STRATEGIC COST MANAGEMENT - BA122B - Fall 2006Slide 5-1 Life Cycle Costing Product Specification Target Price Target Profit Target Cost Major Product and Process Design Changes Does the design meet target cost? Estimate Life Cycle Cost Is project life cycle cost acceptable? Put product into production Minor Product and Process Design Changes Product Abandonment Target Costing On-going improvement Abandonment

STRATEGIC COST MANAGEMENT - BA122B - Fall 2006Slide 5-2 Product Cost Life Cycle n R & D n Design n Production n Marketing & Distribution n Customer Service Upstream (focus for early settlement here) Downstream

STRATEGIC COST MANAGEMENT - BA122B - Fall 2006Slide 5-3 Shift in Strategic Impact n Shift focus from manufacturing costing to… n Upstream or downstream focus using the value chain

STRATEGIC COST MANAGEMENT - BA122B - Fall 2006Slide 5-4 Target Costing n Customer Orientation n Sets costs in the commitment phase-concurrent engineering n Supports keiretsu model via the value chain n Price led costing n Cross functional product teams n Focuses on life cycle costing

STRATEGIC COST MANAGEMENT - BA122B - Fall 2006Slide 5-5 Target Costing Process n Establishment phase n Market research n Competitor analysis n Niche definition n Customer requirement definition n Product feature definition n Market price determination n Profit rate

STRATEGIC COST MANAGEMENT - BA122B - Fall 2006Slide 5-6 Target Costing Process n Attainment phase n Cost gap computation n Design costs out n Design release and continuous improvement

STRATEGIC COST MANAGEMENT - BA122B - Fall 2006Slide 5-7 Cost Reduction n Cost analysis n Components list n Functional analysis n Customer requirement ranking n QFD Matrix n Relative functional rankings n Value engineering n Identify components for cost reduction n Generate cost reduction ideas n Testing and implementation n Cost estimates required at each design iteration

STRATEGIC COST MANAGEMENT - BA122B - Fall 2006Slide 5-8 Value-Index Analysis n Choose features and options based upon customer preference n Value-Index = Cust. Preference % Feature Cost % n VI > 1…increase spending n VI < 1…decrease spending

STRATEGIC COST MANAGEMENT - BA122B - Fall 2006Slide 5-9 TC-Strategic Implications n Quality is improved through the customer focus of target costing n Cost reduction is the heart of target costing n Time reduction is a natural by- product due to concurrent engineering

STRATEGIC COST MANAGEMENT - BA122B - Fall 2006Slide 5-10 TC-Attribute Implications n Technical n Decision relevance improves (quality, cost and time issues are integrated) n Process understanding improves n Behavioral n Early finance involvement and teamwork are mandated n Undesirable attributes of longer development, burnout, feature creep & internal conflict can be managed

STRATEGIC COST MANAGEMENT - BA122B - Fall 2006Slide 5-11 TC-Attribute Implications, cont. n Cultural n Organizational culture must be prepared n Commitment to sustaining values must be established n Customer focus n Cross-functional cooperation n Open sharing of information