TARGET COSTING CROSS FUNCTIO NAL LI N CY

TARGET COSTING** $ CROSS FUNCTIO NAL LI N CY FE DESIG C EN CO LE DRIV ST S R ME O T D S CU CUSE FO PR IC LE E D VA CH LUE AIN ** These slides have been developed jointly with CAM-I and include material covered in the book Target Costing: The Next Frontier In Strategic Cost Management By: Shahid Ansari Jan Bell and The CAM-I Target Cost Core Group Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999.

TARGET COSTING. . . A Case for Action v Global competition with mobile capital v Technology leadership no longer provides lasting competitive edge v Pressure for lower prices v Shorter product life cycles v Demand for custom products Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999.

TARGET COSTING. . . The new competitive environment Global competitiveness requires balancing quality, cost, and time Q ua st Co lit y v Time v Target costing focuses on all three dimensions of the strategic triangle Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999.

TARGET COSTING. . . State of the Art in the U. S. v v v 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. v v v Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999. Japanese Companies 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.

TARGET COSTING. . . What Is It? v v 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 u Price-led u Customer-focused u Design-centered u Cross-functional u Life cycle oriented u Value Chain-based Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999.

TARGET COSTING. . . Managing committed costs 100 Committed Costs 80 60 40 Incurred Costs 20 0 PRODUCT CONCEPT DESIGN AND DEVELOPMENT PRODUCTION DISTRIBUTION SERVICE DISPOSITION DEVELOPMENT CYCLE Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999.

TARGET COSTING. . . A Different Profit Planning Approach v Cost v v v v v Target 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. v v v v Copyright, Ansari, Bell, Klammer and Lawrence, v Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999. Costing 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.

TARGET COSTING. . . In the Product Development Process VOICE OF THE CUSTOMER Market Research ESTABLISH TARGET COSTS ATTAIN TARGET COSTS Competitive Strategy Product Strategy and Profit Plans Product Concept & Feasibility Product Design & Development Competitive Intelligence EXTENDED ENTERPRISE PARTICIPATION Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999. Production and Logistics

TARGET COSTING. . . Setting Target Costs Market Research MARKET PRICE Define Product/ Customer Niche Understand Customer Requirements Competitor Competitive Analysis Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999. Define Product Features TARGET COST REQUIRED PROFIT $

TARGET COSTING. . . Voice of the Customer v Develop a market-focused mindset – Open-minded, inquisitive, take nothing for granted, share what you learn v Solicit customer information – Panels, focus groups, interviews, surveys v Analyze customer feedback – Profiles, charts, maps, tables v Understand truly values completely what the customer – Features and cost determine value Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999.

TARGET COSTING. . . Price and Profit Margin Pricing is dynamic Multi-year – Collectively consider Product competitor prices, market and Profit Plan share goals, and customer’s acceptable price. Required Price - Profit v Compute profit over the life of a Profit product – Profit targets may change ALLOWABLE each year TARGET COST v Target margins must consider firm’s required financial rate of Copyright, Ansari, Bell, Klammer and Lawrence, return Management Accounting: A Strategic Focus, Irwin-Mc. Grawv Market Price Hill, 1999.

TARGET COSTING. . . Who Participates v. Major cross-functional teams –Business Planning Team –Product Team –Design Team –Product Manufacturing Team v. Team and functional coordination v. Supporting infrastructure Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999.

TARGET COSTING. . . Involving the Value Chain TIER THREE SUPPLIERS TIER TWO SUPPLIERS TIER ONE SUPPLIERS SERVICE & SUPPORT PRODUCER SUPPLIERS DISTRIBUTORS CUSTOMERS RECYCLERS/ DISPOSERS v v v OPTIMIZING THE SUPPLY CHAIN Characterize the Supply Chain v Nature and number of suppliers v Distance from the producer Develop Long Term Relationships Involve Suppliers in Design Maintain Margins v v v Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999. EXPECTED CONTRIBUTIONS Better Focus on Customer Requirements Provide Input and Ideas Early in the Concept Formation Stage Eliminate Non-Value Added Activities Pursue Standardization

TARGET COSTING. . . Achieving Target Costs COMPUTE COST GAP Initial Cost Estimate s Compare To Target Cost DESIGN COSTS OUT Design Products/ Processe s Perform Value Engineerin g Perform Cost Analysis Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999. PRODUCE Estimate Achievabl e Cost ACTUAL COST Release Design to Productio n Undertake Continuous Improvemen t

TARGET COSTING. . . Information Requirements COMPETITIVE INTELLIGENCE MARKETING DATA COST DATA TARGET COST INFORMATION PROCUREMENT DATA Information not routinely collected. Existing information not routinely available. Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999. ENGINEERING DATA

TARGET COSTING. . . Typical Information Gaps PRODUCT STRATEGY CONCEPT AND FEASIBILITY DESIGN AND DEVELOPMENT PRODUCTION & LOGISTICS Product Development Cycle (When tools are used) Customer & Marketing Competitive Prices and Features Product Life-cycle Engineering Systems Feature/Price Data Attribute/Price Data Feature/Cost Data Cost systems Competitor Cost Technology Life Cycle Procurement Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999. Attribute/Cost Data Function Cost Data Component Interaction VE Case Studies Supplier Cost Data Improvement Ideas Database Type of Information needed Competitive Intelligence

TARGET COSTING. . . Supporting Tools PRODUCT STRATEGY CONCEPT AND FEASIBILITY DESIGN AND DEVELOPMENT PRODUCTION & LOGISTICS Product Development Cycle (When tools are used) Functional Expertise for Tools Planning Marketing Multiyear Product Plan Benchmarking QFD Cost Tables Feature Costing QFD Function Cost Component Cost Process Costing Engineering Value Engineering DTC QFD Value Engineering DFMA, DTC QFD Procurement Supplier Based Value Engineering Costing Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999. Value Analysis

TARGET COSTING. . . Extending The Domain Many service industries (e. g. telecommunications) are design driven and can use target costing. v The design philosophy of target costing can be broadly applied to many nonmanufacturing situations. v The customer value approach of target costing provides a useful strategic umbrella for ABM and BPR leading to an integrated cost management approach. v Target Costing can be used to address legacy Copyright, Ansari, Bell, Klammer and Lawrence, costs through creative redesign. v Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999.

TARGET COSTING. . . Does It Work? CHRYSLER’S RESULTS -- 1994 v v v 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-Mc. Graw. Hill, 1999.

TARGET COSTING. . . Critical Success Factors POLITICAL v v v Accommodate legitimate interests Obtain “buy-in” from major groups Avoid turf battles TECHNICAL/ STRUCTURAL BEHAVIORAL v v v Early functional involvement Engineering owns costs Marketing evaluates trades Targets are commitments Cross-functional cooperation Accounting as “business advisor” v LEADERSHIP v v v New data New tools Cross-functional teams New business processes Revised career paths Partnerships in value chain CULTURAL v v Customer focus Trust v v Copyright, Ansari, Bell, Klammer and Lawrence, Management Accounting: A Strategic Focus, Irwin-Mc. Graw. Hill, 1999. Open information sharing Cross-functional teamwork