2.5 Closing the target cost gap Target cost gap = Estimated product cost – Target cost
It is the difference between what an organisation thinks it can currently make a product for, in order to make a required profit.
Alternative product designs should be examined for potential areas of cost reduction that will not compromise the quality of the products.
Questions that a manufacturer may ask in order to close the gap include:
§ Can any materials be eliminated, e.g. cut down on packing materials?中华考试网
§ Can a cheaper material be substituted without affecting quality?
§ Can labour savings be made, for example, by using lower skilled workers?
§ Can productivity be improved, for example, by improving motivation?
§ What production volume is needed to achieve economies of scales?
§ Could cost savings be made by reviewing the supply chain?
§ Can part-assembled components be bought in to save on assembly time?
§ Can the incidence of the cost drivers be reduced?
§ Is there some degree of overlap between the product-related fixed costs that could be eliminated by combining service departments or resources?
A key aspect of this is to understand which features of the product are essential to customer perceived quality and which are not. This process is known as ‘value analysis’. Attention should be focused more on reducing the costs of features perceived by the customer not to add less value. |