Industrial Management & Data Systems

Emerald Article: Target costing for supply chain management: criteria and
selection
Archie Lockamy III, Wilbur I. Smith
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To cite this document: Archie Lockamy III, Wilbur I. Smith, (2000),"Target costing for supply chain management: criteria and
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Target costing for supply chain management: criteria
and selection
Archie Lockamy III
School of Business, Samford University, Birmingham, Alabama
Wilbur I. Smith
Florida A&M University, Tallahassee, Florida, USA
Introduction
Success for many firms depends on their
ability to balance a stream of product and
process changes with meeting customer
demands for improved cost, delivery, quality,
and flexibility. In response to these issues,
many firms have begun to adopt the
principles of supply chain management
(SCM). With SCM, the flow of incoming
materials, manufacturing operations, and
downstream distribution are aligned in a
manner that is responsive to changes in
customer demand without creating surplus
inventory. Supply chains represent a
coordinated network of firms interacting to
provide a product or service to the end
customer. They operate across functions
within organizations, company boundaries,
and national borders. A diagram illustrating
the basic components of a supply chain is
presented in Figure 1.
As can be seen, all supply chains have
three common components: suppliers,
producers, and customers. Supply chains
often contain distributors and retailers,
along with service and support functions.
The components of the supply chain must
interact in a coordinated manner to achieve
the ultimate goal: the delivery of goods and
services resulting in the creation of customer
satisfaction. Products and services generally
flow from sources of supply to sources of
demand, while information and cash
payments generally flow in the reverse
direction. In a supply chain, producers must
view their suppliers as working partners,
and suppliers must invest in their capability
to meet the needs of producers. Retailers,
distributors, and producers must share
information concerning store level sales,
warehouse inventory profiles, and
production orders to enable firms to
manufacture and ship products at their level
of actual demand.
For effective supply chain management to
occur, firms must adopt a new managerial
approach (Balsmeier and Voisin, 1996).
Historically, each segment of the supply
chain was managed as an independent entity
and concentrated on achieving local
objectives without regard to their effect on
other components of the chain. This
approach has resulted in increased conflicts
between functional areas, unfulfilled
company-wide objectives, and reduced levels
of customer satisfaction. Eventually, a firm's
inability to satisfy its customers results in
the loss of market share and profitability. A
primary reason for the problems associated
with the traditional approach to supply chain
management is its dependence on a cost
management system focused on minimizing
local cost versus maximizing customer
satisfaction. In addition, authors such as
Ellram (1991) suggest that the goal of supply
chain management is to improve customer
service at reduced overall costs. While firms
must strive to manage costs associated with
their product/service delivery system, the
goal should be to increase customer
satisfaction, not merely minimize supply
chain cost. Traditional cost management
systems often legitimize organizational
activities that result in localized cost
reductions that inhibit the firm's ability to
meet customer expectations. Some firms
have attempted to mitigate this problem
through the use of activity-based
management (ABM). However, through its
focus on activity costs, ABM fails to address
the issue of how the supply chain can be used
as a means for increasing customer
satisfaction.
Target costing is a better choice for supply
chain management. Notwithstanding the
name, target costing focuses less on cost than
on customer requirements. Cost is viewed as
a result, an economic umbrella, whereas
customer requirements are viewed as
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# MCB University Press
[ISSN 0263-5577]
Keywords
Activity-based costing,
Supply-chain management,
Supply chain, Target costing
Abstract
This article examines the use of
target costing as a means to
improve the management of
supply chains. A discussion of the
shortcomings of traditional and
activity-based cost management
approaches to supply chain
management provides the basis
for exploring the use of target
costing within supply chains.
Customer requirements and
supply chain relationships are
identified as key criteria for
selecting the most appropriate
method of target costing for
supply chains. Price-based, value-
based, and activity-based cost
management approaches to target
costing are discussed, and
recommendations for their use
based upon customer
requirements and supply chain
relationships are offered.
Conclusions are provided on the
use of target costing to enhance a
supply chain's ability to improve
customer satisfaction.
binding competitive constraints. Under
target costing, the supply chain incurs
whatever costs are necessary to satisfy
customers' expectations for price,
functionality, and price. Cost rationalization,
not minimization, is the goal.
Purpose
The purpose of this article is to provide a
basis for selecting a target costing approach
to improve supply chain performance. The
article examines the shortcomings of using a
traditional cost management approach as
well as an ABM approach in managing
supply chains. Additionally, the article
provides three approaches to applying target-
costing techniques within supply chains
based on customer requirement and supply
chain relationship considerations. Finally,
conclusions are presented on the use of target
costing within supply chains as a means for
enhancing customer satisfaction.
Cost management and supply chains
Firms use financial data from their cost
management systems to plan and control the
operations of their supply chains and to
establish the costs of products and services
moving through the supply chains (Johnson,
1992, p. 18). Most of these cost systems are
traditional, in that their operating principles
and concepts were largely developed prior to
1925 (Johnson and Kaplan, 1987a, p. 12).
However, some firms are now using the more
recently developed ABM system. The next
two sections of the article discuss the origins
of these systems and the drawbacks of using
information from them to manage integrated
supply chains.
Traditional cost management
Not every observer describes traditional cost
management in exactly the same way (see
Cooper, 1988; Johnson and Kaplan, 1987b;
Kaplan, 1988; Sandretto, 1985). Nonetheless,
most would agree that traditional cost
management is earmarked by the
combination of the ``managing costs''
philosophy once widely practiced by senior
US managers (Johnson, 1989, 1990b) and a
1950s vintage product costing methodology
(Johnson and Kaplan, 1987a, p. 182). This
combination often results in managers using
misleading cost information in their
planning and control decisions.
Explanations of why today's managers are
``misled'' by traditional cost information
usually point to a design mismatch (Hall et
al., 1991; Johnson, 1992; Kaplan, 1990; Turney,
1991). The fifties era product costing methods
are highly simplified. They were fashioned to
provide objective, consistent, and auditable
inventory valuations for external financial
reporting purposes (Dugdale, 1990). In the
typical manufacturing firm, for example, the
traditional cost system performs two
functions. First, it divides the cost incurred
during the operating period between the
broad categories of operating expenses
(which includes such costs as marketing,
distribution, service, and R&D) and factory
costs. The second function involves assigning
factory costs to products. The materials and
labor costs of products are established
through direct tracing. Factory overhead,
lacking traceability, must be allocated. For
this purpose, factory overhead costs are
pooled at either the departmental or plant
level and assigned to individual products in
proportion to their use of labor or machine
hours. Such a straightforward costing
procedure fit the business conditions of the
1950s. Data processing technologies were
rudimentary and incapable of economically
supporting complicated costing procedures;
most US manufacturing firms competed in
regional or national labor-intensive
industries; product variety was low; and
manufacturing methods consisted of long
production runs, discontinuous production
flows, large inventories, and extensive
rework (Hall et al., 1991). Under these
circumstances, the traditional costing
approach generates accurate aggregate
values for the cost of goods sold to customers
and the cost of ending inventories.
Figure 1
Supply chain
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chain management: criteria
and selection
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By the 1980s, circumstances had clearly
changed. US manufacturers, responding to
competitive pressures, had diversified their
product offerings and, to improve product
quality and service, had begun adopting
advanced management techniques such as
total quality management, just-in-time (JIT)
manufacturing and distribution processes,
design for manufacturability, and flexible
manufacturing systems (Kaplan, 1990). As a
consequence, their operating characteristics
and cost structures changed dramatically.
Overhead replaced direct labor as the major
component of manufacturing conversion cost
(Eiler et al., 1982; Kaplan, 1984; Johnson and
Kaplan, 1987a; Miller and Vollmann, 1985;
Reeve, 1992); variable costs were converted to
fixed as new manufacturing technologies
were purchased (Berliner and Brimson,
1988); inventory, once considered an asset,
became a liability (Hayes and Clark, 1986;
Kaplan, 1984); and lead time became as
important as marketing mix in creating
customer value (Blackburn, 1994). This blend
of operating factors clashes sharply with the
assumptions underlying traditional cost
systems. In fact, in this new manufacturing
environment, the simple, volume-based
overhead allocation schemes of traditional
cost systems cannot accurately assign the
burgeoning factory overhead costs to diverse
products. Instead, the traditional cost
systems inundate managers with accounting
reports that routinely overstate the cost of
high-volume, standardized products and
understate the costs of low-volume,
customized products.
Taken by themselves, such cost distortions
are benignly wasteful. They become more
ominous when presented to managers who
are ``managing costs'' (Johnson, 1989, 1990a;
Neuman, 1975). According to this perspective,
competitiveness is reflected in unit cost
(Johnson, 1990a, p. 32). The firm with the
lower unit cost has an advantage in the
marketplace. The traditional cost approach
supports firms' efforts to control and reduce
unit cost by providing cost-based budgets and
variance analyses that allow managers to
monitor asset utilization and budget
compliance for each functional department.
However, because these reports are filled
with inaccurate cost information, they
provide false signals to unwitting managers,
leading them to make decisions that impair
competitiveness and destroy customer value
(Johnson, 1991; Johnson and Kaplan, 1987b;
Turney, 1991). They set incorrect prices; sell
the wrong products; choose the wrong
suppliers; and pursue the wrong customers
(Turney, 1991).
Clearly, the traditional cost approach is not
an adequate framework for managing supply
chains. Its most glaring weakness is in the
treatment of customers. Except for cost, their
value perceptions and requirements are
ignored. Managers, according to the tenets of
traditional cost management, should focus
exclusively on minimizing supply chain cost.
Suppliers, manufacturing methods, and
distribution channels should all be selected
based on the impact on unit cost. Other
aspects of the supply chain strategy are not
considered.
Activity-based management
When American businesses such as
Tektronix, John Deere and Schrader Bellows
saw their competitiveness eroding during the
1980s, they demanded that accountants
provide better information for making
planning and control decisions (Ansari et al.,
1997a). One response to their demand has
been ABM (Johnson, 1991). Atkinson et al.
(1997, p. 20) describe ABM as a management
process that uses activity cost information to
improve organizational profitability. Player
and Keys (1995, p. 5) offer a similar view,
saying that ABM is ``the broad discipline that
focuses on achieving customer value and
firm profit via the management of activities.''
Unlike the traditional cost approach, ABM
regards the firm as a set of interlinked
processes that create and deliver value to
customers. ABM's goal is to provide
managers with the analytical concepts and
information to run these processes
effectively in ways that place the fewest
demands on the resources of the firm.
ABM's most basic analytical concept is
that of an activity the smallest, meaningful
unit of work performed by an organization.
The advocates of ABM contend that the best
way to understand, manage and improve the
processes of an organization is to ask
questions about the activities that comprise
them (Maisel and Morrissey, 1994; Ostrenga,
1990; Turney, 1992): What activities are
performed? How are they performed? Why
are they performed? Do they add value? What
is the cost of the resources consumed in
performing them? The answers provide the
basis for improving the firm's processes by
eliminating costly, non-value-adding
activities (Convey, 1991; Turney, 1992).
The success of ABM depends heavily on the
availability of accurate estimates of activity
costs. For that reason, ABM abandoned the
simple, volume-based product costing
methods traditionally used by firms.
Complexity replaced volume as the primary
cost driver in modern firms (Cooper, 1988).
Complexity, here, refers to the degree to
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chain management: criteria
and selection
Industrial Management &
Data Systems
100/5 [2000] 210218
which diverse inputs and outputs must be
managed and transformed by shared, limited
resources (Cooper, 1988). For example,
holding other factors constant, a plant that
produces 12 different models, in varying
volumes, of a product on a single production
line faces a more complex production
situation than a plant producing only one
product.
Accordingly, the 12-model plant incurs
higher overhead costs for production
scheduling, procurement management, and
so on. Since neither labor nor machine hours
adequately capture complexity in most
situations (Kaplan, 1991), ABM uses
``transaction-type'' (see Miller and Vollmann,
1985) allocation bases accurately to assign
activity costs to products, processes, and
customers (Cooper, 1989; Turney, 1991).
The structure of ABM facilitates the
generation of useful information for effective
supply chain management. In particular,
ABM's accurate cost information can be used
to support and monitor the firm's supply
chain strategy (Turney, 1992). More
importantly, ABM partially integrates
customer requirements into its analytical
procedures for establishing the value of an
activity. Activities that positively contribute
to the customer's perceived value of the
product or are essential to the functioning of
the organization are ``value adding.'' In
contrast, an activity is ``non-value adding'' if
its elimination would not affect the
customer's perception of value or impair the
functioning of the organization (Convey,
1991; Miller, 1992; Turney, 1992).
Nevertheless, ABM is not a fully
satisfactory framework for managing supply
chains. The reason is most easily seen in
ABM's practice of labeling activities as ``non-
value adding'' without direct customer input.
The designation may reflect firm policy, the
recommendation of an ABM consultant, or
the best guess of a participant in the ABM
study (Brimson, 1994; Pryor et al., 1992;
Sharman, 1994). In either case, there is no
guarantee that the value of an activity
established by an ABM study reflects the
customers' true requirements (see Butz and
Goodstein, 1996, Gale, 1994).
A second problem with ABM's activity
valuations is that they become inputs for the
calculation of ``non-value-added'' cost.
Managers are expected to use these cost
figures to identify improvement
opportunities. This ``cost-world'' use of ABM
information encourages managers to become
more effective and efficient in performing
existing activities. It does not, however,
encourage managers to engage in the
relentless search for new opportunities to
create customer value or to find ways to
reconfigure existing activities to provide
greater customer value (Johnson, 1992). For
this reason, ABM may lead the manager to
optimize the short-run efficiency of the
supply chain to the detriment of its long-run
survivability and profitability.
Target costing for supply chain
management
Target costing, developed by Toyota during
the 1960s (Tanaka, 1993), is a process for
ensuring that a product launched with
specified functionality, quality, and sales
price can be produced at a life-cycle cost that
generates a satisfactory level of profitability
(Cooper and Slagmulder, 1997). Since its
introduction, the use of target costing has
spread throughout Japan. Over 80 percent of
Japanese assembly manufacturing firms
were using target costing in the early 1990s,
and while no firm in the paper and pulp
industry employed target costing, all firms in
the Japanese transportation equipment
industry found it worthwhile (see Kato et al.,
1995). This differs from the US experience.
Compared to Japanese firms, US firms are
more wedded to traditional cost management
practices (Hiromoto, 1988; Sakurai, 1996), and
have deployed target-costing systems more
slowly and less widely.
Figure 2 shows the general structure of the
target costing process. As can be seen, target
costing, unlike other costing approaches, is
imbedded within the firm's product
development and introduction process. For
that reason, the target costing process
requires information pertaining to the firm's
competitive, product, and supply chain
strategies. Once this information has been
established, as the firm moves from the
product strategy phase of the product
development and introduction process
through product concept and design to
manufacturing and logistics, the various
activities of target costing are performed.
Early in the beginning phase of target
costing, the firm uses market research
information to determine the price
customers are willing to pay for the product,
given its functionality, quality, and the
substitute products offered by competing
firms. From this price, the firm subtracts the
profit margin required to satisfy its
stakeholders and to fund the research and
development of future products. The
resulting quantity, as shown in equation 1
below, is the ``allowable'' cost for the
product.
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chain management: criteria
and selection
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Data Systems
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Allowable product cost
Sales price profit margin
1
This is the maximum cost that the firm
should incur in the manufacture,
distribution, service, and disposal of the
product, and, in the simplest cases, is the
target cost.
With the target cost established, the firm
begins the task of attaining the target cost.
Value engineering is performed to redesign
the product, its manufacturing process, and
its distribution and service systems. The
target costing process ends when either the
firm discovers a way to satisfy customer
requirements at the target cost, or the
product is abandoned.
Target costing places customer
requirements at the heart of the firm's efforts
to develop and deploy product strategies.
Target costing views meeting or exceeding
customer requirements for quality,
functionality, and price as key to attaining
and sustaining product competitiveness.
Despite embracing this view, target costing
cannot be uncritically adopted as a tool for
supply chain management. It should be
introduced into only those supply chains
whose trading partners are ready to deploy
target costing (Ansari et al., 1997b).
Owing to the influences of various
competitive considerations, all ready supply
chains may not implement the same target
costing system (see Ansari et al., 1997b, and
Cooper and Slagmulder, 1997). Two of the
more important of these considerations are
the relationships among trading partners
within the supply chain and the nature of
customer requirements. They partly
determine which of three approaches to
target-costing should be deployed within the
supply chain: (1) price-based, (2) value-based,
and (3) activity-based cost management
(ABCM). Thus, it is essential that the target
costing approach be selected only after a
careful analysis of customer requirements
and supply chain relationships.
Supply chain relationships
The supply chain is a network of relationships
among trading partners. The content of these
relationships sets the operating characteristics
of the supply chain, including the ability of the
chain to support channel-wide target costing.
Since the ability successfully to utilize a given
target costing approach within a supply chain
is influenced by the relationships among its
trading partners, understanding these
relationships is critical to choosing the right
target costing approach for the chain.
Supply chain relationships are often
described in terms of the level of integration,
interconnectedness, or interdependence
among the trading partners within the chain.
Cooper et al. (1997) and Tyndall et al. (1998),
for example, identify four levels of supply
chain relationships, progressing on a
unidimensional continuum from lower to
higher degrees of partnership (cf. Cooper et
al., 1997, p. 74). At the lowest level of
partnership, the trading partners rely on
what Tyndall et al. (1998, p. 249) calls open-
Figure 2
Target costing process (adapted from Ansari et al., 1997a, exhibit 3-1
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chain management: criteria
and selection
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market negotiations. These are arm's length
transactional business practices that
structure and control the interactions of
trading partners. Under open-market
negotiations, market structure and
competitive imperatives, not management
initiatives, determine the nature of the
relationships within the supply chain.
Management's primary role is to ensure that
the firm has the capacity to meet the
transactional requirements of its trading
partners. In the next level of partnership,
according to Tyndall et al. (1998, p. 249),
trading partners formalize their cooperation.
They deliberately depart from open-market
transactional patterns and construct
specialized transactional processes that
better serve their needs. To secure the
benefits of these specialized interactions,
trading partners often enter into long-term
business contracts, and, to further reduce the
uncertainty in their business relationships,
they commit to sharing information about
the volume and timing of product and service
flows among them. Such exchanges of
information broaden and intensify as the
partnership moves from cooperation to
coordination. In this third level of
partnership, the trading partners create
relationships rich enough to support joint
efforts to simplify supply chain operations.
Coordinated efforts to reduce inventories
within the supply chain by deploying JIT or
to reduce transaction costs by exchanging
information electronically is typical of these
relationships. Finally, by the time trading
partners reach the collaboration stage of
partnership, they will have attained a large
measure of integration. They engage in joint
efforts to develop and improve products and
in joint efforts to enhance the value and
satisfaction provided to customers.
Consequently, management devotes
considerable energy to building trusting
supply chain relationships and to negotiating
equitable arrangements for sharing the
burdens and rewards of supply chain
improvements.
To be effective, the trading partners within
the supply chain should deploy the target
costing approach that best aligns with the
level of their partnership. Chains operating
either cooperatively or as a collection of
independent, open-market firms, for
example, could successfully deploy price-
based target costing, for this approach does
not require strong, active, specialized
sharing arrangements among trading
partners. Value-based and ABCM-based
target costing require higher levels of
partnership than the price-based approach.
Besides requiring trading partners to share
greater amounts of information, these
approaches may require joint efforts among
the trading partners to reconfigure the
operating characteristics of the supply chain
so that the customer requirements can be
met at the prescribed sales price. Even so, a
coordinative relationship among trading
partners will often offer a sufficient basis for
implementing value-based target costing
within the supply chain, but ABCM-based
target costing will most likely require true
collaboration among the trading partners.
The price-based approach
A price-based target costing approach
requires that the supply chain operate in a
business environment characterized by
stability and uniform customer
requirements. Thus, the supply chain offers
few product variations, and new product
introductions are infrequent. Target costing
is primarily used to ascertain the market
prices and profit margins for products and to
provide a means for negotiating
compensation among trading partners for the
performance of supply chain activities.
Gaining agreement among the supply chain
trading partners on the level and timing of
compensation for their services is the most
imposing and the most vital step in the target
costing and supply chain relationship
building process. The negotiations should
result in the following: the compensation
paid to all members of the supply chain,
excluding the market maker, total to no more
than the ``allowable'' product cost, and the
agreed-to prices are adequate to protect the
long-run profitability and survivability of the
members of the supply chain. It is crucial
that members of the supply chain receive a
level of compensation that makes
membership advantageous.
The value-based approach
A value-based approach to target costing
requires supply chains that cater to customers
whose requirements are diverse and rapidly
change. Thus, in order to satisfy these
customers, the supply chain must provide a
large variety of high-value products, most of
which, failing to become ``business classics'',
are short-lived (Sanderson and Uzumeri,
1997). A supply chain catering to such
customers would benefit from adopting value-
based target costing, especially if the
relationships among the trading partners
within the chain are based primarily on open-
market negotiations. Such a supply chain can
be reconfigured so that its core competencies
closely match customers' current
requirements. Effectively used, this capacity
for reconfiguration allows the supply chain to
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chain management: criteria
and selection
Industrial Management &
Data Systems
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sustain its competitiveness by responding to
changes in customer requirements with
products of superior value. However, to
minimize interfirm conflicts and to reduce the
disincentives for participating in the supply
chain, the trading partner relationships
within the chain must remain equitable.
For supply chains exhibiting the above-
mentioned characteristics, value-based target
costing is used to apportion the ``allowable''
product cost among supply chain activities in
proportion to the value the activities create.
These ``prorated costs'' become the prices paid
to members of the supply chain, other than
the ``market maker'' (Ansari et al. (1997b)
provides a more detailed account of the role of
``market makers'' in supply chains), for
performing the activities. With the cost or
price of supply chain activities determined,
target costing procedures can be used to
identify members of the supply chain that are
capable of performing the supply chain
activities at the allowed cost. The set of most
capable members combine to operate as the
supply chain until further changes in
customer requirements necessitate another
reconfiguration.
Many supply chain trading partners find
themselves in environments where customer
requirements are ever changing and the cost
of switching supply chain members is
prohibitive. If the supply chain is to succeed,
its existing members must find ways to
satisfy the increasingly exacting changes in
customer requirements. Under such
circumstances, value-based target costing is
still used to allocate the ``allowable'' cost to
supply chain activities in proportion to the
customer value created. However, the
members of the supply chain must now
undertake joint reengineering activities to
ensure each member's value contribution is
properly aligned with the ``allowed'' cost.
The ABCM-based approach
The ABCM-based approach to target costing
requires supply chains where customer
requirements are uniform, stable and well
known, and the supply chains relationships
are fixed through collaborative arrangements.
To be effective, supply chains operating in
this environment must control and reduce
their overall costs. (An example of an activity-
based model of supply chain costs is contained
in Statement on Management Accounting 4P
(IMA, 1992).). Thus, the supply chain trading
partners devote considerable effort to building
interfirm activity-based models of supply
chain costs. Knowledge about the cause and
cost of non-value-added supply chain
activities extracted from these models is used
to design joint cost improvement projects and
to fashion equitable agreements for sharing
the burdens and rewards of any joint projects.
Target costing's role in environments
featuring the above-mentioned characteristics
is to stimulate and structure efforts to
continuously improve the cost competitiveness
of the supply chain. Thus, the ABCM-based
target costing process operates as a modern
version of a cost-plus pricing system (see
Bayou and Reinstein, 1997), wherein prices
among members of the supply chain are
derived by applying the market markup to the
waste-free cost of performing supply chain
activities. This pricing system may induce
supply chain trading partners to eliminate
waste from their processes based upon their
self-interest. However, self-interest cannot be
allowed to advance unchecked. The ``gain
sharing'' arrangements among members of the
supply chain must be sufficiently robust that
the overall viability of the supply chain is
assured, and not threatened by efforts to
optimize local cost.
Conclusions
In order to avoid the problems associated
with the traditional approach to supply chain
management, firms must adopt a global
perspective regarding their supply chains
that eliminates functional cost objectives
that ignore the creation of customer
satisfaction. Target costing is a mechanism
for determining a total supply chain cost that
meets the requirements of the customer.
Thus, target costing allows the firm to focus
on rationalizing total cost with respect to the
customers as opposed to minimizing the local
cost of individual functions. Additionally, a
sound supply chain strategy is needed which
is aligned with the target market as well as
with the firm's competitive and product
strategies. The criteria for selecting the
appropriate target costing approach include
customer requirements and supply chain
relationships. As depicted in Figure 2, the
trading partners within the supply chain
must develop market feedback mechanisms
designed to anticipate changes in customer
requirements and to evaluate the supply
chain's effectiveness in providing customer
satisfaction. Target costing can be used as a
means for integrating market feedback into
the supply chain through the development of
a total cost structure reflective of current
customer requirements. These requirements
are then used to determine where cost must
be reduced within the supply chain to
provide enhanced levels of customer
satisfaction. However, in order to ensure
effectiveness, the selection of the target
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costing approach must be aligned with the
type of relationships established among the
supply chain trading partners. A price-based
approach to target costing is best suited for
supply chains whose relationships are
characterized by open-market negotiations
or simple cooperative arrangements. Value-
based target costing is best suited for trading
partners whose relationships are
characterized by joint efforts to simplify
overall supply chain operations. Finally, an
ABCM-based approach to target costing is
best suited for trading partners whose
relationships are characterized not only by
joint efforts to improve the supply chain, but
also by joint efforts to develop and improve
products. The selection and use of the
appropriate target costing approach based
upon customer requirements and supply
chain relationships should result in higher
degrees of customer satisfaction, leading to
improved competitiveness, profitability, and
long-term sustainability.
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