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COST COST ACCOUNTING
ACCOUNTING
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turers, warehouses and stores so that merchandise is
produced and distributed at the right quantities, to
the right locations, and at the right time, in order to
minimize system-wide costs while satisfying service
level requirements. According to the Council of
Supply Chain Management Professionals (CSCMP),
supply chain management encompasses the planning
and management of all activities involved in sourcing,
procurement, conversion, and logistics management.
It also includes the crucial components of coordination
and collaboration with channel partners, which can
be suppliers, intermediaries, third-party service
providers, and customers. In essence, supply chain
management integrates supply and demand
management within and across companies.
Supply Chain Management (SCM) and Target
Cost : An integration
The management decides whether increased
functionalities are to be provided at the same cost or
same functionalities are to be provided at a reduced
cost. If the firm has positioned itself as a cost leader,
then the firm will have to focus on attaining target
cost. But if the firm has positioned itself as a
differentiator, then it will focus more on functionalities
than on cost. Once target cost is decided, then it cannot
be achieved without incorporating it in each step of
supply) chain. As can be seen that all supply chain
management have three components: suppliers,
producers and customers. As the various components
of supply chain are integrated, increase of costs of a
portion of the chain will increase costs of other
components too and, as a result, overall cost of the
product/service will increase. Therefore, cost
management must be done in all the components of
the supply chain and, it must be ensured that cost
management is done—and also value is added—in
each activity of the chain. Thus SCM takes into account
every facility that has an impact on cost and ensures
that the product conforms to customer requirements.
The objective of SCM is to be efficient and cost
effective across the entire system—taking into account
total system-wide costs from transportation and
distribution to inventories of raw materials, work in
process, and finished goods. SCM strategies are directly
affected by the development chain which is defined as
the set of activities and processes associated with new
product introduction. It includes decision on product
design, i.e., product architecture, what to make
internally and what to outsource, supplier selection,
early supplier involvement and strategic partnerships.
Thus decisions taken during the development chain
would impact the supply chain and the characteristics
of the supply chain would impact product design
strategy and thus the development chain.
Though SCM and development chain are closely
linked and affect each other, organization structures
limit the scope for an integrated approach. For
example. Vice President (VP) of engineering would
be responsible for the development chain, VP of
manufacturing for the production chain, and VP of
supply chain or logistics for the fulfillment of customer
demand, leading to a misalignment of product design
and supply chain strategies as there would be
conflicting objectives and trade-offs which would not
be resolved. The VP for a manufacturer of a car model
might not wish to increase the production run in times
of excess demand putting a strain on dealers who
would face increased waiting times and stock outs
leading to cancellations and/or poor word of mouth
publicity affecting the VP of supply chain’s
performance. Similarly, while designing a new car
model, the development team may reduce certain
features to reduce product cost requiring without
taking into account its impact on the logistics or supply
chain leading to higher costs of transportation or
storage. The same approach also overlooks
opportunities for cost reduction in the supply chain
which may give the design team more flexibility in
meeting their cost targets. A decision may be taken
whether to outsource a particular part or to
manufacture it in house.
Thus, integrating the supply chain, the development
chain and the production chain while practicing
target costing would be much more effective in
meeting the company’s strategic objectives. Coordination
is extremely important here. Therefore,
while target costing may serve as a solution when
developing new products, minimizing costs through
the optimal use of all resources along the entire supply
chain would be a better strategy. The current practice
involves use of Target costing to reduce costs by
involving suppliers and manufacturers as contributors
to the design process, thereby focusing the entire chain
toward the overarching goal of eliminating costly
waste, excess, and unevenness. The supply chain
partners can also consider costs of reclamation and
disposal of products after their useful life in a total,
closed-loop life cycle costing model.
Thus, adoption of target costing approach across
the supply chain would involve selecting the most
appropriate product development and process
technologies, minimizing the complexities of productlines,
eliminating cost overruns, limiting design
problems and delivering the lowest priced highest
valued product to the final customer. Other trends
prevalent in the industry include value engineering,
parts standardization, and a sharing of knowledge
along the supply chain.
764 The Management Accountant |September 2011