Target Costing
Summary of the Young Reader Case (heading 1)
The success of Mercedes in target costing manufacturing of their new M-Class sports utility vehicle had six valuable points of focus:
- Price-led Costing
The product price for commodities with a massive number of competitors is an uncontrollable variable. This means that it is near impossible for a company to control the selling price of its product and still maintain a competitive advantage over other producers. To use price-led costing as a strategy for target costing, the manufacturer sets the selling price at about the trending market price, with the profit mark-up included. With the price in mind, the producer then works on the production process to ensure that the product is sold at the market amount, and the company still makes its profit. Mercedes, in the production of M-class SUVs, had a competitive selling price of its new product in consideration when considering the production process and design.
- Customer Orientation
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Mercedes Company’s production of the M-class focused on what the customer would desire in an SUV. They considered the quality and functionality of the vehicle that would give their consumers value for their money. Considering other companies like Ford already had SUVs in the market, Mercedes sought to give their clients the same functional quality that Mercedes vehicles are famed for. However, the company had to consider reducing the production cost through listening to the client and not including functions of the car the customers did not necessarily desire. By listening to the customer’s needs, the company was able to come up with a quality vehicle that was functionally acceptable to its clients and at a competitive price.
- Product and Process Design
Since the company may not easily control the market price, Mercedes chose to create their profit margin by reducing the cost of production. To reduce the cost of production, the design created must comply with the target cost. The means of production cost reductions must, therefore, be identified way before the production phase begins. Product design includes the selection of materials necessary for production and the value-added activities involved in the production process. Mercedes chose to work with system suppliers instead of their usual traditionally purchased components. The company’s value-added percentages dropped to below 25% from their typical 45%. To achieve the target cost, sensitivity to the cost of production per unit has to start right from the design phase.
- Cross-Functional Teams
To correctly assess customer needs and comply with them at a target cost, Mercedes employed the input of a variety of experts. Having a cross-functional team ensures that every aspect of the new product is focused on the survival triplets; price, quality and functionality. For this reason, Mercedes had design engineers, system suppliers, cost planners and marketing professionals working at proximity in their new facility. Having the team in one location, ensuring that every professional angle was considered during the entire design and production process. Occurring changes and challenges were quickly addressed since the team had the advantage of availability to each other for consultations and easy communication. Controlling costs of production was achieved in a highly efficient manner, and with the necessary professional guidance from all possible angles.
- Life-Cycle Cost Reduction
Target costing not only serves the company in cost reduction but also aims at ensuring the customer’s maintenance costs are affordable. The consideration of product costs beyond the manufacturing ensures customer satisfaction with the new product since a significant function of target costing is customer-oriented production. M-class design engineers considered the costs the customer would incur in repairs and longevity of service of the vehicle. Life-cycle cost reduction strategies included designing a vehicle that would serve the client for an extended period with minimal maintenance costs, and have a considerably high resale value. Through market surveys, Mercedes discovered that clients would rather pay a little higher than the market price for a vehicle that would serve them longer with low maintenance costs.
- Value Chain Involvement
The inclusion of production suppliers early in the production process is vital. The collaboration between suppliers, marketers and consumer service personnel ensures that the best supplies are provided for at the best possible cost, considering the desires of the customer. The involvement of the value chain in target costing proves essential in the timely delivering of quality raw materials at the least possible cost. Mercedes had some of the material produced at the plant since they had the machinery necessary to do so. Supplier input may prove valuable in advising and encouraging reuse and recycling of some of the production materials and their wastes.
Relationship of the Case to your work experience (heading 2)
Beauty & Cosmetics Industry
The beauty and cosmetics industry is a highly competitive industry. Many manufacturers find new ways and products to create a competitive advantage over their peers in the industry. Beauty and cosmetics cover a wide range of products, each competing for the attention of the market. Working in the cosmetics industry is a challenge. However, not many beauty product manufacturers take target costing into consideration during the manufacturing process. Considering that the market price of the products cannot be significantly manipulated to suit the desired profit margins, such companies are mostly left to play catch-up when the market opts for a different product.
The beauty and cosmetics companies would benefit significantly from target costing management and production strategies. In the company I worked with, production plants, laboratory product designers, testers, marketers and the customer experience department all came in at the relevant points in the production process. When the market absorption of the product does not go as planned, the company goes into huge losses since they had to reduce the selling price. Choosing to retain the selling price at a point higher than the market range to build the profit margin also resulted in poor sales. The consideration of target costing strategy could benefit the company significantly in both creating competitive products and competitive advantage over other companies.
Having a cross-functional team for every product would seem costly. However, the input of all the professionals ranging from design to customer satisfaction would ensure the reduction of the cost of production. This would be vital since the manufacturers can hardly control the market prices of beauty products. Target costing would ensure that production considers the market price with the desired profit margin included. With this in mind, managers would have to work together to come up with a production process that is cost-effective while still giving the customers a product they are happy with. Target costing in the beauty and cosmetic industry would require an overhaul of management and production practices. However, the benefits promise to be higher for both the market and the manufacturers.
Relationship of the Case to material covered in class. (heading 3)
Lean Manufacturing
New management strategies have had to come into play for most manufacturing industries due to the high competition for their target markets. In the case of Mercedes, for example, there are several vehicle production companies all over the world. Manufacturers, therefore, have to come up with new ways to attract their desired market, increase sales while still maintaining a viable profit margin. The strategy to achieve these goals has to go beyond the artistic design as seen from the manufacturer’s point of view. Market surveys geared towards lean manufacturing reveal that most of the aesthetic functions put into products by manufacturers are inconsequential to their consumers.
Lean manufacturing, therefore, focuses on consumer-oriented products with efficient production processes and minimal waste. Target costing is one of the ways that lean manufacturing can be achieved. With target costing, the selling price of the product is set and cannot be adjusted. To create a profit margin, other factors within the production process would have to be adjusted. The inclusion of all departments involved from the beginning of production to the point of sale is vital to achieving viable profits. Efficiency in the production process, including the cost of raw materials and minimization of manufacturing waste, plays into creating the desired product at a minimal cost.
Customer Oriented Production
Target costing re-orients the focus of manufacturing to the desires of the target consumer. Creating a product geared towards the consumer wants and needs ensures that little time and resources are spent on parts of production that are not necessary. A customer will easily spend money on a product that fully meets their functional desires at an affordable cost. Consumers mostly need to feel that they got value for the money they spent. In the case of Mercedes M-class, customers prefer the quality chassis that is the signature of all Mercedes vehicles. The company could not compromise on this, although the chassis they use are expensive. However, other functions in the design were deemed unnecessary to a client that needs an SUV. Therefore, customer-oriented production ensures the relevant functionality of the product while maintaining the qualities desired by the customers.
Summary (heading 4)
Each point of focus of target costing in production is geared towards creating a product that is mutually beneficial to the manufacturer and the customer. The manufacturer benefits from high sales, customer loyalty and viable profit margins. The consumer, on the other hand, receives a satisfactory product at a competitive market price. For Mercedes, the creation of an entirely new brand of vehicle to compete with others already in the market was a massive goal. However, focusing on the best qualities Mercedes vehicles are known for while seeking the customers’ opinion on what they would want in an SUV, helped in achieving their goals with target costing.
For target costing to work, the management strategies of companies have to change significantly. In situations where departments would have to wait their turn to handle their duty towards the new product, target costing requires a concerted effort. Every aspect of the production process has to be analyzed and compared to others to ensure the viability of selling the end product at the set target cost. Companies that seek to use target costing to increase their competitive advantage require a management overhaul in terms of efficiency and style of thought.