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Strategic Cost Management in Retail

Nissan uses target costing to determine the costs of new vehicles. It establishes a target selling price based on consumer research and then works backwards to determine the target cost. Value engineering is used throughout development to identify ways to reduce costs at the component and design levels. Suppliers play a key role in helping achieve the target costs. Accounting monitors final costs but is not involved in setting or reducing costs, which is led by engineering. Target costing requires buy-in from various departments, so cultural barriers can exist for Western companies adopting this approach.

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Pranai Mehta
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15 views2 pages

Strategic Cost Management in Retail

Nissan uses target costing to determine the costs of new vehicles. It establishes a target selling price based on consumer research and then works backwards to determine the target cost. Value engineering is used throughout development to identify ways to reduce costs at the component and design levels. Suppliers play a key role in helping achieve the target costs. Accounting monitors final costs but is not involved in setting or reducing costs, which is led by engineering. Target costing requires buy-in from various departments, so cultural barriers can exist for Western companies adopting this approach.

Uploaded by

Pranai Mehta
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

PGDM E-Biz

Pranai Mehta
Roll No : 44

Strategic Cost Management


Assignment

1. What is the competitive environment that creates the range of products sold?
 Sophisticated Japanese consumer and lean enterprise shape the competitive environment.
 Toyota has approximately 45% and Nissan has approximately 25% of market share, followed by
Honda and Mazda (20% together)
 There was no brand loyalty.
 Continuous improvement in functionality at the same cost and products engineered around
concepts that offer customers automobiles that matched their lifestyle was the strategy used by
Nissan.
2. How does Nissan determine its future product mix?
 Nissan determines its future product matrix using 3 models:
 Product matrix: to achieve market coverage and decide on the product mix for the next 10 years
 Matrix helps identification of body types and models that appeal to a specific group of target
customers
 Consumer analysis: determine attributes valued by customers
 Helps determine new entries in its product matrix
 Mind-sets: How customers visualize themselves in relation to their cars
3. Describe Nissan’s cost system. Is it strong enough to support its target costing system?
 The production cost system in Nissan’s which basically divides the cost into two subjects; direct and
indirect expenses.
 Three different product profitability were calculated as well, where the 1 st was the direct material
marginal profit, 2nd the product contribution, and last operating profit.
 The product costs reported by the cost system had four primary uses. First, they were used in the
long-range strategic plan as a basis for estimating future profitability. Second, they were used for
cost-control purposes. Third, they were used to help select the product mix, and finally they were
used to identify unprofitable variants that were candidates for discontinuance.
 Yes, Nissan will be able to support the system because most costs are traceable.
4. What is value engineering and how it is used in Nissan?
 A value engineering process examines the design of each component to determine whether
it is possible to reduce costs while maintaining functionality and performance.
 The concept of value engineering was used in all the 3 stages of new product development by
Nissan to keep a check on the price at every level and rectify it there.
1st stage of value engineering was to determine if the product can be manufactured under
acceptable profits. Allowable costs were kept low to adjust current manufacturing cost
2nd value engineering identified allowable cost at each major function.
3rd value engineering was used to identify allowable cost at each component level.
5. What is target costing?
 Product cost is determined by market price
 Management tool designed to reduce product’s cost over its lifetime
 Long-term profit planning
Target cost was identified as the difference between the target selling price and the target margin.
PGDM E-Biz
Pranai Mehta
Roll No : 44
6. What is the relationship between value engineering and target costing?
 Target cost is focused on setting the cost
 Value engineering is to achieve and maintain that target cost
7. What role the consumer play in the target costing system?
 Role of Consumer is to obtain a better idea of the price range over which the model would sell and
the level of functionality that the consumer expected.
8. How does Nissan determine the target margin for a new product?
 The target margin was determined by careful consideration of available information on the
consumer, the firm’s anticipated future product mix, and its long-term profit objective.
 Each new model’s target margin was established by running simulations of the firm’s overall
profitability for the next 10 years if it was selling the models identified in the product matrix at
expected sales volumes.
9. What role does profitability play in the target costing system?
 Profitability plays a very important role in target costing system as it allows to discount the selling
price to arrive at the product price.
 Target cost is derived because sales and profits are fixed and profits are fixed as part of sales and
hence if sales are achieved, profits must follow.
10. What is the role of suppliers in target costing?
 With 70 percent outsourced components, suppliers play a critical role, they are the partners.
External and internal suppliers were provided with description of each component and their
potential production volumes.
 Suppliers were expected to provide price and delivery timing estimates for each component.
Suppliers were asked to generate cost reduction ideas.
 An incentive plan was to motivate the suppliers in the form of regular orders
11. Why is accounting role so limited?
 Accounting is not involved in the core value engineering process and only monitors the final
cost if it is not exceeding the set target.
 As the vehicle entered production, accounting would monitor all components and assembly cost
and if these were not in line with the final target cost, accounting would notify cost design and
engineering that the final target was not being met.
12. Why there is no attempt to reduce cost of a vehicle after it enters production?
13. What barriers exists for introducing target costing into western companies?

14. What approaches can be used other than target costing?


 Moving away from lean accounting and switching to western methods like ABC costing and Cost-
plus pricing.

Common questions

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Nissan might avoid reducing a vehicle's cost post-production to maintain product consistency, quality assurance, and to focus resources on future models rather than retro-fit adjustments. This approach supports the company's strategic cost management by ensuring that cost targets are met at the development stage, allowing Nissan to align its production capabilities with strategic goals without the adverse effects of post-production cost variances, hence ensuring focused innovation and resource allocation .

Suppliers play a crucial role in Nissan's target costing as 70% of components are outsourced. They are considered partners and are given details about components and potential production volumes. Nissan expects suppliers to provide cost and delivery estimates and generate ideas for cost reduction. An incentive plan exists whereby suppliers are motivated with promises of regular orders to enhance collaboration and achieve cost targets efficiently .

The Japanese automobile market’s sophisticated consumers and the prevalence of lean enterprise practices shape Nissan’s competitive strategy. The lack of brand loyalty and the dominance of major competitors like Toyota compel Nissan to continually enhance functionality while maintaining costs. This results in constant innovation tailored to customer lifestyles. Nissan employs strategies like continuous improvement in products and competitive design features to keep up with consumer expectations and maintain its market share .

Nissan uses value engineering in all three stages of product development to ensure target costing is achieved. In the first stage, it assesses whether products can be profitably manufactured under acceptable cost constraints. The second stage involves identifying allowable costs at each major function, while the third stage focuses on individual components. This process helps reduce costs while maintaining the required functionality and performance, thus supporting the target costing process by aligning product costs with market-driven pricing expectations .

The lack of brand loyalty in the Japanese market forces Nissan to focus heavily on continuous product improvement and customer-centric innovations. This environment encourages Nissan to adopt strategies that prioritize delivering high-functionality vehicles at competitive prices. In new product development, they ensure that products meet evolving lifestyle needs to capture consumer attention, and in marketing, they highlight features and design innovations rather than relying on brand prestige .

By integrating consumer analyses into its target costing system, Nissan aligns its product offerings with customer preferences, ensuring high market relevance. This integration allows Nissan to set realistic target prices and margins based on valued consumer attributes, enhancing product appeal and competitive advantage. It supports product development geared towards long-term profitability and adaptability, giving Nissan a robust framework to respond to changing market demands and consumer expectations effectively .

Western companies might face cultural and structural challenges in implementing target costing, such as resistance to change from traditional cost-based pricing models. The complexity of aligning cross-functional teams and achieving the necessary level of supplier collaboration pose additional barriers. Moreover, western accounting practices like ABC costing or cost-plus pricing are deeply rooted, providing less incentive to shift towards market-driven pricing approaches commonly used by companies like Nissan .

Nissan determines the appropriate target margin for a new model by analyzing consumer data, the anticipated future product mix, and the company's long-term profit objectives. They run profitability simulations over a 10-year horizon, factoring in expected sales volumes of the models identified in their product matrix. This comprehensive analysis helps establish a realistic target margin that aligns with strategic business goals and market conditions .

Nissan’s cost system supports strategic planning and operational management by categorizing costs into direct and indirect, facilitating the identification of product profitability. It provides crucial data for long-range strategic planning by estimating future profitability and aiding in cost control. Additionally, it helps select the optimal product mix and identify unprofitable variants for potential discontinuation, hence supporting both short-term operational efficiencies and long-term strategic objectives .

Consumer analysis significantly impacts Nissan’s future product matrix by determining which attributes are most valued by customers. This analysis informs decision-making regarding new entries into the product matrix, helping Nissan to tailor its model offerings to specific customer preferences and lifestyle considerations. By understanding customer perceptions and desired features, Nissan creates a product mix that is more likely to resonate with its target audience over the long term .

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