Toyota (target costing)

Toyota Motor pot started as a subsidiary of the Toyota voluntary Loom Works, Ltd. It was founded in 1937 as the Toyota Motor Company, Ltd. It assortmentd its name to the Toyota Motor Corporation in 1982 when the parent company merged with Toyota Sales Company, Ltd. In 1 993, Toyota Motor Corporation (Toyota) was Japans largest automobile company. It controlled nigh 45% of the house servant foodstuff. Its conterminous largest Japanese competitor was Ionians, with approximately 25% securities industry percentage, followed by Honda and Mazda, which unneurotic represented about an opposite 20%.The remaining 10% of the domestic automobile market was make up of well-nigh(prenominal) domestic manufacturers, including Issue, and several foreign competitors, ofttimes(prenominal) as Mercedes Benz and the big three American firms superior general Motors, Ford, and Chrysler. The domestic and world automobile markets were characterized by Intense competition. Models were brought out cursorily despite their high developing address. Fractions of a percentage of market share were often viewed as representing the difference amongst success and failure.No Globalization exclusively over the years, Toyota had evolved into a global firm. In 1993, a considerable part of the firms overseas markets were serviced by local subsidiaries that frequently inclinationed and manufactured automobiles for local markets. For example, local plants produced al just about one-third of the vehicles sold in the North American market. These vehicles were produced in three plants, one in Kentucky, another in Ontario, Canada, and the unsanded get together Motor Manufacturing Inc. (MINIMUM) Joint venture plant with General Motors.These plants produced approximately 400,000 vehicles per annum, including 220,000 Camera, 170,000 Corollas, and the conclusion being pickup trucks. outpution volumes for pickup trucks were expected to amplification to approximately 100,000 in the nex t professor Robin Cooper of the Peter F. teamster Graduate Management Center at The Claremont Graduate tame and Professor Take Tanana of Tokyo Aziza University prepared this case as the basis for severalise discussion rather than to illustrate either effective or ineffectual handling of an administrative situation.Copyright 1997 by the President and Fellows of Harvard College. To order copies or betoken permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication whitethorn be reproduced, stored in a retrieval ashes, used in a spreadsheet, or transmissible in any form or by any means-?electronic, mechanical, photocopying, recording, or otherwise-?without the permission of Harvard Business School. This document is authorized for use only by Lingua Wang at Chinese University of Hong Kong until May 2013.Copying or posting is an invasion of copyright. emailprotected Harvard. Du or 617. 783. 786 0. 197-031 few years. In 1994, the firm expected to begin merchandise vehicles from North America to markets such as Japan and Taiwan. In increment to automobiles, the firm likewise manufactured and sold forklifts. Toyota controlled 70% of the forklift market in the United States. The same commitment to local manufacture and control was spare in Toasts other study overseas markets. In Europe, two bare-ass UK plants began producing to r each(prenominal) 100,000 by 1995 and 200,000 units originally the end of the century.Altogether, Toyota vehicles were either manufactured or assembled in more than 20 nations. These local manufacturing facilities provided Jobs for nationals and business for local supplier firms. The relative importance of the international supplier business to Toyota was increasing. In 1992, for example, Toyota purchased topically approximately 70% of its parts requirements (or $5 billion) for its North American operations. The other 30% was imported from Ja pan, however this percentage was expected to decrease over time. By 1994, Toyota expected to purchase $6. Billion of parts from local suppliers intercontinental and import $2. 9 billion for domestic use. Supplier Relationships Product architectural plan was also international in scope. Salty Research, Inc. , a Toyota subsidiary create in California in October 1973, was responsible for the body styling ND interiors of untried vexs scheduled for mathematical production in North America. The see styling for European markets was merged from the firms project and technical centers located in Brussels. Third-party suppliers were responsible for approximately 70% of Toasts parts and materials.In particular, the live and quality of third-party supplied parts was considered faultfinding to the firms success. In refreshed years, Toasts expansion into international production had required increased interaction with non-Japanese suppliers to lift their efficiency and quality to t he same level as that of Toasts Japanese suppliers. Etc To help oneself non-Japanese supplier firms manufacture acceptable parts, Toyota had developed programs to transfer Japanese manufacturing techniques. At the heart of these so-called object-in programs was Joint work by suppliers and Toyota locomotive orchestrates on untried components.This Joint work began in the early stages of the vehicle- development process, because prospective suppliers cited a lack of involvement in the early stages of vehicle propose as an obstacle to loving business in highballs components. In a emblematic instauration-in program, several initiationers competed for a part interact the firms were evaluated on the worths bid, the technology applied, and their performance. The winning firm was granted a contract for the aliveness of the exercise. When the next form was developed the contract was once again thrown open for bidding.By 1993, more than 120 U. S. Suppliers had participated in in tention-in programs and firms were involved in such programs but had only to sign contracts for parts. A similar program was in place in Europe. Toyota heads also helped its overseas suppliers to adopt the Toyota Production System. Many Toyota overseas suppliers had right off success righty implemented modified erosion of the Toyota Production System. The system contained quad key elements just-in-time production, Kanata, total quality management, and multi- die hardal work teams. only when-in-time production avoided the build up of excessive work-in-process inventories and increased the firms ability to respond quickly to customer demands. Kanata was the brainish force behind KIT, tying production closely to customer demand. hail quality management ensured high-quality products and minimized the risk that the reduced levels of inventories would lead to stock-outs because of poor-quality components. Finally, multi-functional workers, overt of performing several tasks, dealt w ith the increased complexity of the production process. 2 appeal political platformning Cost preparedness at Toyota worked to reduce product speak tos at the design stage.Toyota first set its bell planning finishings and then set out to strain those deaths by aggressive design changes. To decently assess the gains made, the exact amount of cost diminution achieved through design changes was estimated after excluding all other factors that affected costs, such as increases in material and labor hurts. The measurement process started with cost tables that helped engineers estimate he menses cost of alive impersonates. These cost tables were kept up-to-date for changes in material wrongs, labor rates, and production volume levels.The updated production volumes helped determine twain depreciation and overhead charges that would be allocated to the naked position. Comparison of this estimated cost to the vehicles print cost gave the desired level of savings, or cost- planning goal, as it was called. At the lettuce-estimation stage, also referred to as the fair game cost-setting stage, Toyota calculated the differences between the costs of the new and current imitates, strutted the appropriate portion of the cost-reduction goal to the design divisions, and then assessed the results.Profit tail ends for the life of the new model were also calculated as differences between estimates and heads. This process constituted the essence of budget control at Toyota. Toyota clearly specified cost reduction goals for each control unit to ensure that the companys boilersuit goals were attained. seat Costing Toyota invented its target costing approach in 1959. Although galore(postnominal) major manufacturers in Japan use target costing, Toasts system is the oldest and insider by many the most technically advanced.While the idea of systematic cost reduction had existed at Toyota since it was founded, the process was first codified in the mid-sass, when the firm set itself the intention of producing a $1,000 car. Existing cost estimation played a consumption in target costing, but there are differences between the two. First, cost estimates relied upon existing standards while target costs were adjusted for any futurity savings repayable to design changes. Second, cost estimates had a horizon of sextet months while the horizon for target costs was the time engaging until the put up of the new product.Target costing brought the target cost and the estimated cost of a product into line by purify specification and design. Toasts target costing system was designed not simply to estimate the cost of new products but to enable a product to attain its profit targets throughout its life. Product Planning Toyota used two broad categories of product development, one for all told new types of automobiles and the other for changes to existing models. The development of an entirely new model, such as the Lexus, was relatively unusual.Mo st of the reduce development projects focused on modifications to existing models. Japanese passenger cars usually underwent major model changes every tetrad years. However, recent industry trends suggested that the period between full model changes may The firm used target costing primarily to support model changes, though the same general cost control procedures were applied to the design of entirely new vehicles. Cost estimates for new vehicles involved a greater degree of uncertainty than for model changes. 3 A model change began with a suggestion from political boss engineers for development of a new model.The proposal usually include Specifications such as size (length, width, wheelbase, and interior space), weight, mileage, engine (type, displacement, and maximum power), transmission (gear and moderation ratios), chassis (suspension and brake types), and body components discipline budget Development schedule and Retail terms and gross sales targets. sore models basical ly maintained the same product concept as their predecessors. Styling was not specified at this stage usually no more than a vague image was mentioned. Most of the cost incurred in any model change was for prototyping. Retail Prices and Sales Targets oodles.The retail price remained the same unless a change in function or performance altered the comprehend value of the vehicle in the eyes of the customer. In theory, therefore, prices changed as the comprehend value of the vehicle changed. Formula for List Price of a New Model The selling price of a new car model was composed of the selling price of the equivalent existing model confirming any additive value collectible to improved functionality. For example, adding air teach to the standard version of a model would increase its price by the value of air conditioning as perceived by customers.The incremental value of a new model was find by analyzing market conditions. Because the automotive industry was mature, most new featu res already existed in some form on other models. For example, if air conditioning was to be included in the standard version, its added value was determined using the list price of optional air conditioners for other models. In the unlikely event that no equivalent option existed, then the firms design engineers and market specialists would estimate how much customers were willing to pay for the added feature.The price increase for an added function did not of all time equal its selling price as a attendant option. The incremental price for an increase in functionality might be lowered because of the firms scheme for the vehicle and because of competitors pricing strategies. As functions were added to the standard version, Toyota increased the selling price until it reached the upper limit for that class of vehicle. When this limit was reached, the only potential realize from adding functionality was increased sales.Because new models were introduced some four years after the des ign project began, Toyota delayed setting the functionality of the standard version as farseeing as possible. Therefore, the target price and margin for a new model, and thusly the associated target unit price, were set quite some time before product launch. The exact functionality of the standard version was set only when factors such as competitive offerings, foreign exchange rates, and user demand were better understood. Changing the functionality of the standard version increased the probability that the new model would achieve its 4 desired level of profitability.Similarly, the actual selling price was not fixed until Just before product launch. Delaying these two critical decisions reduced significantly the uncertainty faced by the firm. For example, suppose the incremental value assign to an air bag in the US market was $450 but the competition had set it at $700. In this case, Toyota might increase its price by the difference. Similarly, if the competitive prices were low er, Toyota would drop its prices to match. The sales division proposed judge production volumes base upon past sales levels, market trends, and competitors product offerings.The sales division typically proposed a figure that was considered safe (I. E. , achievable), based upon the models current sales level. Optimism was restrained in favor of realistic goals. Development Plan Assisted by engineers in the design, riddle-production, and technical divisions, a chief engineer drafted the development plan for the new model and then led the development project. Well over a hundred engineers from the various divisions worked with a chief engineer on a typical project, but since they belonged to variant divisions, in all likelihood only about a dozen people reported straightaway to the chief engineer.In this sense, the chief engineer was more a project draw than a supervisor of product development. The chief engineer coordinated the design process at the design divisions, which wer e relatively autonomous the chief engineer was expected to develop a concept for the new vehicle that spanned triplex design divisions. Toyota considered the tensions created by this matrix approach beneficial to the creative design process and worth any conflict that might arise. Toyota set the cost-planning goal based upon the product plan and the targets for the products retail price and production volume.Because an estimated price had the expected profit from product sales over its production life (usually, four years). The products target cost was the unit cost upon which the profit target was based. Calculating Target Profit and Target Cost Toyota calculated the sprightliness target profit for a product, such as the Celiac, by multiplying the target sales volume by the models return on sales (or, as it was known at Toyota, profit ratio of sales). Toyota set the sales profit ratio with reference to the corporations long-term target profit ratio.Estimated cost was determined fr om the firms cost tables. Estimated profit was calculated using this figure. Estimated profit was less than the target profit because the target cost included the estimated cost savings due to value engineering and other cost reduction activities. The difference between target and estimated profit was the amount to be cut from costs through cost planning. The cost-planning goal was obtained by subtracting the estimated total profits from the target profits.The goal of cost planning was to determine the unit profit needed to achieve the profit target, and thus the amount to be trimmed from the new products cost through cost planning activities. Estimated profit equaled the retail price damaging the estimated cost per unit times the production volume. As cost reduction activities were implemented, the products estimated costs decreased. If the goal was achieved, the target cost and expected cost became equal, as did the expected and target profits. Estimating Difference Costs Rather than adding together all of the costs for a new model, Toyota added the determined at the major function level. Thus, cost planning could begin even before blueprints for the first test model were drawn. Also, estimating the total difference instead of the total cost tended to be more accurate because the typical new model was heavily based upon existing designs. Trying to estimate the cost of a new vehicle from scratch would, in managements opinion, introduce more errors than using existing data and modifying it accordingly. And it helped the related divisions understand cost fluctuations. The approach was more helpful to the design divisions because it highlighted the areas of the new model that were different from existing designs. New designs required most of the work in the design divisions. Thus, the estimated cost of a new model was the cost of the current model plus the cost of any design change. Thus, for every increment in the functionality of a new del there was an estim ated incremental price and cost.This approach allowed the firm to measure the incremental profitability of each new function it built into a new model. A full model change required many design modifications. Consequently, the cost of the design change was broken out into the costs of a number of different design modifications. The design team analyzed each modification and assigned it an estimated cost. The sum of these cost estimates had to equal the cost planning goals for the new model. Estimating differences helped polish off the cost-planning goal and wowed accurately how much was accomplished through cost planning.Cost planning focused on new model design. Its effectiveness was measured as the amount of cost reduction achieved through design. Therefore, other factors that affected cost, including reward and fluctuations in indirect costs incurred by related divisions, had to be eliminated from overall cost reduction in order to identify the portion due to cost planning. By f ixing the cost of the current model and work out the differences between the current and new models, Toasts system dealt only with cost changes resulting from changes in design and production volume.Without actual drawings for the new model, the estimate often began with Just an idea. Since rough sketches provided by the design division were often the only sources of information, estimates were made under the guidance of the cost planning division rather than the score division. Toasts 20 design divisions designed each major function of the new vehicle, including the engine, transmission, air conditioner, and audio system Because the people at the design and cost planning divisions had the latest in-house