At a stage in world economic history in which demand exceeded the quantity of products offered, accompanied by little restrictive monetary policies, costs were only controlled in order to increase profits.
Today, when we have an extensive range of highly competitive products, participating in the market implies, among other things, actively competing in terms of prices, for which the systematic control and reduction of costs is clearly essential and fundamental.
In an era with globalized competition due to trade liberalization, with digitized offers worldwide, there is a tendency to generate a global market price for various tradable products and services. To this must be added the pressure of the various environments, in terms of the face of each particular business cycle, government measures, financing facilities and payment methods, among others.
All this leads companies to the urgent need to manage the costs of their products and services in order to start from said prices, generate a profit that allows them to achieve the returns required by investors.
Although the Japanese have developed through systems of function analysis and value analysis, refined systems tending to reach the objective cost, the characteristics of that same system make it impractical and effective for most companies.
Firstly, the study of functional areas from the point of view of clients not only has a high cost, but also its degree of effectiveness is relative, in addition to requiring personnel with a high degree of specialization, as well as very unconventional.
Secondly, there is a strong methodological tendency to concentrate the analysis effort on the components of the product or service, leaving aside the operation of the system that leads to the generation of lower costs.
In the new proposed methodology inspired by the Horizontal Organization, rather than concentrating only on the components of the product or service, there is a greater analysis of the processes and activities that participate in their generation.
Although the logic of the system in terms of designing a product that allows achieving a certain degree of marginal contribution based on a target price (fixed or not by the market), the philosophy and methodology change in the sense of not only giving importance to design of the products or services, but also to the design of the processes.
The objective cost system is essential for the purposes of a continuous and systematic increase in productivity levels, thereby achieving greater results with less and more rational use of resources.
This new philosophy of objective cost gives transcendental importance both to teamwork, as to knowledge management, creativity and innovation, the experience curve and the analysis of activities.
Price determination
What is the price and who determines it? That is the key question depending on the specific activity of each company.
In some cases the price is determined by a government agency, in other cases it is set by the market as a product of the free play of supply and demand, in other cases although it is set by the market, monopolistic competition allows a certain degree of variation. Thus, depending on the type of market in which the company participates, and its capacity to face its suppliers, customers and competitors, direct and indirect, will be the ability of the company to set a certain price. Price in relation to which the determination of the target cost begins.
The companies considered traditional start from the determination of their costs and from there determine their sales prices.
Competitive companies, like athletes, start from a value to beat, in this case, the value delivered to the customer and the price they are willing to accept based on said value.
The time to add benefits to costs is over, at least for most products, services and markets.
Although there seems to be a great freedom to set prices in cases where it is decided to compete based on design and differentiation, even there there is a margin to take into account based on the value generated, and the price policy of the direct competitors and substitutes.
Reaching the Target Cost
The two main ways to get there are by subtracting the benefit from the sale price (Β) from the price, or subtracting the benefit from the cost of the product (ϕ) from the price.
Co = Target cost
Pv = Sale Price
Co = Pv x (1 - Β)
Co = Pv / (1 + ϕ)
Thus, for a sale price (Pv) of $ 1,000.- with an expected profit on sale of 20%, the Target Cost (Co) is $ 800.
Q: Quality
C: Cost
R: Rotation
B: Benefits
Bibliography
Modern Cost Management - Tanaka, Yoshikawa, Innes and Mitchell - Editorial Díaz de Santos - 1997
Management & Costs - Cost by Objective - Ovidio Gaudino - Editorial Macchi - 2001
Value Analysis - Mauricio Lefcovich - 2005
