Target Costing

If you cannot find the time to do it right, how will you find the time to do it over?

General Concept

Target cost is the cost that can be incurred while still earning the desired profit

Selling price desired profit = target cost

The customer sets the price

Profit must be achieved through cost control

Target Costing Characteristics

Contradicts the traditional approach: design product, determine cost, set price Intense customer focus

What do they want? How much will they pay for it?

Can we make a profit on it?

Want answers to these questions before committing to the project

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Target Costing Characteristics

Cost control from the beginning

70-90% of costs are committed to at the design stage

Focus on product and process design to engineer out costs from the beginning

Saves costly changes later on

Target Costing Characteristics

Product, manufacturing process, delivery process designed simultaneously

Ensures features customers demand, but within acceptable cost parameters Eliminates the temptation to add costly features

Customers may not value the added features

Forces consideration of manufacturability

Reduces the need for subsequent changes

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Target Costing Characteristics

Cost control at all phases of the product life cycle

Design
Production Delivery/setup Customers cost of ownership

Emphasizes future sales instead of current cost savings

Service and repair Disposal and recycling

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Cross-Functional Team

Marketing

Distribution

Design/engineering
Manufacturing Purchasing

Service/support
Cost accounting Finance Legal

Including suppliers

Target Costing Process

Two stage process

Establish the target cost

Market research Product planning, concept development stages

Achieve the target cost

Value engineering, continuous improvement

Design stage

Continuous improvement in later stages

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Establishing the Target Cost

Determine the product and its market

Who is the target market?

What do they want?

What do competitors offer?

Introduce concept or prototype

Evolutionary or revolutionary? Refine until it meets customer needs

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Establishing the Target Cost

Determine the selling price

Must be acceptable to the customer

Must be able to withstand competition

Techniques

Existing price +/- value of features added or deleted Consensus of focus group Price predicted to achieve a desired market share

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Establishing the Target Cost

Determine the required profit

Return on sales

Desired return Historical return for similar products Industry average for similar products

Return on sales will fluctuate over the life of the product

Price and costs fluctuate

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Establishing the Target Cost

Unit price, cost and profit are almost meaningless because they fluctuate

Life cycle totals are more meaningful

Total expected revenue throughout product life - Total desired profit throughout product life Total target cost

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Achieving the Target Cost

Must include the features the customer wants while maintaining cost at or below target

Want to meet the customers needs, but not exceed them

Eliminating desired features will result in an undesirable product Adding unwanted features will increase cost

Failing to keep cost at or below target will result in unacceptable profits

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Achieving the Target Cost

Rank customer requirements (exhibit 1)

What does the customer want?

How important is each function to the customer?

What do we and our competitors currently offer?

Competitive evaluation (exhibit 1)

Do our current product features meet the customer needs?

Are the customers needs met, unmet or exceeded?

What can we learn from our competitors products?

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Achieving the Target Cost

Determine the cost gap between current cost and allowable cost

Current cost is based on

Currently used components Current suppliers Current manufacturing processes

Current distribution network

Etc.
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Make the Decision

Begin Value engineering

Yes

Repeat value engr.? No Abort project

No

Close enough?

No

Achieve target cost? Yes

Yes

Release design for production

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Organizational Impact

Positives

Negatives

Customer focus
Cross-functional integration

Too much customer focus

Potential organizational conflict Too much pressure to attain targets Longer development times

Open sharing of information

Better process understanding

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