OPERATING DECISIONS 135
can be eliminated that cannot be justified in the target price. This is an iterative
process, but an essential one if the lifecycle costs of the product/service are to be
managed and recovered in the (target) selling price. Importantly, this process of
estimating costs over the product/service lifecycle and establishing a target selling
price takes placebeforedecisions are finalized about product/service design and
the production process to be used.
The investigation of cost reduction is acost-to-functionanalysis that examines
the relationship between how much cost is spent on the primary functions of the
product/service compared with secondary functions. This is consistent with the
value chain approach described earlier in this chapter. Such an investigation is
usually a team effort involving designers, purchasing, production/manufacturing,
marketing and costing staff. The target cost is rarely achieved from the beginning
of the manufacturing phase. Japanese manufacturers tend to take a long-term
perspective on business and aim to achieve the target cost during the lifecycle of
the product.
Kaizen costing
Kaizenis a Japanese term – literally ‘tightening’ – for making continuous, incre-
mental improvements to the production process. While target costing is applied
during the design phase, kaizen costing is applied during the production phase of
the lifecycle when large innovations may not be possible. Target costing focuses on
the product/service. Kaizen focuses on the production process, seeking efficiencies
in production, purchasing and distribution.
Like target costing, kaizen establishes a desired cost-reduction target and relies
on team work and employee empowerment to improve processes and reduce costs.
This is because employees are assumed to have more expertise in the production
process than managers. Frequently, cost-reduction targets are set and producers
work collaboratively with suppliers who often have cost-reduction targets passed
on to them.
Total quality management
One aspect of operational management that deserves particular attention is total
quality management and the cost of quality.Total quality management (TQM)
encompasses design, purchasing, operations, distribution, marketing and admin-
istration (see for example Slacket al.(1995) for a fuller description).
TQM involves comprehensive measurement systems, often developed from
statistical process control (SPC).Continuous improvementis perhaps the latest
form of total quality management. This is a systematic approach to quality
management that focuses on customers, re-engineers business processes and
ensures that all employees are committed to quality. Standardization of processes
ensures consistency, which maybe documented in a quality management system
such as ISO 9000. Continuous improvement goes beyond processes to encom-
pass employee remuneration strategies, management information systems and
budgetary systems.