I recently had a conversation with Jim Rains, author of a new book titled Target Cost Management: The Ladder to Global Survival and Success. I must admit, I began our conversation in quite a blunt fashion by asking him right up front: "Why is target costing even important?" Here is his direct response:
"Target costing is important for a very simple reason. When it is performed properly in any major corporation it sets the stage for constant, consistent, acceptable and predictable levels of profitability. Predictable infers that there is a profit plan; a long term profit plan. All companies need to make money to stay in business, but only the best are able to sustain it forever. Making money must be the bottom line measure for any company’s success, but the real difference in companies that excel in target costing is that they achieve long term profits over a period of many years, literally decades, as opposed to a short term profit horizon.
The main activities of comprehensive target costing are:
- Planning for target cost and target profit.
- Confirmation of the target cost and profit and allocation to main portions of the product.
- Assisting and promoting the activities of target cost and profit and managing them in product planning, development, design and manufacturing preparation stages.
- Achieving the target cost and profit by the activities of all areas of the business.
- Evaluating target costing activities for continuous improvement."
I surely appreciated his response, but it then begged the question: "If target costing is so effective, why aren’t more companies implementing it?" Jim replied:
"This answer is more complicated but in short target costing is not easy. It is almost never easy to be the best at anything. The best athletes in the world at their sport work endless hours to separate themselves from their competition. Long term profitability that is constant, consistent, acceptable and predictable takes a fully dedicated leadership team that knows, follows and embraces the proper corporate strategy for target costing to flourish."
Do work with or know of any corporations that use target costing for long-term profits? Have these corporations been successful?