Simulating the Effects of Cost Targets and General Goals During Product Design

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Simulating the Effects of Cost Targets and
General Goals During Product Design

• Dan Swenson
• (dan.swenson_at_asu.edu)
• Arizona State University
• July 21, 2009

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Agenda

• Cost control strategies
• Theoretical background
• Target costing
• Simulation
• Build a Lego model truck
• Develop its product cost
• Reduce its cost through redesign

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Cost Control Strategies

• For any new product the greatest opportunity to
  reduce costs occurs during product design.
• Companies promote cost reduction by taking one of
  two approaches
• Creating specific cost targets
• Using general cost goals

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Goal theory

• Individuals or groups with a specific and
  challenging goal will outperform those with
  general do your best goals, see Lock and Latham
  (2002).
• Specific goals (e.g., cost targets) Defines an
  acceptable level of performance and motivates
  groups to achieve a specific outcome.
• General goals (e.g., do your best) Standards of
  performance are not defined, thus allowing for a
  wide range of performance to be judged as
  acceptable.
• Target costing applies goal theory to a product
  design environment.

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Target Costing

• Market Price Required Profit
• Target Cost

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Target Costing
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Target Costing Definitions
Target Costing can be defined as a cost
management tool for deducing the overall cost of
a product over its entire life cycle with the
help of the production, engineering, research and
design, marketing and accounting departments.
Dr. Michiharu Sakurai (1989)
Target Costing is a comprehensive cost planning,
cost management, and cost control concept ...
used primarily at the early stages of product
design in order to influence product cost
structures depending on the market derived
requirements. The Target Costing process requires
the cost-oriented coordination of all
product-related organizational functions.
Dr. Peter Horvath (1993)
The target costing process is a system of profit
planning and cost management that is price led,
customer focused, design centered and cross
functional. Target costing initiates cost
management at the earliest stages of product
development and applies it throughout the product
life cycle by actively involving the entire value
chain.
CAM-I Target Costing Group (1996)
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Principles of Target Costing (Per CAM-I)

• Target Costing is an interdependent system of
  profit planning and cost management that has six
  principles
• Price-led costing
• Customer-focused
• Design-centered
• Cross-functional
• Life cycle oriented
• Value Chain-based

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Price-Driven

• Costing Formulas
• Cost Profit Price
• Price Profit Cost (Target Cost)

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Price-Driven
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Customer-Focused
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Design-Centered
Cost of Design Changes
Concept Development
Product Design
Planning
Production
Cost Reduction Potential
Costs of Change Exceeds Benefits
Cost of Change
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Cross-Functional
EXPERTISE REQUIRED Strategic Product
Profit Planning Sales Marketing Product
Planning Technology Planning Product
Design Process Design Cost Estimating Procur
ement Manufacturing Team
Product Strategy Profit Plans
Product Design Development
Production Logistics
Product Concept Feasibility
V o i c e o f T h e C u s t o m e r
Continuously Measure Evaluate Results Against Q
CT
Establish DeployBusiness Strategies
Develop Portfolio ProfitPlans
Set Margin / Price Goals
Implement Sales /Distribution /Service Plan
Monitor Customer Preference Competition
Define ProductStrategy
ValidateDesign
Gate
Manage Continuous Improvement
Gate
Valida
te Process
Review/ Update
Status
Gate
Finalize Design
Define Product Line Size/Share Objectives
Analyze Customer/ Competition
Prepare Development Plan
Define Product Concept
Confirm Concept Feasibility
DefineInvestmentRequired
Continue Value Engineering
Establish Technology Plan
Estimate Product / Process Costs
Initiate Value Engineering
Implement Sales / Distribution / Service Plan

Confirm Suppliers
Plan Production System
Launch Production
Suppliers / Extended Enterprise
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Keep it Simple
Population Survey
Preliminary Game Selection
Trade Study Mammoth vs. Tiger vs. Rabbit
Final Game Selection
Site Survey
Meat Requirements
Meat Requirement Review (MRR)
Site Preparation
Site Selection
Game Sightings
Hunt Leader Chosen
Preliminary Hunting Plan
Final Hunting Plan
Weapon Selection
Preliminary Hunting Review (PHR)
Preliminary Hunter Selection
Weapon Development
Trade Study (rock vs. spear)
Site Inspection
Final Hunter Selection
Obtain Blessing of Great God Thag
Weapons Practice
Meat Distribution Plan
Weapons Inspection
Forecast Weather
Critical Hunting Review (CHR)
Schedule Hunt
Hunter Inspection
Hunt Readiness Review (HRR)
Distribute Meat
Transport to Cave
Catch Game
Kill Game
Chase Game
YES, BUT OG ASSURES ME THAT THIS WILL IMPROVE OUR
EFFICIENCY AND KEEP US AHEAD OF THE CROMAGNONS
IN THE VALLEY.
Get Caught by Game
Choose New Hunt Leader
Lose Game
I DONT KNOW, IT SEEMED EASIER WHEN WE JUST WENT
HUNTING.
Why Neanderthals Became Extinct
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Life Cycle Oriented

85 of Cost Committed
5 Cost Expended
Percent of Life-Cycle Cost Committed
100
90
Percent
95
85
80
70
70
60
50
40
30
Percent of Program Cost Expended
30
20
Brief Window of Opportunity
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5
0
Concept Development
Preliminary Design
Detail Design
Production
Phase of Product Development
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Value Chain-Based
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Adoption Rates
Percentage of Respondents Using Target Costing

Japanese Industry
Transportation Equipment 100 Electrical
88 Machinery 83 Precision Equipment
75 Nonferrous metal 53 Oil, rubber and
glass 36 Other Manufacturing
33 Chemical 31 Steel 23 Textiles
17 Food 14 Paper and pulp 0
Target Costing well-suited for high product
complexity, incremental innovation, long product
development cycle, large investment , horizontal
integration
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Classroom Activities

• Developed after working with Boeing and CAM-I.
• Student activities
• Individually build and cost a Lego model truck
  (The original design costs 20,000)
• Redesign the truck (groups of three)
• Accommodate three design changes
• Move gas tank
• Four-wheel drive
• Flat truck bed
• Cost target groups16,500 cost target
• General goal groupsreduce costs as much as
  possible

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Basic Building Blocks - Bricks and Plates Bricks
are thicker than plates
BRICKS
PLATES
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Size of Bricks PlatesCount the number of studs
2 x 6 Brick
2 x 2 Brick
1 x 6 Brick
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Special Parts
Steering Wheel
Grille
Roll Bar
2 Axles
Windshield
4 Tires
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Roll Bar
Windshield
Steering Wheel (cant see)
Axle (behind wheel)
Grille
Wheels
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In addition to the special parts,we have defined
some of the important truck components.
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Light
Cab
Engine
Truck Bed
Gas Tank
Front Bumper
Under- Carriage
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View from under truck
Front Bumper
Gas Tank
Under- Carriage
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Truck Costing Worksheet
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Design Specifications

• The redesigned truck must contain all of the
  special parts (4 wheels, 2 axles, a grille,
  windshield, steering wheel and roll bar).
• The trucks components must adhere to the
  following standards
• A light and a roll bar are required and must be
  placed on top of the cab.
• The dimensions of the space inside the cab must
  not change.
• The dimensions of the engine must not change and
  it must remain in front of the cab.
• The dimensions of the trucks bed must not
  change.
• For hauling cargo, the tuck bed must have sides
  and a tailgate at their current height.
• The distance between the two axles must not
  change.

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Design Changes

• Safety Hazard. The National Traffic Safety Agency
  has discovered that this truck becomes a fire
  hazard when it is hit from behind. Therefore, the
  gas tank that is located behind the rear axle
  must be moved.
• Four-Wheel Drive. A consumer focus group
  recommends converting this truck from front-wheel
  to four-wheel drive. This requirement can be met
  by extending the undercarriage to the front and
  rear axles.
• Uneven Truck Bed. Another consumer focus group
  recommends removing the indentation from inside
  the truck bed. Items being hauled in the truck
  were getting stuck in this sunken area.

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Quality Requirements

• The truck must maintain its integrity during a
  minor crash test (hitting a wall after traveling
  18 inches at a 20 grade).
• The truck must maintain its integrity while being
  lifted off the table two times, for five seconds
  each time.
• For one lift, the facilitator will only hold on
  to the cab.
• For the second lift, the facilitator will only
  hold on to the truck bed.

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Original design (20,000)
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Original design (20,000)
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Narrowed undercarriage (17,400)
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Original design
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Flat truck bed (14,620)
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Results