copyright, ansari, bell, klammer and lawrence, management accounting: a strategic focus,...
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Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING**
LIFE CYCLECOSTS
CROSSFUNCTIONAL
CUSTOMER
FOCUSED PRICELED
$$
DESIGN
DRIVENVALUE CHAIN
** These slides have been developed jointly with CAM-I and include material covered in the book
Target Costing: The Next Frontier In Strategic Cost ManagementBy:
Shahid AnsariJan Bell
andThe CAM-I Target Cost Core Group
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING ...A Case for Action
Global competition with mobile capital
Technology leadership no longer provides lasting competitive edge
Pressure for lower prices Shorter product life cycles Demand for custom products
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING ...The new competitive environment
Global competitiveness requires balancing quality, cost, and time
Qua
lity
Cost
Time Target costing focuses on all three
dimensions of the strategic triangle
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Japanese Companies
TARGET COSTING...State of the Art in the U.S.
US Companies
67% use cost plus pricing Cost estimates need great
improvements Estimate of sales volume
provided to suppliers are overstated between 11-25%
No tight monitoring of profits, costs, capital investment, quality, development budget, and performance.
100% used price minus profit
Achieve 80% accuracy of cost estimates at product concept stage
Estimate of sales volume provided to suppliers are within +/-5%
Tight monitoring of profits, costs, capital investment, quality, development budget, and performance.
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...What Is It?
A target cost is the allowable amount of cost that can be incurred on a product and still earn the required profit from that product
A strategic profit and cost management process
Price-led Customer-focused Design-centered Cross-functional Life cycle oriented Value Chain-based
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
PRODUCTCONCEPT
DESIGN ANDDEVELOPMENT
PRODUCTION
P R O D U C T D E V E L O P M E N T C Y C L E
0
20
40
60
80
100
Cost
s
Committed Costs
Incurred Costs
DISTRIBUTIONSERVICE
DISPOSITION
TARGET COSTING...Managing committed costs
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
Target Costing
TARGET COSTING...A Different Profit Planning Approach
Cost Plus
Market considerations not part of cost planning.
Costs determine price. Waste and inefficiency is
focus of cost reduction efforts.
Cost reduction is not customer driven.
Cost accountants manage costs.
Suppliers involved after product designed.
Minimizes initial price paid by customer.
Little or no involvement of value chain in cost planning.
Competitive market considerations drive cost planning.
Price determines costs. Cost reduction is achieved by
simultaneous product/process design.
Customer input guides cost reduction.
Cross-functional teams manage costs.
Suppliers involved in concept and design of product.
Minimizes cost of ownership to customer.
Involves the value chain in cost planning.
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...In the Product Development Process
MarketResearch
Competitive
Strategy
Competitive
Intelligence
Product
Concept &
Feasibility
Product Strategy
and Profit Plans
Product
Design &
Development
Production
and
Logistics
ESTABLISH TARGET COSTS
ATTAIN TARGET COSTS
VOICE OF THE CUSTOMER
EXTENDED ENTERPRISE PARTICIPATION
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...Setting Target Costs
Market
Research
Competitive
Analysis
Define Product/
Customer Niche
Understand
Customer
Requirements
Define
Product
Features
TARGET
COST $$$
MARKET
PRICE
MarketResearch
CompetitorAnalysis
REQUIREDPROFIT
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...Voice of the Customer
Develop a market-focused mindset– Open-minded, inquisitive, take nothing for
granted, share what you learn
Solicit customer information– Panels, focus groups, interviews, surveys
Analyze customer feedback– Profiles, charts, maps, tables
Understand completely what the customer truly values
– Features and cost determine value
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...Listening to the customer?
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...Price and Profit Margin
Multi-year Product
andProfit Plan
MarketPrice
RequiredProfit
ALLOWABLE
TARGET COSTTARGET COST
Price - Profit
Pricing is dynamic– Collectively consider
competitor prices, market share goals, and customer’s acceptable price.
Compute profit over the life of a product– Profit targets may
change each year Target margins must
consider firm’s required financial rate of return
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...Who Participates
Major cross-functional teams–Business Planning Team–Product Team–Design Team–Product Manufacturing Team
Team and functional coordination
Supporting infrastructure
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...Linear Product Design!
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...Involving the Value Chain
SUPPLIERS
TIER TWOSUPPLIERS
TIER THREESUPPLIERS
TIER ONESUPPLIERS
CUSTOMERSPRODUCER DISTRIBUTORS
SERVICE &SUPPORT
RECYCLERS/DISPOSERS
OPTIMIZING THE SUPPLY CHAIN
Characterize the Supply Chain
Nature and number of suppliers
Distance from the producer
Develop Long Term Relationships
Involve Suppliers in Design Maintain Margins
EXPECTED CONTRIBUTIONS Better Focus on Customer
Requirements Provide Input and Ideas Early
in the Concept Formation Stage
Eliminate Non-Value Added Activities
Pursue Standardization
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...Achieving Target Costs
InitialCost
Estimates
PerformValue
Engineering
PerformCost
Analysis
DesignProducts
/Processe
s
Release Design
toProducti
on
COMPUTE COST GAP DESIGN COSTS OUT PRODUCE
CompareTo
TargetCost
ACTUAL
COST
EstimateAchieva
bleCost
UndertakeContinuou
sImprovem
ent
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...Information RequirementsCOMPETITIVE INTELLIGENCE
MARKETING DATACOST DATA
ENGINEERING DATAPROCUREMENT DATA
Information not routinely collected.
Existing information not routinely available.
TARGET COSTINFORMATION
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...Typical Information Gaps
CompetitiveIntelligence
Customer &Marketing
Engineering
Systems
Procurement
Competitive Prices
and Features
Feature/Cost Data
Technology Life Cycle
Supplier Cost Data
Component InteractionVE Case Studies
Product Life-cycle
Feature/Price DataAttribute/Price
DataAttribute/Cost DataFunction Cost Data
Cost systems
Competitor Cost
PRODUCTSTRATEGY
CONCEPT AND
FEASIBILITY
DESIGN ANDDEVELOPMENT
PRODUCTION
& LOGISTIC
SProduct Development Cycle (When tools are
used)
Typ
e o
f In
form
ati
on
need
ed
Imp
rovem
en
t Id
eas D
ata
base
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...Supporting Tools
Planning
Marketing
Engineering
Procurement
Multiyear Product Plan
Value Engineering
DTCQFDSupplier BasedValue
Engineering
Supplier BasedValue
Engineering
Value Engineering
DFMA, DTCQFD
BenchmarkingQFD
Cost TablesFeature CostingQFD
Function CostComponent CostProcess Costing
Costing
Multiyear Product Plan
PRODUCT
STRATEGY
CONCEPT AND
FEASIBILITY
DESIGN AND
DEVELOPMENTPRODUCTION
& LOGISTICS
Product Development Cycle (When tools are used)
Fu
ncti
on
al Exp
ert
ise f
or
Tools
Value Analysis
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...Extending The Domain
Many service industries (e.g. telecommunications) are design driven and can use target costing.
The design philosophy of target costing can be broadly applied to many non-manufacturing situations.
The customer value approach of target costing provides a useful strategic umbrella for ABM and BPR leading to an integrated cost management approach.
Target Costing can be used to address legacy costs through creative redesign.
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...Does It Work?
CHRYSLER’S RESULTS -- 1994 Meets customer requirements for safety
and driveability Neon named “Auto of the Year” in 1994 Short development time (concept to
market 31 months) Below projected development and
investment budget Neon one of few small cars that earns a
positive return
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...Does It Work?
CHRYSLER’S RESULTS -- 1995 Chrysler's share price $10 in 1990 to $54 in
1995 Since 1990, revenue increase 70% Market share increase by 2.1% Profits and cash flows increase 400% since
1990 Profit margin ratio up from 0.33% to 7.1% in
1995 Chrysler’s Truck Line (including Jeeps and
Minivans) number one among US carmakers in “Power Survey.”
Industry benchmark study finds Chrysler the low cost producer in North America for second straight year.
Standard & Poors and Duff & Phelps raised credit ratings - first time since 1974 to “A” level.
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...Does It Work?
CHRYSLER’S RESULTS -- 1996 Industry Sales Above Trend Stock Levels -- Well Positioned for Launch of
1997 Models Relatively Stable Incentives Labor Contract New Products
Full Wrangler Production All New Dakota -- Very Well Received By
Automotive Press Jeep Cherokee Update
Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-McGraw-Hill, 1999.
TARGET COSTING...Critical Success Factors
LEADERSHIP
POLITICAL Accommodate legitimate interests Obtain “buy-in” from major groups Avoid turf battles
BEHAVIORAL Early functional involvement Engineering owns costs Marketing evaluates trades Targets are commitments Cross-functional cooperation Accounting as “business
advisor”
TECHNICAL/ STRUCTURAL
New data New tools Cross-functional teams New business
processes Revised career paths Partnerships in value
chain
Customer focus
Trust
Open information sharing Cross-functional
teamwork
CULTURAL