Target Costing and Value Engineering (PDF)

What would happen if everyone in your company followed a disciplined approach to cost reduction? Go ahead -- imagine it. What would it look like? How can it be done?

The answer -- smart cost management.

Effective cost management must start at the design stage. As much as 90-95% of a product's costs are added in the design process. That is why effective cost management programs focus on design and manufacturing. The primary cost management method to control cost during design is a combination of target costing and value engineering.

Target Costing Objectives:

1. Identify the cost at which your product must be manufactured at if it is to earn its profit margin at its expected target selling price.
2. Break the target cost down to its component level and have your suppliers find ways to deliver the components they sell you at the set target prices while still making adequate returns.

Value Engineering:
The connection to function: An organized effort and team based approach to analyze the functions of goods and services that the design stage, and find ways to achieve those functions in a manner that allows the firm to meet its target costs.

The result: Added value for your company (development costs on-line with added value for your company; development costs on-line with selling prices) and added value for your customer (higher quality products that meet, possibly even exceed, customer expectations.)