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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