Nissan Motor Company Ltd

Target Costing System

 Sophisticated Japanese consumer and lean enterprise shape the competitive environment Toyota has 45% and Nissan has 25% of market share No brand loyalty Continuous improvement in functionality at the same cost is the confrontation strategy of Nissan

What is the competitive environment that drives the range of products sold?

How does Nissan Determine its future product mix?

Product matrix-to achieve market coverage and decide on the product mix for the next 10 years Information is about target customers like their income levels, their needs, age etc Matrix helps identification of body types and models that appeal to a specific group of target customers

How does Nissan Determine its future product mix?

Consumer analysis-determine attributes valued by customers Determine new entries in its product matrix Fifty potential models were identified and reduced to thirty models due to costs of differentiation and maintenance of inventory

How does Nissan Determine its future product mix?

Mind-sets: How customers visualize themselves in relation to their cars Attributes that play an important psychological role when customers purchase a new car Cluster of mind-sets to identify market niches that warrant a new model How is this related to customer satisfaction?

What is the purpose of Nissans target cost system?

Manufacture products that deliver functionality and quality at a cost that achieves firms target profit Proactive control of manufacturing cost Cost is viewed as an interaction function between price and profit. Set quality, price and functionality in advance Control is possible because target cost is identified at design stage than at production cost Long term profitability can be secured

What approaches can be used other than target costs?

Differences between
p=s-c c=s-p S=c+p

Profit projection vs value projection

What is target costing?

Price, quality and functionality to achieve desired profit All major departments are involved in the process

What is value engineering?

Systematic inter-disciplinary examination of factors affecting the cost of a product to device means of achieving to achieve required quality and reliability at its target or kaizen cost Design modification or process reengineering or new production methods Reduce total cost while maintaining functionality applied from concept stage

 Target cost is focused on setting the cost Value engineering is to achieve that target cost Allowable cost for components
Increase commonality of parts Reduce number parts in each new model

What is the relationship between value engineering and target costing?

Boundaries are determined on price, quality and functionality set by target costing restrict the value engineering activity

What role does the consumer play in the target costing system?
Required level of functionality of a product at a given price Project next ten years consumer preferences to get a conceptual design

How does Nissan determine the target margin for a new product?
Price/margin curves for different mixes using simulation Many variations are run to examine combinations of price, volume and product mix Determine robustness mix-probability of new model success and failure

What role does profitability play in the target costing system?

Target cost is derived because sales and profits are fixed. Profits are fixed as part of sales Sales becomes the only focus If sales are achieved, profits must follow Employees,customers, creditors, shareholders

What is allowable cost? Draft target cost? Final target cost?

Allowable cost=target price-target margin Establishes the level of cost reductions required through value engineering Allowable cost is adjusted to the required functionality across components Draft target cost includes only manufacturing cost Final target cost includes assembly cost also

What is the role of suppliers in target costing?

With 70 percent outsourced components, suppliers play a critical role, they are the partners Incentives in the form of regular orders Technical innovation can be shared

What is the role of accountant?

Final control Japanese believe in multi-functional skills and pre-production accounting The idea of control is replaced by empowerment and ownership

 Shorter product life and cost benefit analysis Tweaking done through kaizen

Why is there no attempt to reduce the cost of a vehicle after it enters production?

What are the prerequisites for success of Target costing?

Good supplier relationship Team work Quality of profit orientation

Some general constructs

Consumer analysis is inherent in target costing Target costing and value engineering are interrelated Deconstruction of target costs for new products into target costs for the components they contain

Process Summary

Process Summary

Overall summary