Target costing for supply chain management: criteria and selection

Archie Lockamy III and Wilbur I. Smith

Industrial Management & Data Systems

2000, Vol 100, Issue 5, pp. 210-218

 

1)      Intro

  1. a) 3 components of supply chains
  2. i) suppliers
  3. ii) producers

iii)     customers

  1. b) Ultimate goals of supply chain management
  2. i) Delivery of goods/services
  3. ii) Creation of customer satisfaction
  4. c) Conflicts in supply chain management
  5. i) Cost reduction vs. customer satisfaction maximization
  6. ii) Traditional costing focuses on cost reduction

iii)     Target costing focuses less on cost and more on customer

2)      Cost Management

  1. a) Activity Based Systems
  2. i) Focuses on achieving customer value and firm profit thru the management of activities
  3. ii) Firm is viewed as a set of interlinked processes

iii)     Depends on availability of accurate estimates of activity costs

  1. b) Target Costing Systems
  2. i) Focus on ensuring that products are launched with customer valued specifications and at a life cycle price that will result in profit
  3. ii) Costing is imbedded in the development / introduction processes

iii)     Process ends when:

(1)   Firm discovers a way to satisfy customer requirements at the target cost

(2)   The product is abandoned

  1. iv) Customer is the focus
  2. v) Target based costing can only be successful when deployed throughout the entire supply chain

3)      Target approaches

  1. a) Price Based
  2. i) Compensation totals no more than set allowable cost
  3. b) Value based
  4. i) Responds to changes in customer requirements with increasing value
  5. c) ABCM
  6. i) Control and reduce overall costs
  7. ii) Stimulate continuously improving competition

4)      Recommendations

  1. a) Adopt a global perspective to consider customer satisfaction
  2. b) Price based approach is best suited for supply chain relationships are open-market or cooperative relationships
  3. c) Value based approach is best suited for supply chains who want to work together to simplify supply chain operations
  4. d) ABCM is best suited for chains who want to work together to improve the supply chain and improve/develop their products

 

 

Key Points

  1. Target costing results in closer to actual cost being applied to products
  2. Target costing can only be successful when implemented through the entire chain
  3. Target costing can help companies select the right products to produce / introduce and when to abandon.