Target Costing ProcessGalorath Estimation Conference

Goof PruijsenMarch 2009

Goof Pruijsen, March 2009 2

Philips Healtchcare

Goof Pruijsen, March 2009 3

Plaque, basics of heart attack

Goof Pruijsen, March 2009 4

Aneurism Internal bleading

Goof Pruijsen, March 2009 5

Application: Image Guided Interventions

Goof Pruijsen, March 2009 6

Technologies involved

X-Ray generationHigh VoltageDetection/chip technologyElectronicsMechanicsMechatronicsSoftware (database, control, processing, networks)And much more …

Goof Pruijsen, March 2009 7

About Goof Pruijsen

Goof Pruijsen, March 2009 8

Content of this presentation

• Why Target Costing?• Cost Monitoring• Cost Estimation Purchasing tool or more?• Some Examples of Cost Reduction

using Cost Estimation• Cost Roadmapping• Conditions to make it work• About: Book

Goof Pruijsen, March 2009 9

Development of our margin

Costs are Designed in

Goof Pruijsen, March 2009 10

Influences on cost in the PCP• ‘Old’ process

Concept phase Development phase Production phase

12

3 45 6

Influence on CostInvolvement supplier (knowledge) too lateNo real targets

available

Target $at project start

Designed in CostsToo much

& Too late

Focus:Technical Feasibility

Selling Price

Margin: Cost Plus

Goof Pruijsen, March 2009 11

Target Costing, the process• Step 1: • Step 2:• Step 3:

Market price

Desired marginIn relation to

Total Cost of Ownership

Allowable cost

STEP 1

Market-driven costing is used to establish allowable cost

Value Engineering + Design-in-Workshops

Achievable target cost

STEP 2

New Current cost

ExistingFunc.

NewFunc.

FrozenSpec.

Establish achievable product cost (Value Engineering & ESI)

STEP 3

$(F1)

$(F2)

$(F3)

$(F..)

$(Fn)

Monitor drifting costsThroughout the project

Set targets for every component in the product (prioritize & budgetize)

Goof Pruijsen, March 2009 12

PCP including Target Costing + Early Supplier Involvement

Concept phase Development phase Production phase

12

3 45 6

Target Costing proces Real

targets

Target $In Projectbrief

Realized @ target cost & in time

Focus:Technical and Economical Feasibility

Continuously measure and

control drifting cost

ESI:Design-inWorkshops

Cost Workshops

Starting point for organization to think

and achieve Cost Price Reduction

with or without suppliers

Mind set: Spin off to projects

STEP 1

STEP 2STEP 3

Use Should Cost Calculations

Goof Pruijsen, March 2009 13

Project examples: Cost monitoring

Cost Monitoring example

Cost Monitoring Process:

1. Target Cost

2. Budget per building block

3. Monthly Estimates

4. Delta Actions

5. Management report

Goof Pruijsen, March 2009 14

Two Focus areas for Estimation :Development and Purchasing

Concept phase Development phase Production phase

12

3 45 6

Target $In Projectbrief

Continuouslymeasure and

controldrifting cost

ESI:Design-inWorkshops

RegularProduction /

RepeatPurchases

Influence on Cost

Involvement of

Cost Estimation= Tool +

Expert

Goof Pruijsen, March 2009 15

Project examples: Early Estimating supports Cost monitoring

Cost Monitoring example

Cost Monitoring Process:

1. Target Cost

2. Budget per building block

3. Monthly Estimates

4. Delta Actions

5. Management report

Goof Pruijsen, March 2009 16

Examples early estimates in project

1. Composite341.33

Total Tooling 859Labour 121

2. Injection Moulding50.86Total Tooling 23.514Labour 15

3. Thermoform68.16Total Tooling 39,111Labour 5

4. Poly Urethane130.28

Total Tooling 43.070Labour 5

• Cover alternatives

Goof Pruijsen, March 2009 17

Case example Should Cost CalculationNo result from negotation with monopolistRecipy: Built an absolute Cost Reference (instead of comparing offers from

your suppliers)• Use Technical Cost Engineers

– Also brings extra benefits: determine ‘golden specs’ and other cost drivers, make-ability.

• And/Or other means to benchmark prices:– SEER, Anklesaria method

• Cooperate with the supplier via Cost Workshops

050

100150200250300350400450500

Est. CostEngineer

IndustryAverage

Price we pay

Profit

Overhead

MOH

Labour

BOM

Goof Pruijsen, March 2009 18

Cost Roadmapping, an example

•Predict Product price, 5 years ahead (includes price erosion)

•Subtract required Margin & Organizational Costs

•Transform material budget into Cost Roadmaps

X-module Cost Roadmap

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

35,000.00

40,000.00

45,000.00

50,000.00

Presen

t Cos

t

Expec

ted C

ost w

k17

Target

Cost 2

004

Targe

t Cos

t 200

5Ta

rget C

ost 2

006

Target

Cost 2

007

Target

Cost 2

008

PC's + infra

Labour costs

Miscelaneous

F parts

H module

Board 5

Board 4

Board 3

Board 2

Board 1

P-Box

Cabinet

Goof Pruijsen, March 2009 19

Results from Cost Engineering

• Low product cost price, both from design point of view as from price negotiation point of view.

• Insight in cost structure and transparency in cost down scenarios. High predictability with respect to cost down projection and realistic cost down roadmaps.

• Cost price reduction in a range of 10 – 50%

• If the cost engineering is involved timely …

Goof Pruijsen, March 2009 20

Conditions to make Cost Estimation work

• And convincing the organization

= Tool +

Expert

Goof Pruijsen, March 2009 21

Value of a Cost Engineer in gold?

• Gold price (March 18th) = $ 868 / ounce• = $ 27.909 / kg• Cost engineer average weight = 75 kg. • Required saving = $ 2,093,247

• We do > 2 Mln Euro savings per year per cost engineer

Goof Pruijsen, March 2009 22

My book about Target Costing / Value Analysis

• How to apply Target Costing

• How to apply Value Analysis

• How to involve suppliers

How to order: www.orenda.nl

Goof Pruijsen, March 2009 23

Example of doing Cost Reductions

Goof Pruijsen, March 2009 24

Results

Goof Pruijsen, March 2009 25

ANY QUESTIONS?