Target Costing for Flexible Manufacturing Systems —A FAST Approach

N Raviswaran* and R Gandhinathan**

New Product Development (NPD) process has undergone revolutionary changes during the past few years due to global economic policies. The organizations have made their manufacturing systems flexible and agile to adapt to changing customer needs. However, with ever increasing demand on lower prices, the NPD process is under constant pressure today to deliver products at lowest possible cost. Target Costing (TC) has emerged as one primary tool backed by conventional NPD tools like Value Engineering (VE), Quality Function Deployment (QFD) and Design For Manufacture (DFM) to facilitate the manufacturer in this emerging economic scenario. The primary objective of this work is to study the influence of Value Engineering on Target Costing process. The case of an Indian Auto manufacturer has been taken up and a Target Costing process aided by Value Engineering has been applied. The approach and results have been discussed in this paper.

1. Introduction
The new economic policies and revolutionary liberalization has made competition to reach heights that were never seen before. Globalization has opened up fantastic opportunities for the Indian industries. Nevertheless, the Indian manufacturers are witnessing a bewildering scene where the products with best quality and least cost alone can survive. With this scenario, a paradigm shift is required in the approach of manufacturers towards cost management. With markets opened to all and having lean and flexible manufacturers worldwide, cutting cost and becoming cheaper is vital to become market leader. A case of an Indian auto component (Air-horn) manufacturer has been taken up in this work. A target cost was set, based on market conditions and the same has been achieved through a structured Value Engineering approach.
* Senior Lecturer, Department of Mechatronics Engineering, Kongu Engineering College, Perundurai, Erode, Tamil Nadu, India. E-mail: ravish@kongu.ac.in; raviswarann@yahoo.co.in ** Assistant Professor, Department of Mechanical Engineering, PSG College of Technology, Coimbatore, Tamil Nadu, India.

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2005 The ICFAI University Press. All Rights Reserved.

Target Costing for Flexible Manufacturing Systems—A FAST Approach

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May 2005 .2 Value Engineering Enabled Target Costing Target Costing enables the manufacturer to identify the product level as well as component level target cost requirements.e. costs which provide neither quality. nor appearance and nor customer feature” [3].2. nor use. A Target Costing model proposed by Cooper and Slagmulder is given in Figure 1. Target Costing and Value Engineering Cooper and Slagmulder [12] define Target Costing as “a structured approach to determine the life cycle cost at which a proposed product with specified functionality and quality must be produced to generate the desired level of profitability over its life cycle when sold at its anticipated selling price”. which has for its purpose the efficient identification of unnecessary costs. Figure 1: Target Costing Model Market-driven Costing Target selling price Target profit margin Market conditions Allowable cost Strategic cost reduction challenge Product–level Target Costing Component-level Target Costing Function level target cost Component level target cost Product level target cost Target cost reduction objective Current cost Suppliers 2. 2. Value Engineering has evolved through years and in today’s market has proven itself to be one of the soundest economic ventures. It is an organized creative approach. a staff Engineer of General Electric in 1947. Since its development by Lawrence D Miles.1 Need for Value Engineering Value Engineering emerged from the industrial community during World War-II. i. To create intensive pressure on the product 44 The ICFAI Journal of Operations Management. a body of knowledge and a group of learned skills. L D Miles defines Value Engineering as “a philosophy implemented by the use of specific set of techniques..

Therefore. Table II: Arriving at the Target Cost Parameters Target selling price to dealer (A) Less excise duty @ 16% on manufacturer’s invoice price (B) Invoice price of manufacturer (C) = (A) – (B) Profit @ 12% on selling price for manufacturer (company’s policy decision) (D) Target Cost (C) – (D) Cost in Cost Units 53. Table I: Selling Price of Competitors S.00 – 7.50 5. (The prices and costs indicated in this paper are in “Indian Rupees” and denoted as cost units in all places. No 1 2 3 Competitors A B C Selling Price to Dealers (in Cost Units) 63.50 45. These targets are set so that they can be achieved only if the product designers expend considerable efforts to design for cost.00 61.50 Minimum available price to market = 60. which is already picking momentum in the market. Setting Up the Target Price M/s Jaishree Industries (name disguised) make air-horn for trucks and buses and they were faced with stiff competition in the market by three leading horn manufacturers. a 12% reduction on existing market price was decided by marketing team. for the benefit of readers in other countries). As such Value Engineering is an integral part of target costing. product level target costing focuses designer creativity on reducing the costs to their target levels [2].designers to reduce costs. The manufacturer decided to develop and launch a single frequency air-horn.00 60. 3. while maintaining the functionality quality and the customer demands.50 40.00 cost units (from table I) For Jaishree Industries to enter.00 7. The selling prices of different competitors were collected from various dealers and are listed in Table I.80 = 53.00 cost units (Approximately) 3.00 Target Costing for Flexible Manufacturing Systems—A FAST Approach 45 . selling price for M/s Jaishree Industries = 60. Value Engineering is the primary technique used to find ways to decrease product costs.20 = 52.1 Arriving at the Target Cost The methodology involved in arriving at the target cost is given in Table II.

00 2.00 2.00 2.25 Moulding – 4.00 (A) 1 Main body 1 Black colored outside Black colored outside Al. green passivation 8. No.40 (6 x . with painting Al.25 and Paint-1.The challenge ahead of the company now is to make a single frequency air-horn at a cost of 40. (a) Collection of existing cost details (b) Pareto analysis to short list items to be taken up for Value Engineering (c) FAST diagram for Air-horn (d) Function-cost worth analysis (e) Evaluation of short listed ideas (f) Summery of savings and presentation 4.25 5.50 and Paint-2.40 46 The ICFAI Journal of Operations Management. of 80mm Polyproand 350mm long pylene with tensile strength of 12N/mm2 5 turns.50 (B) Machining -1.40) - 4.25 2.1 Product Cost Based on Company’s Existing Design and Technology The Bill of Material details of various components in the product are shown in Table III. Components Qty Operational Target (if any) Material Material Processing Cost in Cost in Cost Units Cost Units Component’s Total Cost in Cost Units (A)+(B) 11. with painting 7.25mm thickness Phosper and tensile strength bronze sheet of 30N/mm2 24 hrs-water immersed test 50 hrs – salt spray test Hi – nitrile rubber Mils steel. Table III: Existing Cost Data S.75 0. 1mm dia Phosper and tensile strength bronze wire of 1900N/mm2 0.00 5 Diaphragm 1 2.00 12. May 2005 .50 4 Spring 1 1. 4.00 cost units meeting all customer needs.00 2 Back cover 1 3.00 Machining1. Value Engineering for Achieving Target Cost A structured Value Engineering approach as detailed below was followed to achieve the set Target Cost.75 3 Trumpet 1 Dia. Zn.25 Coiling and heat treatment – 0.25 6 7 Seal Fasteners 1 6 4.

50 cost units = 0.40 cost units A Pareto Chart was constructed based on existing cost details of an Air-horn product and is given in Figure 2. The short listed items which contribute to 80% of the total cost of the Horn are Trumpet. and gives a better understanding or the interrelation of functions and their costs [7]. Back cover and Seal.90 x 80/ 100 = 31. Cost in Cost Units Fastener Diaphragm Main body Back cover Trumpet Seal Target Costing for Flexible Manufacturing Systems—A FAST Approach Spring 47 .50 cost units = 0.90 cost units.90 cost units = 5. This technique basically finds answers to three questions about each function performed by the product or service.Product cost from Table III Assembly and inspection charges Supervision cost @ 0.2 Pareto Analysis to Shortlist Items = 39. According to Pareto’s 80-20 principle. Based on the pareto chart.20 cost units = 1. 4.40 cost units = 40.30 cost units = 1.3 FAST Diagram for Air-horn FAST is an advanced technique developed by Charles Bytheway to determine the relationship between functions in the analysis of an entire system. process or a complicated assembly.00 cost units = 8. Main body.00 cost units = 48. 80 % of the product cost = 39. Product cost = 39.00 cost units per horn) Total cost of the product Target cost to be achieved Drifting cost 4.20 cost units per horn Transportation and freight insurance (@ 1.50 cost units per horn Packing and finished product storing cost Selling expenses @ 1. Why? How? and When? The FAST diagram constructed for the Air-horn taken up for this study is shown in Figure 3. Figure 2: Pareto Chart for Air-horn the items were short listed Pareto Chart for further work.92 cost units.

48 Figure 3: FAST Diagram for Air-horn Facilitate Mounting Why? Provide Aesthetics Prevent Leakage All time functions Vibrate air column Vibrate diaphragm Stiffen diaphragm Provide tension Hold parts Supply Air How? Sound Level: 120±5 dBA Freq: 400±20 Hz Leak Proof Provide Parts Safe Riding Transmit sound Warn approach Amplify sound Create resonance Enclose parts Add weight Induce vibration Unwanted function VE Scope Withstand vibration Strengthen trumpet Unwanted function The ICFAI Journal of Operations Management. May 2005 .

body with black plating (c) Plastic – (Nylon 6) body in black color (a) Hi-Nitrile rubber seal (b) Natural rubber seal 5.00 3. The final proposals short listed were tested for their functional worthiness and most of the proposals were found to be acceptable.75 Total Legends: B—Basic function. body with black outer painting (b) Al.75 Prevent 4. Table IV: Function—Cost Worth Analysis S. The details of evaluation is given in the Table V.00 4 Seal 2. The details of analysis are tabulated in Table IV.00 3. body with black outer painting (b) Al.00 10.00 6.00 4.4.00 20. S—Secondary Function. 4. body with black plating (c) Plastic – (Nylon 6) body in black color 12.4 Function—Cost Worth Analysis A brainstorming was conducted involving personnel from various departments and several alternate proposals are analyzed. Target Costing for Flexible Manufacturing Systems—A FAST Approach 49 .50 3.00 (vi) Provide aesthetics(S) (i) Hold and Enclose parts(B) (iii) Prevent leakage(B) (iv) Supply air(B) (v)Provide aesthetics(S) 5.00 leakage(B) 11.00 5.00 3 Back cover (a) Al.00 2.50 Trumpet in HDPE material (a) Al.75 5. No Items Function(s) Item Cost in Cost Units Function Possible Cost of Alternatives of Alternatives Worth (Cost Achieving the in Cost of Least Cost Alternative) Function(s) Units in Cost Units Value Gap in Cost Units 1 Trumpet (i) Create resonance(B) (ii) Withstand vibration(S) (iii) Provide aesthetics(S) (a) 400 mm Trumpet in polypropylene material (b) 400 mm 12.50 9.00 6.50 12.75 2.50 9.00 2 Main body (i) Hold and Enclose parts(B) (iii) Facilitate mounting(B) (iv) Prevent leakage(B) (v) Supply air(B) 11.5 Evaluation Phase Various alternatives from Table IV were evaluated and tested.00 2.

has been achieved and hence the Target cost requirements are satisfied.00 0.00 10. The savings are summarized in the Table VI.00 3.50 6.50 11.75 cost units. 50 The ICFAI Journal of Operations Management.00 2.00 Proposed Change (Acceptable Concept) HDPE Nylon 6 Al. which is more than the drifting cost. the Back cover bulges out after 20 hrs of operation and hence the idea is rejected Concept acceptable based on marketing feed back Concept acceptable 4 Seal Change Seal material to Natural rubber (a) To withstand water immersion test for 24 hrs (b) No air leakage 4.00 5. sound function requirements remain unaltered) Concept acceptable Trumpet Change trumpet material to HDPE 2 Main body (a) To withstand 8 kg/cm2 Change Main body material to pressure (b) No air leakage/change Nylon 6 in sound after 100 hrs of continuous operation @ 7 kg/cm2 (a) To withstand 8 kg/cm2 Change Back cover material to pressure (b) No air leakage/change Nylon 6 in sound after 100 hrs of continuous operation @ 7 kg/cm2 Do black plating No appreciable change in instead of painting outer finish (based on marketing feed back) on back cover 3 Back cover Due to creep loading. the following are concluded: • A cost reduction of 10. No Items 1 2 3 4 Trumpet Main body Back cover Seal Existing Cost 12.75 cost units.00 5.75 2. a cost saving of 10. Table VI: Summary of Savings S. which is more than the required drifting cost was attained. body with black plating Natural rubber Total Cost Saving Proposed Savings Cost (Cost Units) 9. May 2005 .75 5.5 Summary of Savings Based on the Evaluation phase.00 5. No Items 1 Proposed Concept Acceptance Criteria (a) To withstand vibration test as per IS-specification (IS-1884) (b) To be mouldable in existing die-set (c) No appreciable change in outer finish Outcome All the conditions satisfied and hence acceptable (since no dimensional changes are done.75 4.Table V: Evaluation of Alternatives S. Conclusion Based on the case study.

RSC 2004. “Cost Engineering with a Model Based Design Process for Satellite Systems”. Target Costing for Flexible Manufacturing Systems—A FAST Approach 51 . which paves way for value enhancement of this product and similar products. Chennai. “QFD Enabled Target Costing – A VE Approach”. TMH. New Delhi. December 2002.icwai. 1997.• A functional approach gives lot of insight about the product. Target costing appears to be heavily relying on Value Engineering methodology for an effective implementation. 3. “Re-Cyclable Packing—A Value Engineering Approach to Achieve Target Cost in Automotive Industries”. February 1997. www. Van Nostrand Reinhold Company Inc. Raviswaran N and Suthakar M. College of Engineering (Anna university). M Wilke and E Igenbergs. The study indicates this methodology may well be extended for similar type of industries (Auto component manufacturers) and FMS. January 2004. 8. proceedings of the international conference on Responsive Supply Chain. 4. 1982 . 5. 7.tudelft. 2. Proceedings of the International Conference on Operations Research Development (ICORD). O • • Reference # 07J-2005-05-03-01 6. “Target and Kaizen Costing”. 22-25. Manufacturing Engineer.dutlsisa.pdf Jagannathan G.lr. “Getting More at Less Cost—The Value Engineering Way”. Gandhinathan R.asp Larry W Zimmerman and Glen D Hart. J O Quirmbach. ICWAI Southern India Regional Council.com/sirc/ features/target. Raviswaran N and Gandhinathan R. “Value Engineering “. 6. pp.nl/seinternet/ Lectures/PDCpapers/paper11. “Compendium on Value Engineering”. References 1. www. Andrew Williamson. 1982. The Indo-American Society. Harold G Tufty. “Target Costing”.

12. Sloan Management Review. January 2003. 1992.9. Target Costing and Value Engineering. Robin Cooper and Regine Slagmulder. Raviswaran N and Gandhinathan R. May 2005 . 52 The ICFAI Journal of Operations Management. Richard C Chen and Chen H Chung. Robin Cooper and Regine Slagmulder. “Achieving Competitive Edge Through Value Engineering—A Toyota Based Target Costing Approach for Indian Manufacturing Industries”. Management Accountant quarterly. “Develop Profitable New Products with Target Costing”. Summer 1999. 11. Productivity Press. Yasuhiro Monden. 23-33. “Cause-Effect Analysis for Target Costing”. pp. Cost Management in the New Manufacturing Age. 1992. Proceedings of the International Conference on Digital Aided Modeling and Simulation (DAMS). Winter 2002. Productivity Press. 13. 10.

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