As Seattle based company Billings Equipment Inc. pushes on to produce a new product line, the organization is instructing supply management employees to reduce costs and cycle times of suppliers, to adhere to the Target Cost objectives. The hasty production timeline restraints led to early missed cost reduction opportunities, unethical reneging on supplier price contracts in order to reduce costs, and jeopardizing Billings Equipment’s historically impeccable reputation for ethical treatment of suppliers. This product line’s aggressive timeline to market; leading to early missed opportunities to reduce costs, followed by forceful demand to suppliers for a ten percent price reduction, and followed by an additional five percent price reduction demand.
The case study demonstrates the fatal mistake Billings Equipment made when implementing the target cost objects; reiterating the product design—eliminating or reducing unnecessary attributes with costs that can’t be recovered in higher prices—until the cost target is met. (Target costing is “a structured approach for determining the cost at which a proposed product with specified functionality and quality must be produced to generate a desired level of profitability at its anticipated selling price.”) In order to properly achieve target costing a company must complete the following steps; determine a market price point for the proposed product, calculate the target cost by subtracting the desired profit from the target price, reiterate the product design to achieve target cost, and finally revise the market price following the redesigned product and current market conditions. This mistake in the implementation of target costing led to missed opportunities to reduce costs through ...
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...to cut costs to meet price demands, and may also cause suppliers to loss faith in the way you do business, potentially inflating pricing contracts in the future in anticipation of price reduction demands
Recommend in the future any new product lines focusing on a lengthened design phase of the timeline to reduce costs, allowing the design team ample time to redesign the product components and tooling to achieve the meet target cost requirements. If redesigns do not result in meeting target costs within a reasonable timeframe the project manager must be willing to either drop the project or shelve the project for a later date. Moving forward on a project without the feasibility of making target costs in the design phase is ill advised, as it will put a company in the same position of Billings with having to renege on previously agreed upon supplier price contracts.
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