Nice Article to understand Target Costing Application in Cost Reduction

1. Enhancing Supply Chain Competitiveness
Through Cost Excellence
Cost Reduction Strategies for an Automobile Supply Chain

2. What is Supply Chain?
Conceptual Diagram of a Supply Chain

3. Why Cost Reduction?
AIM
Profit = Selling Price – Cost of Mfg.
C
Can you Increase the Selling Price of your product in today's Environment.
C= Cost of Direct Material + Cost Of Conversion + Taxes

4. Cost Management Strategy for Two
Different types of Products

5. TWO TYPES OF STRATEGY
Red Ocean Strategy Blue Ocean Strategy
Compete in existing market space Create uncontested market space
Beat the competition Make the competition irrelevant
Competitive Advantage Value Innovation
Segment existing customers Attract noncustomers
Exploit existing demand Create and capture new demand
A STANDARD BUS A NANO
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6. Cost management For Blue Ocean
Strategy Products
Tata Nano Tata Ace

7. Mechanics of Target Costing
Suppose you work in an Automobile Company?
Your Chairman wants you to make a Truck ( LCV)
Market Price for Truck = Rs 2 lacs
Total no. of parts in a truck = 1000 no.s
How would you decide which part to procure at what cost?
The Answer?

8. When do you lock your cost?
100
95
85
Committed Costs (%)
Incurred Costs (%)
66
Product Design & Productio Logistics
Concept Development n Support

9. Target costing is
A structured approach
A structured approach
to to determine cycle costcost at which the proposed
determine life life cycle at which the proposed product
with specified functionality and quality must be produced
product
to generate the desired level of profitability over its lifecycle
with specified functionality and quality must be
when sold at its produced selling price
anticipated
to generate the desired level of profitability over its
It is a price based costing rather than cost based
lifecycle
pricing.
when sold at its anticipated selling price
It is a price based costing rather than cost based.

10. Seems a Little fictional?
• With all these unknowns –
– Selling Price
– Life Cycle Sales Volume
– Dedicated and Common Investment
– Expected Costs of Materials, Conversion and post production
– WACC
• Is it not getting a bit too theoretical?

11. Target Costing Process
Target Price Target Profit Allowable Cost
Kaizen
Costing
Current Cost Value Target Cost
Engineering
Design Phase Production Phase

12. Now, lets come back to the main problem
Manufacture a product which can be sold at Rs 2 Lac and profitable to company as well.
What is the Cost of each of the 1000 parts used to manufacture this product.

13. Target Cost of Future Truck (May be…)

14. We Decided that Total Material Cost of a Truck
should not exceed 1,16,500 ; else we cannot
sell it at Rs 2 Lacs which is the Aim.
Now, Lets try to find out from Target Costing
Methodology , what should be the Target cost
of each Major System

15. Target Cost for all Major Systems (May be…)

16. Lets Take An Example Of Braking System
We have a Target Cost for Full Braking System (i.e. Rs 9323)
Now, either I can give this target cost to my vendor or can ask him to design for
me a braking system for me in this cost
Or
I can find out target cost for each of the braking parts and procure them
seperately from different vendors

17. Target Cost for all Parts of Brake System (May be…)
Now, you would know , how much target price you need to give to your brake
drum supplier.
Supplier should design a new part at this cost.
Similarly , find target costs for all other parts.

18. Cost management For Red Ocean
Strategy Products

19. Three types of Values
Functional
Value
Value in Esteem
Exchange Value

20. How to Enhance Contribution? ( Cost Reduction)
Some Important Levers
Feature de-contenting
Specifications Levers
De-specification
Alternate Material
Weight Reduction
Technical
Value Engineering Design Levers Part Commonization
Parts substitution
Modularization
Mfg Process Change / Yield
Manufacturing Levers
Improvement
Make vs. Buy
Joint Process Improvement
Commercial Levers Supplier Management Levers
Alternate/Global Sourcing
Negotiation improvement
Feature Addition
Value Enhancement Levers Specifications Levers Specification Up-gradation

21. VALUE ENGINEERING
A HUMOUR STORY

22. Welcome to the court of Emperor
Jalaluddin Muhammad Akbar
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23. The raw material
Noble men! There
price is shooting up.
is a very I want to handle
The material cost of
important matter this situation
a sword has gone up
before the court without
by Rs.10 . And ….
today. increasing the
We are adding
50,000 soldiers to taxes. Please
our army this year. give your
valuable
suggestions as
to how we
should face this
situation.
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24. Why everyone’s
Your Majesty, I quiet?
have six ideas Birbal! I am
which can reduce surprised that you
the cost of a too have become
sword by atleast silent!!
Rs.20 without Brilliant!.
compromising the Tell us those
functional ?? ideas.
!!
requirements.
!?
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25. Part Count
Reduction
Presently,
the hilt has
7 parts.
The
proposed
design will
have 4 .
Existing Design New Idea
7 parts 4 parts
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26. Part
Commonisatio
n
For the new hilt,
instead of designing
exclusive rivets, we
can use the rivets of
daggers.
x
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27. Benchmarking
When the Shah of
Persia was our Guest
last month ,
I observed that the
hilt in his sword does
not have a curved
portion. We can
design similar hilts
for our experienced
soldiers.
Existing Design New Idea
Curved portion
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28. Alternate
The sheath Material
which houses
the blade is
made of copper
now.
We can switch
over to Alloy
steel which is
cheaper.
Copper Steel
Sheath
Blade
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29. Weight
Since alloy steel is Reduction
stronger than
copper, we can
reduce the
thickness by 0.5
mm which will save
material
2 mm 1.5 mm
Sheath
Blade
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30. Yield
The curved Improvement
blade design is
yielding only 2
pieces per die. If
a straight blade
is designed, we
can extract 3
pieces per die.
2 Blades 3 Blades
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31. There is an
advantage also.
I do not have to
Saheb, there is no
increase the tax.
doubt that the
present sword
designed by you for Your majesty. The
my Grandfather’s present design is being
army is superior. used since the time of
However, let us test Babur
this new design in without any failure.
our barracks.If they We should not risk any
pass the tests, we design change.
will deploy them in If the ideas pass
the battle field. the test, we can
save atleast Rs.
Ten Lakhs this
year, thus serving
the purpose of
cost reduction.
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32. Yes, your Majesty. If six ideas for the
With the help of Functional Analysis System sword itself can
Technique(FAST) any body can generate such save Rs. Ten lakhs ,
ideas. FAST is a powerful tool used in Value
Engineering (VE) which is an extremely effective
imagine how much
system to improve products and services for cost money we can save
and productivity improvement. on other weapons
like spears, arrows
and cannons etc.
Birbal! I wonder
how you
developed these
ideas! Is there a
systematic way
by which others
can also be
trained to
generate such
ideas.
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33. Birbal! There are four divisions in my
army – Infantry, Cavalry,Artillery and
Elephant brigade. I want you to teach
the engineers in each of these
divisions the application of Value
Engineering (VE), especially the
Functional Analysis System
Yes, your Technique(FAST). Each division should
Majesty. release Armoury Change Requests
(ACRs) for the worth of Rs.25 lakh.
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34. Thank you