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They all had very effective organizational structures, responded to the "voice of the customer," streamlined their product development process, and actively engaged their supply chain to achieve target costing objectives.

To better understand these practices, we visited the four companies that had achieved the most success in each area.

Target costs are calculated using a formula similar to the following: market price - required profit margin = target cost.2. Customer requirements for quality, cost, and time are simultaneously incorporated in product and process decisions and guide cost analysis.

The value (to the customer) of any features and functionality built into the product must be greater than the cost of providing those features and functionality.3. Cost control is emphasized at the product and process design stage.

The target costing system determines cost objectives and performance goals for each platform team, and meeting these goals is an important component of team members' annual performance reviews.

The target costing system at Daimler Chrysler makes use of a "toolbox" of management initiatives to improve productivity and reduce costs.

During this stage in a product's life cycle, workstation setups, assembly steps, and process flows are simulated and optimized on paper before expenses are incurred.* Lean Manufacturing occurs after product launch and extends beyond Daimler Chrysler to include its supply chain.

The cross-functional teams employ a variety of management tools and initiatives to help them achieve their objectives.

SRL" ------ Calle Charcas, Pasaje El Cerro, casa 10 ------ Tel. 591-3-3346847 ------ [email protected] Santa Cruz, Bolivia Target costing can best be described as a systematic process of cost management and profit planning.

The six key principles of target costing are: (1)1. Market prices are used to determine allowable--or target--costs.

Frequently a "gap" exists between the target cost and cost projections for the new product based on current designs and manufacturing capabilities.

Closing the gap through cost reduction is central to the target costing process.

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