"Achieving Full-Cycle Cost Management"

Robin Cooper and Regine Sagmuller

MIT Sloan Management Review

Fall 2004, pp. 45-52

This article discusses a case study of Olympus Optical, in Japan, to illustrate that substantial cost reductions can occur not only in the design phase but also throughout the product life cycle.

Five different major techniques are identified to manage costs throughout a product's life cycle:

1. Target Costing—Target costs are established through determining in advance the probable selling price and the desired profit margin per sale. Product engineers then seek innovative and creative ways to attain the desired product performance at the target costs. Value engineering is applied through attempting to: (a) reduce the number of parts in the product, (b) eliminate expensive, labor-intensive and mechanical-adjustment processes, (c) replace components with less expensive ones, and (d) aggressively pressure suppliers to reduce costs.
2. Product-Specific Kaizen Costing—This technique corrects for any cost overruns during the early stages of manufacturing the product. The product is rapidly redesigned, while keeping in mind the constancy of quality and functionality.
3. General Kaizen Costing—At this stage, the design is assumed to be firmly set. Cost reduction goals are set for production processes, and the employees are empowered to achieve them through improvements in the current manufacturing process.
4. Functional Group Management—"This technique consists of breaking the production process into autonomous groups and treating each as a profit (instead of a cost) center." This allows the group to increase its profits and productivity, even if it incurs higher costs in the process of doing so. It also helps improve understanding of each group's own contributions to the overall profitability of the organization.
5. Product Costing—This consists of three major functions: Determining if new products are meeting their target costs; Ensuring that production processes are meeting their expected levels of efficiency; and Identifying unprofitable products for further action.

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