Overview:Nissan Motor Company was the world’s 4th largest automobile manufacturer in 1990. They had 10% of the market for cars and trucks, with roughly 2 million passenger cars being produced each year. To increase its market share, Nissan implemented a plan to achieve domestic sales of 1.5 million cars by 1992. It also sought to obtain the number one rating in customer satisfaction.
The company tried to develop a plan to produce a line of automobiles that matched consumer lifestyles. Nissan had a three stage process of introducing new models, the conceptual design stage, the product development stage, and the production stage, which typically took 10 years to complete.
Olympus Optical Company was founded in 1919 as a producer of microscopes. The company developed its first camera in 1936 and by 1990 it was the world’s fourth largest camera manufacturer.
The company had four major revenue producing divisions, a consumer products division, a scientific equipment division, an endoscope division, and a diagnostics division. Olympus relied heavily on the sales of its SLR camera models until a major shift in consumer preferences. When compact camera sales began to skyrocket, Olympus fell behind since it never established a market share for the compact camera market. Management then decided to reconstruct its camera business with a three year program.
Market-Driven Costing:At the Market-Driven costing level, initial profit planning and extensive market research are used to determine what price level the market will support. Existing products, market position, estimates of sales volume and consumer perceptions of value are considered. This information is then used to determine an appropriate range of prices or the allowable cost. “The allowable cost is the cost at which the product must be manufactured if it is to earn the target profit margin at the target selling price.” (Cooper, 398) This will not be the final target cost, however, since the allowable cost does not incorporate the costs associated with manufacturing or thesuppliers.
Nissan Motor Company used market-driven costing in its conceptual design stage. Here the designers would identify an appropriate product mix or the matrix of vehicles it intended to produce. The market mix contained information related to each product and helped Nissan to achieve the desired level of market coverage. Additionally, Nissan hired outside consulting firms to identify new products for the matrix by collecting information regarding consumer preferences. With this information, management then chose an appropriate matrix of models to cover the market.
Nissan would then identify different consumer mind-sets relating to each model. Each model was designed to fit these identified mind-sets.
Olympus Optical Company instated a new strategy to recapture its lost market share. The company focused on both the SLR market and the low-cost compact camera market. In the SLR market, Olympus began to differentiate its products by using innovative technology. In the low-cost camera market, the company developed a full-line of cameras with zoom lens models. In addition to new technology and new product lines, Olympus reduced the time it took to bring its camera to the market to18 months. This allowed the company to react to changes in the market since the industry was so competitive.
Also, another major portion of its market-driven costing plan was to use extensive research to identify the mix of cameras it would be producing. The volume of information collected to be used in decision making was greatly increased. This information came from six different sources, such as the corporate plan, the technology review, and qualitative information about consumer trends. After extensive reviews of the plan and several meetings with management, Olympus would formally accept and eventually implement the plan.
Product-Level Target Costing:Product-Level costing focuses on production efficiencies through evaluating a firm’s manufacturing costs. Target cost is the most important measure, which is similar to allowable cost, but differs by focusing on the firm’s capabilities rather than the market demand. If engineers can find a way to improve the functionality of a product, they must also find a way to reduce related costs.
Nissan then determined the estimated sales for each vehicle as well as projected revenues. When the target profit level was determined, Nissan would compare estimated actual costs to the allowable costs. If the actual costs were greater than the allowable costs, Nissan employed a system of value engineering to rework the products to make cost goals more attainable. After the first value engineering phase, management conducted reviews of each model. If the financial and performance analyses were accepted, the new model was authorized and went to the product development stage.
Olympus developed a plan to reduce production costs. It would design products that could be manufactured at a low cost, reduce unnecessary expenditures, improve production engineering, adopt innovative manufacturing processes and shift a large portion of production overseas. The camera manufacturing process became highly automated and production engineering produced smaller, more manageable batches. Reducing unnecessary expenditures was the biggest program in the cost reduction plan. The company analyzed fixed costs, it analyzed costs associated with launching new products, it lowered the cost of purchased parts, and it integrated its existing cost reduction programs.
Component-Level Target Costing:Component-Level costing focuses on setting budgets for raw materials and other inputs. Important aspects include getting competitive bids, managing relationships with suppliers and encouraging innovation. Dissecting product costs allows management to see which components produce the greatest costs. With this information, management can find the suppliers with the lowest cost products and find ways to become part of a highly efficient supply chain.
During the product development stage at Nissan, a detailed order sheet for a new model was prepared. Every component was listed and analyzed to see which parts would be supplied internally or externally. Suppliers were also given this list, along with estimated production volumes, so they could submit a competitive bid for each part. Additionally, value engineering was used to determine the allowable costs for each major function of the automobile. There were several ways Nissan reduced costs.
First, it bought competitor’s products and disassembled them to try and improve them, it asked suppliers to generate cost reduction ideas, it tried to increase the commonality of the parts used, and it tried to reduce the number of parts in each model.
Olympus began setting target costs assuming aggressive cost reduction and high quality levels. Three objectives were prepared to reduce costs, first to reduce the number of parts in each unit, to eliminate expensive, labor extensive processes and to replace metal and glass components with cheaper plastic components. These objectives provided Olympus with major cost reductions. Furthermore, many of the cameras sold were to overseas markets, which left the company susceptible to currency fluctuations. If the company felt the currency fluctuations caused profits to be out of scope, the target cost of the camera was reviewed and revised to bring the price back into the appropriate range.
Conclusion:For Nissan, target costing is highly favorable. The firm depends on the consumer, whose needs and/or wants are continuously changing. This is evident with Nissan’s characteristics of consumers from different eras, such as sentiment from the 1950’s of “keeping up with the Joneses.” Nissan therefore has a large product mix (30 models), which increases the complexity of the production cycle. Nissan also depends heavily on outside suppliers for materials.
Olympus also faces pressure from consumers to redesign its products and provide new and more innovative cameras. It also relies heavily on outside suppliers. The complexity of the product, however, is much lower than the automobiles produced at Nissan. Less capital and resources must be expended during production and the overall production cycle is much less time consuming. Target costing is also extremely beneficial to Olympus; it isjust a much simpler and less time consuming process than that of Nissan.