Benchmarking is a business improvement technique. There are different types of benchmarking.
The aim of benchmarking is to identify where best practice lies and then to analyse what constitutes the best operational practice so this can be implemented across the business.
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Methods of Benchmarking
1. Internal benchmarking is where similar operations in different parts of the company under consideration are compared with each other and also with an internally generated target.
2. External benchmarking is where the company’s results are compared to those of other companies.
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There are different types of external benchmarking:
**one where competitors are used as comparators and
**another where a company with similar operations (eg warehousing), which is not a direct competitor, is compared.
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The main advantages and disadvantages concern the availability of benchmark information and its applicability to the business.
Internal comparison between regions in a group of companies will be easy but may not yield dramatic improvements as the regions are probably already in relatively close contact. Any improvements identified from this exercise should be easily applicable as the systems will be broadly the same.
External benchmarking in this case means comparison to competitors where the possibility of radical new ideas is greater but the difficulty will lie in obtaining sufficiently detailed information to identify the best practice business process. Of course, it will be difficult to negotiate an information sharing arrangement with a competitor due to the commercially sensitive data being exchanged. However, there exist some government schemes which require subscriber companies to supply data and then provide them with anonymised industry data in return.
It would be easier to obtain information from a company which is not in direct competition with the company but which has similar functions such as purchasing and warehousing. However, there are likely to be more significant differences in the objectives and functions of the activities being compared and so it may be harder to apply the lessons from the competitor to the company’s operations.
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Tuesday, October 18, 2011
Target Costing and Its Application
Target costing should be viewed as an integral part of a strategic profit management system.
The initial consideration in target costing is the determination of an estimate of the selling price for a new product which will enable a firm to capture its required share of the market. Then it is necessary to reduce this figure to reflect the firm’s desired level of profit, having regard to the rate of return required on new capital investment and working capital requirements.
The deduction of required profit from the proposed selling price will produce a target price that must be met in order to ensure that the desired rate of return is obtained.
Thus the main theme that underpins target costing can be seen to be 'what should a product cost in order to achieve the desired level of return’.
Target costing will necessitate comparison of current estimated cost levels against the target level which must be achieved if the desired levels of profitability, and hence return on investment, are to be achieved. Thus where a gap exists between the current estimated cost levels and the target cost, it is essential that this gap be closed.
Example:
The Marketing Director of Company A has estimated that sales volume amounting to 5% of the total market size can be achieved in year 1 if a selling price of £80 per unit is maintained throughout the year. The board of directors are in agreement that they wish to maintain a 5% share by volume, of the total market size in each of years 2–4.
The management of Company A should be cognisant of the fact that it is far easier to ‘design out’ cost during the pre-production phase than to ‘control out’ cost during the production phase. Thus cost reduction at this stage of a product’s life cycle is of critical significance to business success. A number of techniques may be employed in order to help in the achievement and maintenance of the desired level of target cost. Attention should be focused upon the identification of value added and non-value added activities with the aim of the elimination of the latter. The product should be developed in an atmosphere of ‘continuous improvement’. In this regard, Total Quality techniques such as the use of Quality circles may be used in attempting to find ways of achieving reductions in product cost.
Value engineering techniques can be used to evaluate necessary product features such as the quality of materials used. It is essential that a collaborative approach is used by the management of Company A and that all interested parties such as suppliers and customers are closely involved in order to engineer product enhancements at reduced cost.
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The initial consideration in target costing is the determination of an estimate of the selling price for a new product which will enable a firm to capture its required share of the market. Then it is necessary to reduce this figure to reflect the firm’s desired level of profit, having regard to the rate of return required on new capital investment and working capital requirements.
The deduction of required profit from the proposed selling price will produce a target price that must be met in order to ensure that the desired rate of return is obtained.
Thus the main theme that underpins target costing can be seen to be 'what should a product cost in order to achieve the desired level of return’.
Target costing will necessitate comparison of current estimated cost levels against the target level which must be achieved if the desired levels of profitability, and hence return on investment, are to be achieved. Thus where a gap exists between the current estimated cost levels and the target cost, it is essential that this gap be closed.
Example:
The Marketing Director of Company A has estimated that sales volume amounting to 5% of the total market size can be achieved in year 1 if a selling price of £80 per unit is maintained throughout the year. The board of directors are in agreement that they wish to maintain a 5% share by volume, of the total market size in each of years 2–4.
The management of Company A should be cognisant of the fact that it is far easier to ‘design out’ cost during the pre-production phase than to ‘control out’ cost during the production phase. Thus cost reduction at this stage of a product’s life cycle is of critical significance to business success. A number of techniques may be employed in order to help in the achievement and maintenance of the desired level of target cost. Attention should be focused upon the identification of value added and non-value added activities with the aim of the elimination of the latter. The product should be developed in an atmosphere of ‘continuous improvement’. In this regard, Total Quality techniques such as the use of Quality circles may be used in attempting to find ways of achieving reductions in product cost.
Value engineering techniques can be used to evaluate necessary product features such as the quality of materials used. It is essential that a collaborative approach is used by the management of Company A and that all interested parties such as suppliers and customers are closely involved in order to engineer product enhancements at reduced cost.
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