the information increased, and discussion followed very quickly
about possible actions for improvement.
Both the accounting department and the operational and sales departments had “a
good feeling” regarding the cost and profitability reporting. The TDABC model
ensured that financial reporting at the management level was maximally integrated
with the operational costs and profitability reporting that takes place at lower
organizational levels.

Conclusions
This paper illustrated how logistics operations can be modeled to provide detailed and
accurate cost information. In a highly-competitive supply chain, in which the gross
margin is extremely low, suppliers must know the cost-of-serving the customer.
TDABC is a new cost management technique (Kaplan and Anderson, 2007) which
provides opportunities to design cost models for complex operations. TDABC differs
from ABC, because TDABC essentially estimates the time spent performing the
activity. In particular, with TDABC, a cost designer can model the time spent for each
activity as a function of one or more parameters, also called time drivers. Conversely,
with ABC, cost designers only can include one cost driver per activity. Furthermore, for
IJPDLM activities that involve many subtasks, TDABC can include a separate time driver for
38,3 each individual subtask, whereas only a single cost driver can be used with ABC.
Our study was based upon case study research at a single Belgian wholesaler. The
wholesaler initially had used ABC, but ultimately decided to switch to TDABC. At the
time of the case study, the TDABC model had been used for almost two years, and was
considered to be a helpful tool for profitability management. The first research
188 question addressed how TDABC modeled the complex logistic operations. Indeed, the
wholesaler was facing different kinds of complexity in its operations. For instance,
activities were composed of a mix of subtasks, each having a different time driver. The
TDABC could model this complexity by including an appropriate time driver for each
subtask. Furthermore, subtasks were not always performed in operations; rather, they
depended upon order or customer characteristics. This resulted in what Varila et al.
(2007) have termed “variability” in working methods. The TDABC model could
capture the variability of the working methods, by including all possible subtasks in
the time equation. An interaction term then indicated whether that order (or customer)
characteristic applied. Also, the time estimation itself for a given subtask was
sometimes influenced by order and customer characteristics. This variability in
time estimates was modeled in TDABC, by including an interaction terms in the time
equation, indicating for what sort of characteristic the time estimates applies. In the
Results section, we illustrated the different complexities with the example of a drop-off
operation. This example clearly demonstrated that the time equation captures different
kinds of complexity, either by including different terms in the time equation, or by
including an interaction term in the time equation. We can conclude that the TDABC
model traced the full complexity of this (and other) logistic operations.
As a second research question, we were interested in assessing whether the cost
information provided by the TDABC model is more accurate than the cost figures
provided by the ABC model. The wholesaler had started with an ABC system, but soon
discovered that the full complexity of the logistics operations could not be modeled by
the ABC model. Whereas the TDABC model provided a whole range of costs per
drop-off, by making a distinction between all the possible variants of the delivery
process, the ABC model provided a single cost per drop-off. For profitability analysis,
with the ABC model, it was not possible to distinguish between a customer requiring a
simple and a customer requiring a time-intensive drop-off operation. When analyzing
the activity and cost databases, we came to similar conclusions. First, the activity
database described 106 activities, of which only 38 of were homogeneous (i.e. driven by
a single time driver). Hence, the ABC model ignored the heterogeneity of 68 activities.
Since ABC could not model activities with different subtasks, the ABC model
oversimplified 64 percent of all activities. Second, the total costs that are linked to these
64 percent of activities represent about 55 percent of all resources. Hence, the ABC
model misallocated more than 50 percent of all costs. Because of high competitive
pressure, the case company could not tolerate a situation in which more than half of its
indirect costs are misallocated between orders and customers. Third, building a
detailed ABC model, one which tried to model each subtask as a separate activity,
resulted in 330 activities, instead of the 106 observed with TDABC. However, the data
collection efforts were huge to feed this 330 activities model. For the TDABC model, the
data on order and customer characteristics were readily available in the ERP system.
Fourth, 21 percent of the time equations included an interaction term. Again, this Cost modeling
variability in time drivers was not possible using ABC. in logistics
The third research question investigated the reported benefits experienced by
decision makers. The TDABC model provided new insights into the profitability of
customers. Large, demanding customers were, in fact, loss-generating customers.
Using TDABC provided managers insight into the causes of excessive logistics and
distribution costs, so that simulations could be made to increase profitability. This 189
detailed and accurate cost information helped management to renegotiate contracts
with high-loss customers. Also, the level of involvement of sales and warehouse
managers increased, because they understood now how their operations could
influence profitability. Furthermore, the TDABC cost information was integrated
within a new performance measurement system, which measured both customer
profitability and logistic process efficiency. The TDABC model was also used for
capacity planning. Understanding the capacity needed relative to the capacity
available, in terms of the full-time employees in the warehouses, resulted in better
allocation of employees across the different departments.
This study suggests several paths for future research. First, the experiences of the
wholesaler demonstrate that TDABC provides many opportunities to design accurate
cost models in environments with complex activities, as within logistics and
distribution companies. In addition, the cases described by Kaplan and Anderson
(2007) primarily describe the experiences of service companies facing variability in
working methods. Future research could examine whether the TDABC approach
provides opportunities for modeling production operations. Second, as more data
become available via ERP systems and the cost of acquiring data decreases, it is
expected that more companies will shift to TDABC. At this wholesaler, the time
equation was based upon characteristics, already available in the ERP system.
The TDABC model essentially “modeled” the time spent on each subtask, based upon
the actual characteristics of the subtasks. However, with the RFID technology, one
could assume that the TDABC model could be fed with the “actual” time spent on each
subtask. It would be interesting to investigate whether a TDABC model with
automatic data collection (ADC), wherein the actual time measured for each subtask
are used, also leads to the same insight into what causes the logistics and distribution
costs as in the case company. One could hypothesize that being overloaded with cost
information would make it difficult for managers to identify the real time drivers of the
operations. Without knowing the time drivers, profitability management, simulations
and efficiency reporting probably will not come out of the TDABC model. As
mentioned in the results, the insights into the time drivers were very valuable for
profitability management in the case company. Third, future research could take into
account how the time estimates were set up in practice. In the case company, the time
equations were constructed bottom-up, based upon extensive interviews with
employees. Three runs of estimates were needed, before the results for capacity usage
made sense. Future research could focus on how the initial time estimates are set up,
and how many runs are needed before the TDABC model provides generally-accepted
time estimates. At this case company, the employees had been involved in building the
time equations, which probably increased the general level of acceptance of the model.
IJPDLM Note
38,3 1. Acorn is the software package that the wholesaler used to run the TDABC model.

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Further reading
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About the authors Cost modeling
Patricia Everaert is currently an Assistant Professor at Ghent University. She has published
several articles in the area of target costing, time-driven activity-based costing and in logistics
outsourcing. Patricia Everaert is the corresponding author and can be contacted at: Patricia.
Everaert@UGent.be
Werner Bruggeman is currently a Professor at Ghent University. He also is a partner of B&M
Consulting. He has done research on activity-based costing, target costing and the balanced
scorecard. 191
Gerrit Sarens is currently an Assistant Professor at Université Catholique de Louvain (UCL)
and the University of Antwerp. He is conducting research on internal audits, outsourcing and
corporate governance.
Steven R. Anderson is the Chairman of the Board & Founder of Acorn Systems, Inc., 4150
Westheimer, Suite 300, Houston, TX 77027, USA. He has published several articles and books on
time-driven activity-based costing.
Yves Levant is a Professor at Université des Sciences et Technologies de Lille and at Lille
Graduate School of Management.

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