Activity-Based Total Quality Management at American Express

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Cost
Management

Journal of

A WARREN GORHAM LAMONT PUBLICATION

Vol. 7, No. 1 Spring 1993

Target Costing at Toyota
Activity-Based Costing in Cellular Manufacturing Systems
Controlling Quality on a Multidimensional Level
The Effect of JIT on Management Accounting
Activity-Based Total Quality Management at American
Express
From the Editors / Barry J. Brinker
Cost Management Practice / Steven C. Schnoebelen
The Factory in Transition / Arun Maira

Reprinted with permission from The Journal of Cost Management, Volume 7, Number: 1 c1993 Research Institute of America, Inc., Warren Gorham Lamont Professional Publishing Division, 210 South St., Boston, MA 02111. All rights reserved.

Activity-Based Total Quality
Management at American Express
David A. Carlson and S. Mark Young

Product costing and a quality strategy are related in
the sense that both seek answers to difficult questions of how and where information workers spend their time. This article illustrates how activity-based
costing contributes not only to the achievement of
accurate product costs, but also to improved quality
at American Express Integrated Payment Systems
(IPS). Activity costs at IPS were determined by
asking each manager to estimate the time that his
department spends on each activity, then splitting
those activity estimates across each product line. To
achieve the objectives of total quality management
(TQM), these activity costs were augmented with
perceptual data that various stakeholders expressed
about the activities. The article suggests how similar
approaches to TQM can benefit other service organizations or the service functions of manufacturing companies.

A

t American Express, a commitment to total quality management (TQM) comes from the top. The
Chairman, CEO, and Chief Quality Officer at American Express is James D. Robinson III, who stresses that quality
must be integrated with business strategy. As a
result, business unit heads must present their
strategy for quality improvements as part of
their annual budget and business plans.

American Express wants to ensure that its
investments in training and technology are
paying off.
Will the changes at the American Express business units improve the bottom line? The activity-based costing (ABC) method used at American Express Integrated Payment Systems (IPS) in Denver can help answer this question. 1

TQM and ABC at American Express
IPS manages one of the oldest financial services
American Express has: American Express
Money Orders. Introduced in 1882, customers
use money orders to pay bills and make mailorder purchases. Money orders provide a stable source of income that has helped support IPS’s
entry into markets for similar financial services,
including:
• American Express MoneyGram, which is a
relatively new and rapidly growing
service that lets consumers transfer funds
around the world, usually within minutes;
• American Express Official Checks, which
are negotiable instruments that financial
institutions use as substitutes for their
own disbursement items (e.g., teller
checks and loan checks); and

As of 1992, each American Express business unit
must undergo a self-assessment based on the
criteria specified in the guidelines for the
Malcolm Baldrige National Quality Award.

Spring 1993 -- 48

COST MANAGEMENT

• Cash Management Services, a service that
works as an electronic clearinghouse to
collect, concentrate, and disburse funds
and data for corporations and financial
institutions.
Early in 1990, IPS instituted a TQM philosophy
that would involve all 1,000 employees in the
Denver metro area. Charlie Fote, the president
of IPS, hired Brian Higgins as director of quality
assurance to lead this initiative.
Fote and other IPS executives were unaware of
any particularly troublesome quality problems;
in fact, IPS was (and remains) a service leader in
the markets it serves. Instead, the reason for...
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