Target Analysis


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Target Analysis

  1. 1. <ul><li>A method of profit planning and cost management that focuses on products with discrete manufacturing processes </li></ul><ul><li>Its goal is to design costs out of products in the RD&E stage of a product’s total life cycle </li></ul><ul><ul><li>Rather than trying to reduce costs during the manufacturing stage </li></ul></ul><ul><li>It is a relevant example of: </li></ul><ul><ul><li>How a well-designed MACS can be used for strategic purposes </li></ul></ul><ul><ul><li>How critical it is for organizations to have a system in place that considers performance measurement across the entire value chain </li></ul></ul>By Engineer Sood 7-
  2. 2. <ul><li>Begins with market research into customer requirements followed by product specification </li></ul><ul><li>Companies engage in product design and engineering and obtain prices from suppliers </li></ul><ul><ul><li>Product cost is not a significant factor in product design at this stage </li></ul></ul><ul><li>After the engineers and designers have determined product design, they estimate cost </li></ul><ul><ul><li>Product designers do not attempt to achieve a particular cost target </li></ul></ul><ul><ul><li>If the estimated cost is considered to be too high, then it may be necessary to modify the product design </li></ul></ul>By Engineer Sood 7-
  3. 3. <ul><li>Both the sequence of steps and the way of thinking about determining product costs differ significantly from traditional costing </li></ul><ul><li>Although the initial steps appear similar to traditional costing, there are some notable differences: </li></ul><ul><li>First, marketing research under target costing is not a single event as it often is with the traditional approach </li></ul><ul><ul><li>While customer input is obtained early in the marketing research process, it is also collected continually throughout the target costing process </li></ul></ul>By Engineer Sood 7-
  4. 4. <ul><li>Second, much more time is spent at the product specification and design stage </li></ul><ul><ul><li>To minimize design changes during the manufacturing process when it is far more expensive to implement </li></ul></ul><ul><li>Third, the total-life-cycle concept is used by making it a key goal to minimize the cost of ownership of a product over its useful life </li></ul><ul><ul><li>Not only are costs such as the initial purchase price considered, but also the costs of operating, maintaining, and disposing of the product </li></ul></ul>By Engineer Sood 7-
  5. 5. <ul><li>After these initial steps, the target costing process becomes even more distinctive </li></ul><ul><li>Determining a target selling price and target product volume depends on the company’s perceived value of the product to the customer </li></ul><ul><li>The target profit margin results from a long-run profit analysis, often based on return on sales </li></ul><ul><ul><li>Return on sales is the most widely used measure because it can be linked most closely to profitability for each product </li></ul></ul><ul><li>The target cost is the difference between the target selling price and the target profit margin </li></ul>By Engineer Sood 7-
  6. 6. <ul><li>Once the target cost has been set, the company must determine target costs for each component </li></ul><ul><li>The value engineering process includes examination of each component of a product to determine whether it is possible to reduce costs while maintaining functionality and performance </li></ul><ul><ul><li>In some cases, product design may change, materials used in production may need replacing, or manufacturing processes may require redesign </li></ul></ul><ul><li>Several iterations usually are needed before it is possible to determine the final target cost </li></ul>By Engineer Sood 7-
  7. 7. <ul><li>Two other differences characterize the process </li></ul><ul><li>First, cross-functional teams made up of individuals representing the entire value chain guide the process throughout </li></ul><ul><ul><li>From both inside and outside the organization </li></ul></ul><ul><li>A second difference is that suppliers play a critical role in making target costing work </li></ul><ul><ul><li>If there is a need to reduce the cost of specific components, firms will ask their suppliers to find ways to reduce costs </li></ul></ul>By Engineer Sood 7-
  8. 8. <ul><li>Some studies of target costing in Japan indicate that there are potential problems in implementing the system </li></ul><ul><ul><li>Especially if focusing on meeting the target cost diverts attention away from the other elements of overall company goals </li></ul></ul><ul><li>Companies may find it possible to manage many of these factors </li></ul><ul><li>Organizations interested in using the target costing process should be aware of them before attempting to adopt it </li></ul>By Engineer Sood 7-
  9. 9. <ul><li>Conflicts can arise between various parties involved in the target costing process </li></ul><ul><ul><li>Excessive pressure on subcontractors and suppliers to conform to a schedule and reduce costs can lead to alienation and/or failure of the subcontractor </li></ul></ul><ul><ul><li>Design engineers may become upset when other parts of the organization are not cost conscious </li></ul></ul><ul><ul><ul><li>They argue that they exert much effort to squeeze pennies out of the cost of a product while other parts of the organization (administration, marketing, distribution) are wasting dollars </li></ul></ul></ul>By Engineer Sood 7-
  10. 10. <ul><li>Employees in many Japanese companies working under target costing goals experience burnout due to the pressure to meet the target cost </li></ul><ul><ul><li>Burnout is particularly evident in design engineers </li></ul></ul><ul><li>Development time may increase because of repeated value engineering cycles to reduce costs </li></ul><ul><ul><li>May lead to the product coming late to market </li></ul></ul><ul><ul><li>For some types of products, being six months late may be far more costly than having small cost overruns </li></ul></ul>By Engineer Sood 7-
  11. 11. <ul><li>Similar to target costing in its cost-reduction mission </li></ul><ul><li>However, it focuses on reducing costs during the manufacturing stage of the total life cycle of a product </li></ul><ul><li>Kaizen is the Japanese term for making improvements to a process through small, incremental amounts rather than through large innovations </li></ul>By Engineer Sood 7-
  12. 12. <ul><li>Kaizen costing’s goal is to ensure that actual production costs are less than the prior year cost </li></ul><ul><li>Kaizen’s goals are reasonable </li></ul><ul><ul><li>The product is already in the manufacturing process, thus it is difficult and costly to make large changes to reduce costs </li></ul></ul><ul><li>It is tied to the profit-planning system </li></ul><ul><li>If the cost of disruptions to production are greater than the savings due to kaizen costing, then it will not be applied </li></ul>By Engineer Sood 7-
  13. 13. <ul><li>The system places enormous pressure on employees to reduce every conceivable cost </li></ul><ul><ul><li>Some Japanese automobile companies use a grace period just before a new model is introduced </li></ul></ul><ul><ul><li>This cost-sustainment period provides employees with the opportunity to learn any new procedures before the company imposes kaizen targets on them </li></ul></ul><ul><li>Kaizen costing leads to incremental rather than radical process improvements </li></ul><ul><ul><li>This can cause myopia as management tends to focus on the details rather than the overall system </li></ul></ul>By Engineer Sood 7-