This paper describes “target costing” as a key element of the cost management function utilized by the Purchasing Division of Honda of America Mfg., Inc. and its supply base. The target costing process started in the early 1990s and has steadily improved to a more efficient and effective process. Honda of America's purchasing operation is responsible for approximately 80 percent of the manufactured cost of a vehicle. Thus, effective management of the cost of parts supplied is critical in assuring that products offered to customers in the marketplace are of highest quality, yet at reasonable prices. Successful cost management also has significant impact on the profitability of the company and its suppliers.
This paper underscores the importance of the company's corporate philosophy - based on “supplying products of the highest quality yet at a reasonable price for worldwide customer satisfaction” - and the expectations placed on the company's supply base to understand and follow this philosophy. Suppliers must provide parts that meet quality standards, specifications, performance and production requirements. Parts and raw materials also must be provided at worldwide competitive costs.
To assure worldwide competitive costs, as part of its cost management function, the purchasing operation has developed target costing processes and practices aimed at achieving cost optimization. It requires an understanding of each cost element of every part purchased. Target costing includes the use of tools and methods and the allocation and development of dedicated human resources.