Target Costing for Supply Chain
Management: An Economic Framework
Wilbur I. Smith and Archie Lockamy III
Facing mounting evidence of their inability to sustain competitive advantages in product quality, functionality, or cost, many companies have begun adopting the principles of supply chain management. However, to realize the benefits promised by this management innovation, companies must first discontinue reliance on deficient cost management practices. This article contends that both traditional and activity-based cost management practices are deficient, then offers an economic framework for replacing them in supply chains with target costing processes. The framework combines the two market variables, customer requirements and supply chain agility, to define strategies for performing target costing. The contents of these strategies set the key features of three unique target costing processes for supply chains. Thus, the article provides an economic rationale for applying target costing to supply chain management. © 2000 John Wiley & Sons, Inc.
n economic era has ended: Most companies can no longer sustain competitive advantages in product quality, functionality, or cost (Cooper, 1995; Fine, 1998; Schonberger, 1996; Wheelwright and Clark, 1992). The familiar struggle among domestic companies for market dominance has become a global struggle among lean competitors for economic parity. Core competencies that once delivered enduring advantages now deliver short-lived firstmover rewards (Collis and Montgomery, 1995; Cooper and Chew, 1996; Cooper and
Slagmulder, 1997; see also Shepherd, 1997, chap. 1). To arrest the financial decline attending this new economic reality, many companies have adopted the following innovative management techniques to enhance competitiveness and control profitability: • Quality function deployment (QFD) to integrate the voice of the customer into the product development process; Design for manufacturability to reduce the variation in manufacturing operations;
Just-in-time (JIT) to eliminate inventories; and Activity-based cost management (ABM) to give managers better levers for controlling value-added costs and for removing non-valueadded costs from business processes.
Underwhelmed by the outcomes (cf. Goldman et al., 1995, p. 5; Mabert and Venkataramanan, 1998, p. 538) and having sensed the need for a more integrated approach to managing competitiveness, companies like 3M, Ford, Hewlett-
© 2000 John Wiley & Sons, Inc.
The Journal of Corporate Accounting & Finance
Packard, Procter & Gamble, and • A 40 to 60 percent advantage in the cash-to-cash Xerox have adopted the princicycle; ples of supply chain manage• A 44 percent higher value ment (cf. Cavinato, 1992). In added per employee; fact, many have come to believe • A 3 to 7 percent reduction in that supply chain management total logistics costs as a persubstantially determines a comcentage of revenue; pany’s capacity to create share• 50 percent lower cost of holder value (Poirier, 1999; ownership of materials; and Tyndall et al., 1998) and to attain • A 30 to 50 percent improveeconomic security (Bovet and ment in meeting commitSheffi, 1998; Lummus and ment dates (Allnoch, 1997; Vokurka, 1999). This belief PRTM, 1993; Stewart, explains why over 86 percent of 1995). the respondents in a recent survey of North American manufacThese economic enhanceturers by Deloitte & Touche ments do not flow inevitably ranked supply chain managefrom supply chain management ment as essential to success (Jarrell, 1998). Effectiveness is (Witt, 1998). required. Therefore, the tradiPut simply, supply chain tional approach of managing the management is a collaborative, cross-enterprise operating strate- supply chain as a loose collecgy that aligns the flow of incom- tion of independent segments, ing materials, manufacturing, and downstream disEffective supply chain management...