Target Cost Management – a method of strategic cost management
There are various products and services around us. This is the result of companies and other business entities coming up with new products and services and using new technologies to create them.
But our satisfaction knows no bounds. As long as we seek a better life, the business of creating new products and services will continue forever.
On the other hand, the resources necessary for business – people, goods, money, and information – are not inexhaustible. From the planning of new products and services to their abolition, companies in particular are required to be creative in acquiring and using their limited resources efficiently and effectively for earning more profits.
Therefore, there is a method of strategically managing costs in order to obtain more profit by treating the resources consumed by new products and services as costs. This is called Target Cost Management (TCM).
In the first place, the measures for companies to earn more profits are very simple: increase sales or reduce costs. However, since sales are subject to market and customer trends, it is a cost that companies can manage on a daily basis with their own efforts.
As a result, companies regularly aggregate, analyze, and minimize costs incurred through production and sales activities where possible. However, the costs incurred cannot be reduced any more, and measures to reduce costs are limited by the condition that the methods of work and the equipment to be used that generate costs are already determined.
On the other hand, before costs are incurred, under the condition that the way of work and the equipment to be used are not yet determined, consideration of preventing future costs of new products and services will lead to significant cost reductions and even greater profits. This is the basic concept underlying TCM.
However, considering costs in advance is easier said than done. For example, if a company sets the sales price of a new product or service acceptable for customers, and then subtracts the profit that the company needs, there is a cost that the company is allowed to incur.
But, at that cost, it may be difficult to realize products and services with functions and quality that meet customer expectations. On the other hand, if the company tries to realize functions and quality that meet customer expectations, costs will increase, and unless the company increases sales prices, it will not be able to secure the profits that the company needs.
Thus, if the company increases the selling price, it may not be accepted by customers. Therefore, if the company keeps the selling price down, the company will not be able to secure the profit it needs, and if the company tries to secure the profit, it will have to reduce the cost … and this will go around in circles.
In short, companies have to figure out how to reduce costs while realizing the functions and quality that customers expect. Value engineering (VE) refers to the search for a balance between functions, quality, and cost to enhance the value of a product or service as mentioned above.
In TCM, project members gathered from various departments within the company and from external suppliers, who develop new products and services, work together to reduce costs by generating various ideas to be creative, aiming to simultaneously achieve goals for functions, quality, delivery deadline, and cost through such VE. This is called “genka no tsukuri-komi” (creation of an optimal cost) in Japanese.
In addition, in the process of developing new products and services, it is necessary to regularly hold meetings involving senior management, development managers, officials from various departments involved in development, and suppliers to check the achievement status and profitability of various goals, such as functions, quality, delivery deadline, and costs, and to manage milestones to consider development policies.
By continuing these TCM activities throughout the development process, a systematic approach is developed to identify and reduce unnecessary costs and to bear costs where they should be borne in order to increase the value of products and services.
Does Target Cost Management not help innovation?
It is said that Toyota Motor started TCM around 1960, but it seems that similar methods were used by Nissan Motor and others.
The background to this was motorization, which sought to popularize automobiles among the general public. At that time, Japanese government proposed a national car concept in which domestic manufacturers would develop domestic cars that would be superior to foreign cars.
In response to that, Toyota Motor conducted cost reviews at the development and design stage of new cars, referring to the sales prices of foreign cars and worked together with external suppliers to achieve high-quality and low-cost national cars. As a result, cars with excellent cost performance such as the Publica and Corolla were born.
This development model spread to various manufacturing industries in Japan, including the processing and assembly industry, and eventually led to the superiority of Japanese products in the world market. In the 1980s, Japan’s manufacturing industry, producing high-quality and low-priced products, swept the global market, earning the nickname “Japan as Number One.”
However, as Japan’s economy matured, globalization developed in Japan’s manufacturing industry, seeking new markets and low-price human resources overseas. At the same time, excellent production systems were transferred overseas, and supply chains became globalized and localized. Under these circumstances, the study of superior technologies in Japan’s manufacturing industry and the provision of technologies to local companies proceeded, and Japan’s unique technologies spread around the world in a way that allowed them to flow out, leading to a relative decline in Japan’s technological capabilities.
In addition, as overseas companies severely criticized keiretsu (conglomerations of companies) which gradually dissolved, it became difficult for Japanese companies to demonstrate their strengths in the Japanese management approach of TCM, which was established through strong cooperation with suppliers.
As a result, Japan’s presence in the global market declined after the collapse of the bubble economy in the 1990s.
The creation of innovation is an important issue for modern companies. Surely, in order to increase our presence as the world is leveling out, it is required to create new products and services that have never existed before.
Can TCM, which was once effective in creating products that swept the world, contribute to the creation of modern innovation? In fact, few studies have considered TCM from the perspective of innovation, and this point has yet to be clarified.
For example, ambidextrous management has become a hot topic in recent management theory. In other words, management that simultaneously deepens knowledge and technology in existing businesses and explores knowledge and technology for new businesses.
TCM, which has demonstrated its strength in the trend of catching up with and overtaking advanced products overseas, is rather good at this deepening, and from the perspective of innovation, it is a management method that promotes incremental innovation. On the other hand, TCM does not seem to significantly contribute to the search that leads to radical innovation to create innovative new products and services.
However, the deepening inherent in TCM and the mechanism that encourages people to cooperate will contribute to exploration. In other words, because of the deepening of knowledge and technology in existing businesses, we become aware of something that is different from what we have had up to now, and because of the collaboration of people from diverse backgrounds, new ideas are created.
As I mentioned earlier, information is also a limited resource. It is expected that TCM will evolve as a platform that encourages ingenuity (innovation) to obtain more profits by acquiring and using information more efficiently (at less cost) and effectively (as a more innovative idea).
For example, by working with consumers and customers to gather user-oriented information, companies may be able to create innovative ideas that have not previously been conceived by them.
Against the backdrop of the recent global situation, production activities are beginning to return to Japan, and it will be possible to activate proposals from suppliers by reconstructing the cooperative relationships and information sharing mechanisms that existed in the past with suppliers.
In this way, TCM can also be useful in the process of creating radical innovation. Because of the cost constraints that must be considered in order to spread new goods and services to the general public, dialogue and cooperation to break through these constraints can arise, and new ingenuity and ideas that lead to new innovations can emerge.
There is a new world to be seen by being conscious of cost (money)
Consideration for the environment and society has become an issue in corporate management in recent years, and TCM is also effective in this regard.
For example, Japanese industry, which once experienced a major social problem of pollution, knows that environmental pollution and destruction can lead to significant costs for both companies and society.
Therefore, when producing and providing products and services, efforts such as not emitting harmful substances to the environment and using environmentally friendly materials and energy were born from the idea of preventing future costs.
At first glance, the realization of a recycling-oriented society, which we often hear about these days, may seem more costly than conventional methods, but in fact, we can see through TCM that the opposite is true.
As mentioned earlier, such cost management leads to the efficient and effective use of limited resources, and also leads companies to contribute to the achievement of the Sustainable Development Goals (SDGs) aimed at sustainable development.
By the way, TCM is a subject of study in accounting, but many people may avoid accounting because it has a rather difficult image. However, using accounting to understand and analyze the impact of our lives on the environment and society in terms of money, which is a unit that anyone can understand, also makes it easier to see various things that are difficult to see and is useful for improving and reviewing our daily lives.
For example, even if most people do not record household accounts on a regular basis, they balance their monthly income and expenses to avoid overspending.
Non-refundable insurance may seem unnecessary at first glance, but you must have bought it because you feel it is necessary to prepare for the costs that may occur owing to illness or accidents in the future.
Such thoughts and actions are our natural accounting skills. If you look at yourself and the events around you from an accounting point of view, you will see that there are unnecessary costs everywhere and ingenuity to reduce such costs.
For example, if you go to a conveyer belt sushi restaurant, you can see the ingenuity to reduce the loss due to the staff’s labor cost and mistakes, such as serving by a conveyer belt lane or ordering by the customer using a touch panel or smartphone. This also leads to convenience and entertainment for customers, which not only makes sushi eating enjoyable, but also becomes a key to keeping food prices low.
In this way, from the perspective of accounting, you can see various examples of ingenuity and efforts of companies that you have not noticed before, and conversely, you can see things that are being uselessly incorporated simply because they are new technologies.
Accounting is very familiar to us. Accounting is said to have originated in ancient Mesopotamia around 3,500 B.C. and has been with our lives ever since. Do not shy away from accounting, and encourage yourself to look at things from an accounting perspective and make new discoveries.
* The information contained herein is current as of January 2023.
* The contents of articles on Meiji.net are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.
* I work to achieve SDGs related to the educational and research themes that I am currently engaged in.
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