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Target Costing

Target Costing on Mercedez – Benz Mercedes-Benz (MB) is one of the world’s most successful car manufacturers since its establishment in 1886. They used target costing in the design and production of one of its products, the M-Class, which is a new sports utility vehicle model, in response to their first time suffering loss in 1993 because of cost inefficiency and problems with material purchasing and adapting to market changes. MB started developing a range of new products such as the C-Class in 1993, the E-Class in 1995, the new sportster SLK in 1996, and the A-Class and M-Class All Activity Vehicle (AAV).

The issues could be raised from this case are how MB reacts to the environmental changes by applying target costing (TC) into the production of its new product, M- Class All Activity Vehicle (AAV). Competitive Environment and Strategy By taking advantages of its customer loyalty and sound brand image, MB was focusing on protecting their existing market share, which can be described as a defender (Miles and Snow, 1978). However, the first-time money losing in 1993 made MB realized that the market was changing rapidly and introducing new strategies is necessary, in rder to remain alive in the market.

Moreover, there are some concerns regarding the target costing application to the AAV product. First, this system will take overly- long development time. Cooperative, mutually beneficial, long-term relationships with suppliers should be maintained to diffuse cost reduction effort. MB’s strategy was producing vehicles that were more expensive and delivered a greater perceived value to customers. To run with this startegy, MB need an intensive cooperation with their suppliers to ensure the production processes could run effectively as they were lanned.

MB’s suppliers provided systems rather than individual parts or components for production of approximately 65,000 vehicles annually. Although the target cost might be met, development time may increase because of repeated value engineering cycles to reduce costs, ultimately leading to the product coming late to the market. The other concern of implementating target costing on MB is employee burnout. One of specialisation of MB which is differentiates them from others producers is MB produce luxury cars, with exclusive design and hig brand image.

They need reliable designers to maintain and develop their products. Indirectly, it become a high pressure for designers that could possibly contributes employee burnout. MB has moved to adapt with the environmental change and to increase their profitability after facing their first loss is seeking new markets, new segments, new niches. Their first move is conduct a market research (concept phase) for one year. The analysis revealed that there is a good opportunity in the AAV market. After identifying customer preferences and component importance index, target cost ndex are determined.

The index indicates that transmission, electrical system, and other function groups are candidates for value engineering. Regarding to the concerns of target costing application on MB, those concerns basically impose that there is a risk of making things worse by pushing it too far. People would normally consider product’s feature as an integration of a series of functions which could be makers upgrade and introduce new cars almost every year. That’s one difference from other products which has a once-for-all design process.

But for a platform, it as MB’s policy to develop new platforms for its series of car every 7 to 8 years, and every development is a new structure rather than simple modifications which means it has a long development life for a platform before it’s launched. So compared with other products, design and engineering process plays a vital role in the whole cycle life of car and mistake in this process normally will lead to a very big risk of unsuccessful products. Then it comes out the paradox between state of art and state of market.

While designer and engineer trying to make an artist, management ocuses on profitability, it’s where MB’s Target costing is available to push designers hard to design cost out. Therefore, MB should work its best to derive a comprehensive category list prior to index development. Finally obtain the target cost through the Target Costing equation. Importance Index (table 4) shows the degree of importance towards customers of each component which may be considered when purchase of a new MB product while Target Cost Index (table 5) is a measure for the deviation of importance (which the component should be given) and component cost.

ABC is an ideal instrument to meet this requirement. Therefore, Tartget Costing was used in the AAV production project. However, there are some problems existing in the development of those indexes as well as the way MB was interpreting them. Meanwhile, MB could use achievement ratio and cost reports to monitor the performance of Kaizen Costing. MB then compared the target cost with drifting cost to find out the cost reduction targets for each function group. In order to achieve this, MB should seek to develop certain organizational arrangements (through policies or ulture) to foster a spirit of continuous improvement.

Finally, i would like to recommend MB to always maintain a good relationship and cooperation with all those suppliers since MB become rely on them to achieve target costing. Indeed, as a leader in luxury car market, innovation on design and features of product are the most important things to be considered. So, regeneration and idea’s tranformation amongst designers, engineers and the rests of human resources shuold be developed by the innovative and modern learning, training, and development systems.

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