What is Target Costing?
- Target Costing is a tool, and comprehensive process, that dramatically improves an organization's capability to reduce costs and improve the bottom line. It is a tool for implementing a Lean Enterprise and managing a cost competitive company.
- There are several key components of Target Costing - in the forms and analysis that are used, the standard work that is used to drive execution, and the standard management practices that are required to guide and lead the cost reduction teams.
- Target Costing is target driven; it is relentless in pushing the organization to establish and achieve the cost targets. The target setting process brings the factory floor together with the supporting departments to ensure there is total understanding of the market price for a product. This approach drives blunt force pragmatism about market realities.
- There are no functional hard targets in target costing. There is no hiding behind functional histories or silos. With Target Costing, it is common to redeploy some talent in the organization to projects with the most opportunity to reduce costs. This may be in manufacturing, in purchasing, in design, or even in sales. The tool drives the organization to efficiently allocate talent to the most productive projects for the company.
- Target Costing also ties together other contemporary management tools such as Lean, 6-Sigma, etc. In fact, Target Costing brings these tools out of a tool silo, and into the mainstream of necessary cost reductions. When an idea is bought off as a key element in the Target Cost reduction plan, the implementation team is signing up to be accountable for the project savings.
- Target Costing also ties in all the necessary components of cost - from design to purchased components to manufacturing to shipping to sales
At the heart of Target Costing is execution. The key tools for executing Target Costing are:
1. Element Tracking List (ETL) - this is the master list of each cost reduction project that the team is working on for the Product Line. This tracks project number, description, project owner, implementation date, savings/unit, customer approval requirements, implementation status, and other data.
2. Key Task Monitor (KTM) - There is a KTM for each project. This is the implementation schedule for the project. It includes the owner, each individual task that needs to be accomplished, with dates. The KTM's track back to the ETL .
3. Sufficiency Chart (SC) - The Sufficiency Chart is the highest level of monitoring for Target Costing. This tracks actual costs, projected costs based on the ETL projects, actual profit margin, target profit margin, and price outlooks. In the context of Target Costing, the SC is the key report card for the product line on actual profit performance and future product line performance to target margins.
A very formal standard management plan and review is paramount to the success of Target Costing.
- The keys to this are constant checking of plan versus actual, corrective actions being addressed with no delay, and multiple levels of management involvement in the process.
- Monthly review with Senior Executives to review the Sufficiency charts for actual performance, and ensure that plans are sufficient, being executed, and resources allocated to achieve the plan.
In summary, Target Costing is a tool that includes standard work and standard management to significantly improve an organization's ability to drive cost reduction performance.