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A commonly quoted statistic is that 80% to 95% of the cost of a product is determined by its design and is therefore set before the item enters manufacturing. This 
assumption suggests that the dominant focus of Cost Management should be during Product Development and not during Manufacturing.
However, contrary to a widely held assumption, companies can integrate a variety of Cost Management techniques not only in the design phase but throughout the product life cycle. This is to ensure that there is a substantial reduction in costs. In fact, companies achieving Operational Excellence and competing aggressively on cost might consider the adoption of some form of an Integrated Cost Management Program that spans the entire product life cycle.
An organization must have a good understanding of Integrated Cost Management and the 5 Cost Management Strategies that they can use to reduce costs but still attain the desired level of functionality and quality at the target costs.
The 5 Cost Management Strategies
The 5 Cost Management Strategies play a crucial role in the company’s integrated approach to Cost Management.
The 5 Cost Management Strategies can be applied throughout the product life cycle with one technique used during the product design and the rest during manufacturing.
- Target Costing. This is a technique applied during the design stage. Target Costing is best used when the manufacturing phase of the life cycle of a product is short.
- Product-specific Kaizen Costing. This is a technique applied during the early stages of the manufacturing phase. It enables the rapid redesign of a new product to correct for any cost overruns. The primary rule in Product-specific Kaizen Costing is that the product’s functionality and quality have to remain constant.
- General Kaizen Costing. The third Cost Management Strategy, this technique is applied during the manufacturing phase. It focuses on the way a product is manufactured with the assumption that the product’s design is already set. This technique is effective when addressing manufacturing processes that are used across several product generations.
- Functional Group Management. This is the technique that is applied in the production process. Functional Group Management consists of breaking the production process into autonomous groups and treating each group as a profit instead of a cost center. The switch to profit as opposed to cost allows groups to increase the throughput of production processes even if changes result in higher costs. It enables the change in mindset that functional group management induces.
- Product Costing. The 5th Cost Management Strategy, this is the technique that coordinates the efforts of the other four techniques. It does coordination work by providing the other four techniques with important, up-to-date information.
Target Costing vis-a-vis Kaizen Costing
Kaizen Costing as known as continuous improvement costing. It is a method of reducing managing costs. Kaizen Costing has a similarity with Target Costing but it also has its differences. (Note: Kaizen is the Japanese term for Continuous Improvement and often tied to the philosophy of Lean Management.)
Both Kaizen Costing and Target Costing can achieve results with lower resources. This is basically their similarity. On the other hand, the differences lie in their usage and involvement.
Target Costing is used on the design stage and requires the involvement only of designers. On the other hand, Kaizen Costing is used during the manufacturing stage and requires high involvement of employees. The general idea of Kaizen Costing is to determine target costs, design products, and process to not exceed those costs.
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There is a general belief among organizations that a large percentage of a product’s costs are locked in by design. It is assumed that little can be done once the 
design is set. This assumption has influenced cost management programs across diverse products’ life cycles. As a result, the focus during the design phase is Cost Reduction and Cost Containment during the manufacturing phase.
Yet, organizations that operated in a highly competitive market and demanded aggressive cost management showed that costs can be aggressively managed throughout the product life cycle. Various cost management strategies or techniques may be used to increase the program’s overall effectiveness. One of them is the Integrated Cost Management.
A Purview on Integrated Cost Management
Integrated Cost Management is every organization’s prescription for lower cost and higher profits. It is the 21st business approach to achieving Cost Management efficiency.
Integration is necessary for Strategy Development as it can promote the achievement of the company’s profit objectives. In fact, there are major benefits to Integrated Cost Management. One of which is lowering of overall costs throughout the product life cycle.
Integrated Cost Management can facilitate a steady decrease in costs all the way to discontinuance. In fact, it can result in an annual cost reduction of about 17% during manufacturing, savings that exceed 30$%, and a designed-in cost of below 70%.
Achieving this requires an understanding of the Integrated Cost Management Approach.
The Integrated Cost Management Approach
The Integrated Cost Management Approach focuses on the integration of cost management techniques which can lead to higher levels of cost reduction and superior overall performance.
The Integrated Cost Management Approach takes into consideration 5 Cost Management Strategies.
- Target Costing. This is the technique used or applied during the design stage. It is a feed-forward mechanism that enables the retooling of the design of new products to reduce costs while maintaining the desired level of product functionality and quality.
- Product-Specific Kaizen Costing. This is a technique that enables the rapid redesign of a new product during the early stages of manufacturing to correct any cost overruns. (Note: Kaizen is the general term for Continuous Improvement and often associated with Lean Management.)
- General Kaizen Costing. General Kaizen Costing is a technique that focuses on the way a product is manufactured with the assumption that the product’s design is already set. It is generally effective in addressing manufacturing processes that are used across several product generations.
- Functional Group Management. This is a technique that is used to break down the production process into autonomous groups and treat each as a profit center.
- Product Costing. Product Costing is a technique that coordinates the efforts of the other four (4) techniques by providing important, up-to-date information.
The 5 Cost Management Strategies enable organizations to better manage costs throughout the product life cycle, with just one (1) technique taking place during the product design and the rest during manufacturing.
The Key Takeaways
The application of the 5 Cost Management strategies has its key takeaways. These can be used as a guidepost in its application and a model of general concepts that organizations may consider.
One key takeaway is significant savings can still be achieved with short life cycle products and aggressive cost management focused on product design. Taking to note this key takeaway, we have to consider that as the length of the manufacturing phase of the product’s life cycle increases, the opportunity for cost reduction increases. Further, there is a need to explore the value of integrating multiple cost management during manufacturing.
Interested in gaining more understanding of Integrated Cost Management? You can learn more and download an editable PowerPoint about Integrated Cost Management here on the Flevy documents marketplace.
Are you a management consultant?
You can download this and hundreds of other consulting frameworks and consulting training guides from the FlevyPro library.
This week, LearnPPT added a new section to their site: Operational Excellence.
What exactly is Operational Excellence?
Operational Excellence is a set of business principles, tools, and frameworks aimed to achieving sustainable improvement of key performance metrics. Much of this management philosophy is based on continuous improvement methodologies, such as Lean Management (or Lean Enterprise), Six Sigma, Kaizen, Hoshin Kanri, 5S Workplace Productivity, and PDCA. The focus of Operational Excellence goes beyond the traditional event-based model of improvement toward a long-term change in organizational culture.
The page is currently divided into 4 main sections:
- Lean Management (or Lean Enterprise)
- Strategic Planning & Deployment
- Quality Management & Assurance
- Six Sigma
Questions, thoughts, concerns? Go to my site (learnppt.com) and shoot me an email.
For other business frameworks, visit our library of consulting-quality business frameworks and methodologies here: http://learnppt.com/powerpoint/frameworks/. These diagrams were professionally designed by management consultants. Give your presentations the look and feel of a final product made by McKinsey, BCG, Bain, Booz Allen, Deloitte, or any of the top consulting firms.
Over the past couple weeks, a ton of new business frameworks, covering topics from the 5S framework to Kaizen principles to benchmarking, have been added to Flevy. Flevy is a marketplace of premium business documents, which include business frameworks, financial models, PowerPoint templates, market research reports, and other similar documents.
This presentation deck covers the benefits of benchmarking, various types of benchmarking, identifying what to benchmark, and provides a detailed step by step guidance on how to systematically carry out a benchmarking project based on the world-renown Xerox benchmarking model. It also includes useful tips on benchmarking, benchmarking etiquettes and the critical success factors.
Hoshin Kanri ( Policy Deployment or Hoshin Planning) is a powerful, systematic Strategic Planning methodology that uses a Plan-Do-Check-Act cycle to create goals, choose control measures and link daily control activities to the company’s strategy.
In this training presentation, you will be able to teach employees on the structured Plan-Do-Check-Act (PDCA) approach to problem solving. Many world class companies such as Toyota uses the PDCA problem solving process for relentless pursuit of continuous improvement.
“Lean” is a management philosophy based on the Toyota Production System (TPS). With Lean Thinking, you will be able to enhance value for your customers by improving and smoothing the process flow and eliminating waste. Simply put, with Lean, you will be able to increase productivity and create greater customer value with less resources.
Strategic principles allow organizations to make decentralized decisions while maintaining cohesive strategic action. This document explains the strategic principle framework, including examples, defining attributes, relevant crucial situations, and an approach to strategic principle development.
Six Sigma provides a rigorous and structured approach to help organizations improve their performance in meeting their customers’ requirements. This training presentation introduces you to the Six Sigma philosophy, methodology and tools and the infrastructure for successful Six Sigma deployment without too much of statistical jargon.
Total Productive Maintenance (TPM) maximizes the effectiveness of equipment. This presentation on Total Productive Maintenance combines the TPM tools, 5S, OEE (Overall Equipment Effectiveness), 8 pillars, Autonomous and Planned maintenance into a highly detailed training tool. This PowerPoint includes a step-by-step implementation process of TPM.
Every organization depends on customer service. When you equip your frontline staff with the skills to create a quality experience for your customers, you enhance customer satisfaction and your organization’s image. In this customer service powerpoint, you teach your staff to manage emotions and deliver professional and personalized service.
This training presentation is specially designed for managers, supervisors, facilitators and continuous improvement steering committees who want to kick-start and implement Kaizen activities in their work areas to improve productivity and customer value.
This training fits well into any improvement initiative, including TQM and Lean management. The COQ methodology instills a practical approach to quantifying the financial impact of the Cost Of Non-Conformance (CONC) and the Cost Of Conformance (COC).
Developing and presenting a business plan is something most of us will do at some point in our business life. If you are good at doing it you are more likely to be successful at raising finance. This is an easy to follow guide that will give you the right attitude and approach to developing and presenting your business plan.
The 5S workplace organization system applies a set of basic management principles that many companies widely adopt to maximize productivity and organization. As a cornerstone of Lean management, 5S improves workplace morale, safety and efficiency.
This presentation provides a blueprint for building a Lean foundation for your office. You will learn how to mobilize and align your management team to launch or improve 5S in your office. The presentation covers 5S and Visual Management key concepts, best practices, step-by-step implementation guidance, and the best ways to integrate 5S into the organization’s culture to achieve sustainable world-class excellence.
Most companies are yet to reach their full potential because Human Resources is yet to reach a strategic level of contribution. This PowerPoint presentation shows how to transform Human Resources from a staff function to a strategic business partnership.
This document outlines a 3-phase framework for conducting robust Strategic Analysis, based on a paper published by A. E. Boardman and A. R. Vining. The framework describes the major elements of a strategic analysis, and consists of a logically-sequenced, coherent skeleton of a comprehensive strategic analysis.
Total Quality Management (TQM) is a holistic approach to long-term success that views continuous improvement in all aspects of an organization as a process and not as a short-term goal. This training presentation includes quality philosophies from key quality leaders such as W. E. Deming, J. M. Juran and Philip Crosby, and provides a summary of process management, steps for TQM implementation, key tools and techniques for total quality as well as the key business excellence and quality management models.
No doubt, employees bestow many improvement ideas. If you don’t have a formal system to collect and evaluate the ideas, you will lose them. These ideas can save you money, grow your business, and affect your overall bottom line. This formal system details the phases of collecting, evaluating, implementing and rewarding good ideas.
This presentation explores the basics of social media and how to select the right social networks, social media branding, social media marketing, social media optimization, how to build and manage your following. This course has been taught at Rutgers University and numerous professional conferences around the country.
The ISO 9001 standard is increasingly being adopted by many organizations world-wide. Whether you are conducting an internal quality audit in your organization or preparing for an external audit, it is important that the auditing process is thorough, systematic and effective.
OHSAS 18001 is a global occupational health and safety management system which is adopted in thousands of companies all over the world, and many more are in the process of doing so. One of the reasons for its wide adoption is because it reduces work-related accidents and ill-health and costs associated with them.
ISO 14001 is a global environmental management system which is adopted by thousands of companies all over the world. The intent of ISO 14001 is to provide a framework for a holistic, strategic approach to an organization’s environmental policy, plans and actions.
Thousands of companies in over 100 countries have adopted ISO 9001 as their quality management standard. Many more are pursuing this certification. ISO 9001 helps your company assure quality, save money and customers expect it. ISO 9001 applies to all types of organizations.
This is a case study presentation on the value of global diversification.
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