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The Use of Target Costing in Developing The Mercedes-Benz M-Class

This document discusses Mercedes-Benz's use of target costing in developing the M-Class SUV. It describes target costing as setting price, quality and function targets early in the design phase when most costs are identified. It also discusses managing the six interrelated components of price-led costing, customer orientation, product and process design focus, cross-functional teams, life-cycle cost reduction and supply chain involvement to help ensure actual costs meet target costs. The development of the M-Class from concept to production using this target costing approach is then outlined.

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James Huang
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219 views10 pages

The Use of Target Costing in Developing The Mercedes-Benz M-Class

This document discusses Mercedes-Benz's use of target costing in developing the M-Class SUV. It describes target costing as setting price, quality and function targets early in the design phase when most costs are identified. It also discusses managing the six interrelated components of price-led costing, customer orientation, product and process design focus, cross-functional teams, life-cycle cost reduction and supply chain involvement to help ensure actual costs meet target costs. The development of the M-Class from concept to production using this target costing approach is then outlined.

Uploaded by

James Huang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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The Use of Target Costing

in Developing the
Mercedes-Benz M-class
Characteristics of Target costing system
• Target for price, quality and functions are set in advance

• Major costs are identified in the design phase ( 80% material &
functional systems)

• The approach is multifunctional

Managing the Six Interrelated Components


1. Price-led costing

Pricing is a function of the cost


1. Cost
2. Markups or required margin
3. Price

Price: Uncontrollable variables, determined by the markets


Margin: Uncontrollable variables, for company to sustain
Cost: Can be influenced by management
2. Customer Orientation:
survival triplet
Competitive advantage Competitive advantage

• Functionality (comparable) • Functionality ( Greater), or /and

• Quality (comparable) • Quality (Greater)

• Price ( Significant lower) • Price (Comparable)


3. Focus on product and process
design
Cost-reduction efforts should focus on development phrase.

• 40% - 45% Value Added Activity

• 55%- 60% purchased component

A strategic decision was made in early stage for M-class

• 75%-80% purchase from system supplier

• Only 20%-25% VAA will be in the new plant ( Reduced variable cost)
4. Cross functional teams
From Customer needs

• Cost planners
• Design engineers
• System suppliers
• Marketing professionals

To Final product that delivers or exceed


5. Life-cycle cost reduction:
Ownership cost
Target costing encourages designers (earlier phrase) to consider cost
that extend beyond the manufacture stage
• Maintenance cost
• Operating cost E.g. fuel efficiency
• Expected life High mileage

6. Value chain involvement


• Suppliers (Upstream) involvement to reduce cost and improve quality
• Customer service department (Downstream)
M-Class: Concept phase began in 1992

1. New opportunity in rapid expanding SUVs market


2. Construct first production facility in the U.S.
• Globalization strategy
• Biggest SUVs market
3. Estimated Material, Labour, overhead and one-time development
4. Cash flow projection
5. Net Present Value

Feasibility study was approved in 1993


Project realization phase 1993-1996
Cross functional activities
• Feedback from customer focus group
• Designed to deliver those essential characteristics

The difference : Goal-oriented approach


• Mercedes: “target cost” remain alive due to changing dynamics
• Some Japanese companies: Fixed cost target.
Production phase 1997-present
Accounting system served as control mechanism to ensure actual cost
conformed to target (standard) cost.

• Annual updates of NPV analysis


• Three-year plan: Projected Financial statements
• Monthly departmental meeting

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