[转帖]Five Techniques for Full-Cycle Cost Management

SuperCFO

Companies tend to assume that a large percentage of a product's costs are locked in by design - that little can be done to reduce costs once the design is set. This belief has shaped many cost-management programs across diverse products' life cycles. Because of it, firms will often focus on cost reduction during the design phase and cost containment during manufacturing. But are much of a product's costs truly locked in during design?

To answer that, consider the consumer-products division of Olympus Optical Co. Ltd. in Tokyo, Japan. In-depth field observations of the life cycle of the new Stylus Zoom camera helped provide a detailed understanding of how the company applies various cost-management techniques across a product's life cycle. Olympus Optical achieves significant cost reductions in manufacturing, contradicting the widely held assumption that a large percentage of costs are locked in during design.

Indeed, costs can be aggressively managed throughout the product life cycle. Furthermore, Olympus Optical applies various cost-management techniques in an integrated manner, with the outputs of some techniques acting as inputs to others, thereby increasing the program's overall effectiveness. The five major techniques are target costing, product-specific kaizen costing, general kaizen costing, functional group management, and product costing. Each plays a crucial role in the firm's integrated approach to cost management.

1. Target costing. This technique is applied during the design stage as a feed-forward mechanism through which engineers retool the design of a new product to reduce costs while maintaining a desired level of product functionality and quality. At Olympus Optical, the first step is to identify the price point at which a new camera model would sell and from that to determine the free-on-board price - the amount the company would receive on the sale of the product. Target costs are then established by subtracting the product's desired profit margin from its free-on-board price. Next, product engineers look for creative ways to attain the desired level of functionality and quality at the target costs.

Olympus Optical's senior management places particular importance on target costing because the manufacturing phase of the life cycle of modern point-and-shoot compact cameras is short. (The typical product is on the market for only 12 to 18 months.) A short manufacturing phase makes it difficult for product engineers to correct any design problems after an item has entered production. Thus the company encourages people to solve as many cost problems as they can during the design phase.

2. Product-specific kaizen costing. This technique enables the rapid redesign of a new product during the early stages of manufacturing to correct for any cost overruns. During the trial production of the Stylus Zoom, for example, management discovered that costs were about 10 percent above target. Furthermore, when the product entered mass production at Tatsuno, Japan, the costs were found to be even higher.

Overall, the production costs were an additional 5 percent more than the trial costs, making the total cost overrun 15 percent. Normally, the earlier 10 percent cost overrun would have led to either the postponement or cancellation of the project. But Olympus Optical proceeded with the Stylus Zoom because the company considered it to be a flagship product.

3. General kaizen costing. This technique focuses on the way a product is manufactured; the assumption here is that the product's design is already set. General kaizen costing can be particularly effective when it addresses manufacturing processes that are used across several product generations. In such cases, savings achieved during the manufacturing cycle of a particular product could continue long after its withdrawal from the market.

In general kaizen costing, management sets cost-reduction goals for production processes and empowers the workforce to find ways to achieve them. Olympus Optical's approach focuses primarily on reducing material, labor, and some overhead costs. For example, sales, general and administrative costs associated with the control and procurement departments are included in the analysis.

4. Functional group management. This technique consists of breaking the production process into autonomous groups and treating each as a profit center. There are two reasons for doing so. First, the switch to profit as opposed to cost centers allows the groups to increase the throughput of their production processes even if those changes result in higher costs. The second motivation is the change in mindset that functional group management induces. Converting the production lines to profit centers helps the groups to better understand their contribution to the company's overall profitability.

The production process at Tatsuno was broken into ten autonomous groups. By finding ways to increase their output levels, those groups were able to generate additional revenues and greater profits. The capacity of the factory increased as a result, leading to real performance improvements.

5. Product costing. This technique helps coordinate the efforts of the other four techniques by providing them with important, up-to-date information. The process consists of three major functions. The first is to determine if new products are indeed being manufactured at their target costs. The second is to ensure that the production processes are operating at the expected level of efficiency. And the third is to identify unprofitable products for further action, such as replacement or aggressive cost reductions.

Applying the Five Techniques

Olympus Optical applies the five cost-management techniques throughout the product life cycle in the following ways:

· Cost reduction versus containment. In cost reduction, people actively try to lower costs to pre-established levels. Cost containment is a more passive process that tries to sustain previously achieved cost-reduction objectives. During the design phase, target costing helps reduce the anticipated manufacturing cost of a product to a pre-established level, namely the target cost. Of the four techniques applied during the manufacturing phase, three (product-specific kaizen costing, general kaizen costing, and functional group management) are used for cost reduction and the other (product costing) for containment.

Olympus Optical relies on product costing to monitor the actual costs during the manufacturing phase. When those costs rise to unacceptable levels - due, for example, to increases in component prices - general kaizen costing is applied to bring those numbers back in line with the previously established objectives. This limited role for product costing might seem surprising given the recent popularity of activity-based costing, but it reflects the way that Olympus Optical has designed its cost-management program.

In the company's approach, the primary role of product costing is monitoring - specifically, ensuring the maintenance of previously achieved cost-reduction objectives. Thus the firm dedicates just one technique to such a passive activity. In contrast, Olympus Optical deploys multiple techniques and greater resources to cost reduction, which is a more open-ended and active objective for achieving significant savings.

· Product design versus process improvement. Cost management during the design phase consists solely of target costing, which necessarily focuses on improvements to the product design. In contrast, cost management in the manufacturing phase includes three techniques (product-specific kaizen costing, general kaizen costing, and functional group management), of which only one (product-specific kaizen costing) is targeted toward product redesign. The other two techniques focus on making the production processes more efficient, and they each play different but reinforcing roles.

General kaizen costing helps reduce the cost of performing production processes, whereas functional group management tries to increase output either by speeding up those processes or by increasing their yields. Lastly, product costing focuses on product costs because of the technique's role of cost containment.

· Ad hoc versus systematic application. Of the five techniques, only one (product-specific kaizen costing) is applied in an ad hoc manner. Specifically, it is used only for products that fail to achieve their target costs but for strategic reasons, are launched anyway.

The goal is to find any savings that people might have missed during the design phase. According to Olympus Optical's management, changing a product's design during the manufacturing phase can be highly disruptive, and in most cases the anticipated savings for products that have already achieved their target costs is not sufficient to justify the effort. Consequently, the company deploys product-specific kaizen costing just for high-volume products that have been launched above their target costs.

lucy98521