The Importance of Setting Target Prices for Your Suppliers

Target costing has been used in Japan since the early 60s, but didn’t start gaining momentum in the US until the 90s. Around 90% of Japanese firms use this cost-saving strategy while only 50% of US firms are taking advantage of its benefits. Given that external purchases average approximately 60% of cost of sales for most manufacturers, it would seem that target costing should be given a great deal of attention by management.

Target costing is the process of determining a target price for your suppliers in order to receive the most competitive quotes. Giving suppliers a target price ensures understanding of the processes used and saves valuable time and money for both parties. In using target costing, supplier relationships are greatly improved by providing an avenue for earlier supplier involvement, clarifying true cost goals, and supporting supplier alliances.

By involving suppliers earlier in the process, all possible ideas for cost reduction can be considered, rather than later in the process when extensive resources have already been invested. This early involvement of suppliers is critical, given the rule of thumb that approximately 70% of the product’s cost is determined by decisions made during the design process.

When using target costing, the entire supply chain is seen as an integrated whole. Each element refines its operations to reduce its own costs, and therefore, reduces the total overall cost of the final product. In addition, target costing assists in internal improvements by creating a benchmark for cost performance, supporting team involvement, and creating greater cost accountability internally and with suppliers.

At Wolverine Machine, we strongly encourage our customers to provide target prices in order for us to be as beneficial as possible. By doing so, we are able to provide the most competitive quote while also assisting in cost-reduction strategies. Please visit our website to learn more about our customer-focused strategies.