Target costing is a market-oriented method for profit planning and cost management of products with independent manufacturing processes. Because the cost is designed in the design and development stage of the product, the advantage of this method is that it can reduce costs in advance rather than in the process.
Target costing was first created by the Japanese manufacturing industry as a cost management method. It usually determines the cost of the product based on a given competitive price to ensure the expected profit. The operating process of this method is to first determine how much the other party will pay for the product or service, and then design the product or service and the corresponding operating process accordingly
Target costing transforms cost management from the traditional “target profit = sales price – cost” to “income – profit contribution = target cost”, that is, setting the income and profit in advance, deriving the target cost, and then managing the product according to the target cost. Target costing can be broken down into three links: first, determine the target and decompose it layer by layer; second, implement the target and monitor it in all directions; third, evaluate the target and implement rewards and punishments.
Through the three links of the target cost method and the characteristics of procurement work, e-commerce companies need to set the target cost of procurement before formal procurement, and then use the target cost to reverse the procurement activities to ensure that the procurement cost is within the target cost or equal to the target cost that has been set.
The procurement activities in the e-commerce industry are very complicated. A relatively small online store may need to purchase multiple types of products. Therefore, e-commerce companies should set the target cost of procurement in advance to reduce procurement costs.
An e-commerce company has opened up a full-link clothing project and needs to purchase a batch of high-quality fabrics. After discussion, the e-commerce company decided to adopt the target cost method and strive to reduce procurement costs from the inside, that is, starting from the formulation of the budget, the cost of purchasing fabrics should be calculated in advance.
A batch of fabrics needs to be sent from the factory to the production department. After negotiation, the e-commerce company decided to load it into the same truck with another batch of fabrics. At the same time, affected by another batch of fabrics, although the time for this batch of fabrics to arrive at the production department was one day later than originally planned, it did not affect the overall production progress and saved transportation costs.
In addition, in the cooperation with suppliers, the e-commerce company also adopted the target cost method to plan suppliers and ensure that the fabrics are delivered on time, according to quality and location. For fabrics that can be combined, the e-commerce company decided to let one supplier transport them, which can reduce transportation costs and improve transportation efficiency.
For cooperation with non-major suppliers, the e-commerce company adopted the method of open bidding, using the competition among suppliers to lower the price of fabrics, so as to purchase fabrics at the lowest price. In order to strengthen the management of suppliers, in addition to adopting the method of open bidding, the e-commerce company also conducts strict performance management on each supplier to evaluate the supplier’s supply service during the cooperation period.
The e-commerce company considers and evaluates the supplier’s supply service, and is result-oriented. By increasing or reducing the supply share and extending or shortening the cooperation time, it encourages suppliers to improve their supply services and reduce the total cost of clothing projects. After final calculation, the total cost of the e-commerce company decreased by 5%, the purchase cost of fabrics decreased by 10%, and a lot of experience in cost reduction was accumulated.
The target cost method is to put all relevant factors into the market for comprehensive consideration, foresee problems and reduce costs before purchasing begins. Of course, using the target cost method to manage procurement activities and even the operations of e-commerce companies is not only about pursuing cost reduction, but also about considering all relevant stakeholders. If a certain cost is reduced without considering other aspects, it is actually not the core purpose of achieving the target cost method.
Tips
E-commerce companies should establish a full-process target cost management concept, take the entire procurement activity as the starting point, and formulate cost reduction strategies and operational guidelines. Under the management of the target cost method, some procurement costs will decrease, but some will also increase. Therefore, e-commerce companies need to take a comprehensive view of the optimization of procurement costs by this method.