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Tws LC Target Costing

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19 views6 pages

Tws LC Target Costing

Uploaded by

Tin Tran
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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SOURCING

HIGH-QUALITY
PRODUCTS
WITH HARD
BUDGET
CONSTRAINTS
TARGET COSTING
THE
CUSTOMER
CHALLENGE
During a time of tight budgets, our client’s indirect Procurement team was tasked
to source a technically complex production line for one of their factories. To this
end, a cross-functional team had already developed detailed product specifications
to ensure the production line met all functional and qualitative requirements our
client would need. However, the Procurement team quickly realised that their
­conventional approach of asking suppliers to submit offers adhering to all specifi-
cations would lead to offers vastly exceeding their available budget.

Faced with the challenge of balancing tough budget constraints with maintaining
high production and quality standards, our client turned to TWS Partners to define
a sourcing strategy that would guarantee two things:

1. Nominate a supplier able to build a functional production line that fulfills the
client’s high-quality production standards.

2. Stay within the budget.

2
THE TWS
APPROACH
Combining our expertise in designing Game-Theory based negotiation processes
with our experiences in creating incentive schemes to motivate suppliers to share
their know-­how, our consulting team developed a new sourcing approach: “Target
Costing”. In a nutshell, Target Costing uses competition between suppliers to opti-
mise the technical concept under a fixed target price. In a Target Costing approach,
technical specifications and requirements are limited to necessary minimum require-
ments to give suppliers a high degree of freedom in developing their own concept
within the pre-­defined budget. Ultimately, our client gave all suppliers the commit-
ment that the supplier to offer the best concept while meeting the target price
would be awarded the business.

3
A TARGET COSTING PROJECT
IS CONDUCTED IN FIVE STEPS:

1 3
Setting the target price Defining an evaluation framework
The first step in a Target Costing project is to deter- A tender that only dictates a target price as well as
mine the target price for the awarded product. This minimum requirements for the final product will natu-
target price needs to realistically reflect the product rally lead to very heterogenous offers and concept
requirements while respecting the client’s budget con- submissions. To compare offers and concepts, we de-
straints. velop an evaluation framework where we pre-define
evaluation criteria together with all relevant
cross-functions. All submitted concepts are evaluated
2 and assessed based on these criteria.

Determining minimum requirements


The key to meeting the target price is limiting the
technical specifications and requirements suppliers
4
need to adhere to. By specifying only a few essential Developing competitive concepts
requirements (i.e., minimum requirements), suppliers During the actual tender, suppliers compete to develop
are granted the creative freedom they need to develop the best concept while meeting the target price. Here-
cost-effective solutions. This allows our client to bene- by, each participating supplier has regular technical
fit from the (technical) know-how existing in the mar- discussions with our client and receives feedback to
ket, and take advantage of suppliers’ strengths and optimise their concept. Throughout these feedback
cost-innovative potential. However, limiting the techni- sessions, concepts are steadily improved, resulting in
cal specifications to a few minimum requirements is viable concepts fulfilling all quality and production
also the main challenge of any Target Costing project. standards.
The trade-off between granting suppliers the creative

5
freedom to develop cost-effective solutions, and speci-
fying enough technical requirements to ensure the
functionality and quality of the product, needs to be
Selecting the winning supplier
carefully balanced. To this end, we conducted inten-
In the final step of a Target Costing project, all submit-
sive workshops with all relevant cross-functions to
ted concepts are evaluated according to the evaluation
align the final minimum r­ equirements.
framework, defined in Step 3, to determine the best
concept. Ultimately, the supplier who submits the best
concept while fulfilling all minimum requirements and
meeting the target price is declared the winner and
will be awarded the project.

4
THE
BENEFITS
By implementing the Target Costing approach, our client successfully sourced a
highly innovative and state-of-the-art production line while staying within the initial
budget. The awarding project showed that tight budgets and sourcing high-quality
products are not mutually exclusive. Avoiding technical overspecifications and
granting suppliers creative freedom is key to fostering a healthy competition between
suppliers to propose innovative and cost-effective solutions. The approach encour-
aged knowledge exchange between suppliers and our client, and allowed our client
to benefit from the technological know-how existing in the market. As an added
bonus, Target Costing presents an opportunity to expand the supplier set and increase
competition as the approach may motivate suppliers, who were previously discour-
aged by the technical (over-)specifications, to participate in the tender.

5
TAKE
COMMAND
OF YOUR
BUSINESS
GAME
CHANGE THE GAME AND MAKE THE RIGHT MOVES
USING GAME THEORY TO WIN MORE OFTEN.

TWS Partners AG Gollierstr. 4 | 80339 Munich/Germany | T +49 89 200040-0 [email protected]


TWS Partners Limited 2 Eastbourne Terrace | London W2 6LG/United Kingdom | T +44 7833 497 266 www.tws-partners.com

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