Control tomorrow's costs through today's designs

In the past, companies took a cost-plus approach to pricing, charging high prices when a product was first released, then lowering prices when production was scaled up. Lean competitors make that approach impossible, however, as they are quick to introduce competitive ''me too'' products to market. To gain and hold market leadership today, a company must design the cost out of its products from the outset. Target costing is a cost-management technique that lets a company do just that: The company determines how much customers are willing to pay for a product and then designs the product within cost limits that will permit it to sell profitably at the predetermined price. Robin Cooper and W. Bruce Chew examine target costing as it has been implemented by Olympus Optical Company in the manufacture of cameras and by Komatsu in the manufacture of earth-moving equipment. Olympus introduced target costing to restore profitability to its camera line; Komatsu, which relies heavily on vendors to supply equipment components and subsystems, used target costing to help suppliers drive costs down. Establishing the target cost is only half the battle. Companies subsequently must adhere to the cardinal Yule: If they cannot meet the targets, they cannot launch the product. The cardinal rule applies to the product as a whole, however, not to each component. If a component or subassembly exceeds its target cost, the excess can be made up by another component that costs less than its target. Target costing is not always a simple process, and a company that practices target costing is not guaranteed victory, but it does earn the right to compete in today's market.