Designing For Cost In An Aerospace Company
by
Elizabeth Hammar
B.S.E., Mechanical and Aerospace Engineering
Princeton University, 2008
Submitted to the MIT Sloan School of Management and the Department of Aeronautics and
Astronautics in Partial Fulfillment of the Requirements for the Degrees
of
Master of Business Administration and
MASSACHUSETTS NY
Master of Science in Aeronautics and Astronautics
in conjunction with the Leaders for Global Operations Program
JUN
814
JU
LIBRRIES
at the
Massachusetts Institute of Technology
June 2014
© 2014 Elizabeth Hammar. All rights reserved
The author hereby grants to MIT permission to reproduce and to distribute publicly paper and
electronic copies of this thesis document in whole or in part in any medium now known or
hereafter created.
Signature of Author.. S
ignature redacted
MIT Sloan School of Management
Department of Aeronautics and Astronautics
May 9, 2014
Signature redacted-
9 0
Certified by ................................................................
Brian L. Wardle
Associate Professor, Department of Aeronautics and Astronautics
C ertified b y .....................................................................
Signature redacted
Thesis Supervisor
Roy Welsch
Professor of Statistics and Management Science and Director CCREMS, MIT Sloan School of
Signature redacted
Management
Thesis Supervisor
A ccep ted by ..................................................................................
Paulo C. Lozano
Associate Professor of Aeronautics and Astronautics
Chair, Graduate Program Committee
Signature redacted
A ccep ted by .....................................................................
................
Maura Herson
Director, MBA Program
MIT Sloan School of Management
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Designing For Cost In An Aerospace Company
by
Elizabeth Hammar
Submitted to the MIT Sloan School of Management and the MIT Department of Aeronautics and
Astronautics on May 9, 2014 in partial fulfillment of the requirements for the degrees of Master of
Business Administration and Master of Science in Aeronautics and Astronautics
Abstract
Companies take different approaches, and achieve different degrees of implementation, in
designing products for cost. This thesis discusses Target Costing and its application at The Boeing
Company. Target Costing is a design for cost framework that is widely used by auto manufacturers,
but is still less widely used in the aerospace industry. This thesis observes the current state at The
Boeing Company and provides recommendations for full implementation of Target Costing.
Through research into best practices at companies that have implemented Target Costing, this
thesis identifies five key enablers: culture, organizations involved, process, tools, and market.
Additionally, this thesis discusses a potential barrier to implementation: organizational politics.
Based on a project to implement a price visibility tool and on three value engineering case studies,
this thesis identifies The Boeing Company's state relative to full scale Target Costing and provides
recommendations for The Boeing Company to achieve full implementation of Target Costing
through the use of the five key enablers.
Thesis Advisors:
Brian L. Wardle
Associate Professor, Department of Aeronautics and Astronautics
Roy Welsch
Professor of Statistics and Management Science and Director CCREMS, MIT Sloan School of
Management
3
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4
Acknowledgements
I would like to thank The Boeing Company for sponsoring my Leaders for Global Operations
internship. In particular, I would like to thank Amanda Taplett for being such a supportive sponsor
and the entire 787 PSE Factory and Supplier Management for standards teams for being so
welcoming and for providing the resources that enabled this project to be successful.
I would also like to thank the Leaders for Global Operations (formerly Leaders for Manufacturing)
program. The past two years at MIT have been a truly transformational experience, and one I
expect to draw from for years to come.
I would like to thank my parents for their support and encouragement, and my partner, Jeanna,
who motivated me to do more than I thought possible.
Finally, I thank my advisors Professor Wardle and Professor Welsch for their input and support
with this project.
5
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6
Contents
A bstract ....................................................................................................................................................................................... 3
A cknow ledgem ents ................................................................................................................................................................ 5
List of Figures ............................................................................................................................................................................ 9
List of T ables .............................................................................................................................................................................. 9
1
2
3
4
5
Introduction ................................................................................................................................................................... 11
1.1
Problem Statem ent ............................................................................................................................................ 11
1.2
Purpose of Study ................................................................................................................................................. 12
1.3
A pproach and M ethodology ........................................................................................................................... 13
1.4
Thesis Roadm ap .................................................................................................................................................. 13
B ackground and D evelopm ent Context .............................................................................................................. 15
2.1
A irplane M anufacturers and A irline Industry ........................................................................................ 15
2.2
B oeing Com m ercial A irplanes ....................................................................................................................... 17
2.3
B oeing program developm ent process ..................................................................................................... 19
T arget Costing B est Practices ................................................................................................................................. 21
3.1
B enefits of T arget Costing ............................................................................................................................... 21
3.2
H igh Level Process ............................................................................................................................................. 21
3.3
O rganizations Involved .................................................................................................................................... 33
3.4
T echniques for Estim ating Costs ................................................................................................................. 36
3.5
U S V ersus Japanese Com panies .................................................................................................................... 4 1
3.6
Im plem entation .................................................................................................................................................. 4 1
3.7
Final T houghts ..................................................................................................................................................... 44
Study at T he B oeing Com pany ................................................................................................................................ 45
4.1
Standards Cost and A vailability Tool ......................................................................................................... 45
4.2
Pilots ........................................................................................................................................................................ 46
4.3
Pilot results ........................................................................................................................................................... 47
4.4
Case Studies .......................................................................................................................................................... 50
Recom m endations ....................................................................................................................................................... 55
5.1
T hree Lenses ........................................................................................................................................................ 55
5.2
Five K ey Enablers of T arget Costing ........................................................................................................... 55
5.3
Culture .................................................................................................................................................................... 57
5.4
O rganizations Involved .................................................................................................................................... 59
5.5
Process .................................................................................................................................................................... 60
5.6
T ools ........................................................................................................................................................................ 6 1
5.7
M arket ..................................................................................................................................................................... 63
5.8
Politics ..................................................................................................................................................................... 64
7
6
Conclusion and N ext Steps ....................................................................................................................................... 67
6.1
Conclusion ............................................................................................................................................................. 67
6.2
O pportunities for Im provem ent .................................................................................................................. 68
6.3
A reas for Further Research ............................................................................................................................ 68
R eferences ................................................................................................................................................................................ 69
A ppendices ............................................................................................................................................................................... 73
A ppendix 1 - B oeing 777 Payload-Range Graph ...................................................................................................... 73
A ppendix 2 - B oeing 787 Sections ................................................................................................................................. 74
A ppendix 3 - Standards Tool Pilot M etrics ................................................................................................................. 74
8
List of Figures
Figure 1-1: Cost Committed During Six Phases of Aircraft Development [3] (Adapted by Kaufmann
12
[4 ]) ...............................................................................................................................................................................................
Figure 2-1: Commercial Airplanes in Use (Adapted from Belobaba et al. [5])........................................
16
Figure 2-2: New Narrowbody Airplanes (Adapted from Belobaba et al. [5]) .................
17
Figure 2-3: BCA Organizational Structure...................................................................................................................18
Figure 2-4: Boeing Product Development Process............................................................................................
19
Figure 3-1: Target Costing Process (Adapted from Ansari et al. [10] and Cooper & Chew [8])...........23
Figure 3-2: Value Index Chart of a Pencil Sharpener (Ansari et al. 1997 [10]) .....................................
27
Figu re 3-3 : 7 7 7 P rogram Success [15]..........................................................................................................................29
Figure 3-4: Reduction of Cost with Design Iterations ......................................................................................
30
Figure 3-5: Product Development and Cost Reduction Timeline .................................................................
33
Figure 3-6: Cost Estimating During the Development Process ...................................................................
37
Figu re 3 -7 : P ro d u ct C o m plexity ......................................................................................................................................
42
Figu re 4 -1 : P ilot P roject Selection ..................................................................................................................................
48
Figure 4-2: Price Pattern for a Family of Bolts ....................................................................................................
51
Figure 5-1: The Five Key Enablers of Target Costing ......................................................................................
56
Figure 5-2 : H ow to Ch ange Culture................................................................................................................................58
List of Tables
T ab le 2 -1 : B o ein g - Key F acts ...........................................................................................................................................
Table 3-1: Involvement of Resources In Cost Allocation Activities ...........................................................
Table 3-2: Techniques for Cost Reduction Over Development Cycle (Adapted from Ansari et al.,
18
27
1 9 9 7 [1 0]) .................................................................................................................................................................................
32
Table
Table
Table
Table
34
38
40
49
3-3:
3-4:
3-5:
4-1:
Responsibilities of Organizations During Product Development...........................................
Feature Based Costing Example Features ......................................................................................
A Sample of Cost Estimating Tools ....................................................................................................
Completed Pilot (as of February 2014) Results...........................................................................
9
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10
1
Introduction
Designing for cost is not a new concept, but companies take different approaches to achieving
design for cost. This paper explores Target Costing, which is a product development framework
that ensures development focuses on the lifecycle cost of the product. The core concept of Target
Costing is that the development team sets a lifecycle cost target based on market conditions, and
the development team must reach that cost target.
Target Costing has proven to significantly reduce product lifecycle costs without diminishing the
technical capabilities of the product. This framework is being used increasingly by manufacturing
companies around the world, and is now used throughout the auto manufacturing industry. Target
Costing originated in Japan, and by 1999, 100% of Japanese auto manufacturers had employed
Target Costing [1].
Although Target Costing has proven successful in the auto industry, it has not been widely adopted
in the aerospace industry. This paper investigates best practices in Target Costing and studies how
Target Costing could be implemented at Boeing Commercial Airplanes (BCA).
1.1
Problem Statement
The importance of addressing cost early in the design cycle has been well established. Researchers
agree that 70 to 80% of avoidable cost is built in during concept design phase [2]. Roskam
investigated cost impact specifically during aircraft development and was able to further delineate
the cost committed during various phases of aircraft development. Figure 1-1 lays out the cost
committed (i.e., our ability to impact cost) during six phases of aircraft development, from
conceptual layout to final disposal of the product. Roskam determined that 65% of cost is
committed during the upfront planning and conceptual layout phase, and by the time designs are
released, 95% of costs are committed. This means that any company relying on continuous
improvement for cost reduction after manufacturing begins is only able to impact 5% of the
product cost. These companies must learn to address cost early in the development cycle.
11
Figure 1-1: Cost Committed During Six Phases of Aircraft Development [3] (Adapted by Kaufmann [4])
100% 85%-
80% 0
t--65%
60%
0 40%
L.
E
20%
0%
Phase 1
Phase 2
Phase 3
Planning and
Conceptua
Preliminary
Design and
Detail Design
and
Design
System
Integration
Development
Phase 4
Phase 5
Manufacturing Operation and
and Acquisition
Support
Phase 6
Disposal
Cost is becoming a more important factor for aerospace companies like The Boeing Company, with
the threat of new entrants into the large commercial airplane manufacturing industry and
customers that are becoming more and more cost-sensitive. While The Boeing Company can
continue to differentiate its product from competitors like Airbus through technical excellence,
market pressures will force The Boeing Company to address cost more aggressively.
1.2 Purpose of Study
This research aims to determine a methodology that would enable aerospace companies to infuse
cost considerations into their design processes. Since Target Costing is a framework that has been
proven to work in the automotive industry, this research focuses on best practices for Target
Costing and determines where those best practices make sense for the aerospace industry given the
differences and similarities between the two industries.
The goals of this study are two-fold. The first goal is to determine Target Costing best practices that
are applicable to the aerospace industry. These best practices come from a variety of industries, but
since Target Costing is mature in the automotive industry and the aerospace industry has many
similarities to the automotive industry, this is our industry of focus. The second goal is to develop
specific recommendations for Boeing Commercial Airplanes based on a combination of these best
practices, infrastructure observed to be in place at The Boeing Company, and gaps identified at The
Boeing Company.
12
1.3 Approach and Methodology
The approach of this study will mirror its goals. This study will start by establishing general best
practices in Target Costing. This research will be completed through a combination of literature
review and interviews with individuals both inside and outside The Boeing Company. The
resources interviewed within The Boeing Company are working-level design and manufacturing
engineers, as well as analysts within the Supplier Management organization. Those interviewed
outside The Boeing Company comprise people who have implemented or seen successful Target
Costing at companies other than The Boeing Company. This study will specifically leverage lessons
learned from the automotive industry since this industry bears many similarities with the
aerospace industry.
The study then uses case studies and results from piloting a price visibility tool at The Boeing
Company to determine what infrastructure The Boeing Company has in place to support those best
practices previously identified. The conclusions drawn will be based on anecdotal evidence from
the combination of case studies, interviews, and piloting the price visibility tool at The Boeing
Company. The study will use those same results and case studies to develop recommendations for
The Boeing Company to enable it to adopt the Target Costing framework.
While this study focuses on specific recommendations for The Boeing Company, the best practices
and recommendations may be applicable to any company within the aerospace industry.
1.4 Thesis Roadmap
This thesis begins by providing background information on The Boeing Company and the industry
it belongs to. This information will provide the context needed to understand the need for Target
Costing and to understand how aerospace companies like The Boeing Company develop a new
product. It is necessary to understand the airplane program development process and timing to
understand how Target Costing might fit in to the process.
The next chapter will identify best practices in Target Costing. These best practices come from a
combination of literature review and interviews and are intended to be industry agnostic. These
best practices represent the ideal Target Costing framework at a company that has successfully
implemented and matured its Target Costing processes.
The next two chapters will explore the infrastructure in place at The Boeing Company to support
the ideal Target Costing framework and to identify any gaps between The Boeing Company and
13
those best practices. These sections will use a project to implement a cost visibility tool and case
studies to determine The Boeing Company's position relative to Target Costing best practices.
Finally, this thesis will lay out recommendations for Target Costing. This paper will provide
recommendations based on observations from Boeing Commercial Airplanes, however, these
recommendations should be relevant to other aerospace companies, as well as companies outside
the aerospace industry.
14
2
Background and Development Context
The airplane manufacturing industry is dominated by a few large companies. Airplane
manufacturing has large barriers to entry since airplane design and manufacturing has a long
learning curve, large capital investment requirements, and customers who are unlikely to purchase
airplanes that do not have a proven safety record.
2.1 Airplane Manufacturers and Airline Industry
The commercial airplane manufacturing industry can be separated into three major segments:
small narrowbodies, narrowbodies, and widebodies. The Boeing Company and Airbus dominate the
narrowbody and widebody markets, while the small narrowbody market is dominated by
Bombardier and Embraer. Airplane manufacturers typically face a tradeoff between payload (how
much weight can be carried by the airplane) and range (distance the airplane can fly). Appendix 1
illustrates this payload-range tradeoff for the Boeing 777 family of airplane.
Since airplane manufacturers face this payload-range tradeoff, we can segment the market
according to these features. Figure 2-1 illustrates the commercial airplanes currently in use, and the
segments they belong to. When airplane manufacturers offer a new product, they will typically
target an area of this chart where there is a gap. For example, Airbus' new A380 allows a higher
payload than any other airplane in production. Since airlines have different payload and range
needs based on their routes and demands, they will look for the airplane that will most closely suit
their needs.
15
Figure 2-1: Commercial Airplanes in Use' (Adapted from Belobaba et al. [5])
Widebodles
600-
500 -
400-
300-
200 -
100 -
00
3
10000
1
20000
RANGE (KM)
While Embraer and Bombardier have historically produced only small narrowbodies, they have
more recently started producing airplane closer to large narrowbodies in terms of both payload
and range. Figure 2-2 below highlights the newer airplane being produced by these manufacturers.
While pilot licensing regulations in the past limited airlines' ability to operate airplanes in this
range, those regulations have been loosened and have allowed Bombardier and Embraer to creep
towards the large narrowbody market. While they have not yet made any overt moves into the
market, their movement towards larger airplanes might be concerning for both The Boeing
Company and Airbus.
1 Aircraft manufacturer key: 7*7 = Boeing; A3** = Airbus; MD** = McDonnel Douglas (now owned by The
Boeing Company); CRJ* = Bombardier; E1** = Embraer
16
Figure 2-2: New Narrowbody Airplanes (Adapted from Belobaba et al. [5])
757-300
200
M 757-200
A321
0 737-900ER
A32~737-800
1_
(150
C130
0Clio
Z
E95
717
1
CRJ-900*
CRJ-700 M
50
CRJ-200A
1319
1318
*E190
100
737-700
7374100
E175
M
M E170
ME145
S E135
Green = new entrants
0
0
1000
2000
3000
4000
5000
6000
7000
8000
RANGE (KM)
In addition to the threat from Bombardier and Embraer, The Boeing Company and Airbus face new
entrants such as Comac in China and the United Aircraft Corporation in Russia. While mainstream
airlines have not yet started placing orders with either of these new entrants, they present a very
real threat in the near future.
Even in the duopoly between Airbus and The Boeing Company, Airbus has been aggressively
capturing market share from The Boeing Company. In a recent press release, Airbus claimed to
have surpassed The Boeing Company in terms of open orders [6].
In addition to the potential for increased competition, airplane manufacturers must deal with the
fact that airlines are becoming more and more cost sensitive. The combination of decreased
passenger traffic due to the great recession and increasing fuel prices has put pressure on the
airlines. With low cash reserves, the airlines are becoming more and more cost-sensitive, and with
large expenditures such as airplanes, airlines do not have the appetite for larger upfront
investments if they will not see the return for years to come.
2.2 Boeing Commercial Airplanes
Boeing Commercial Airplanes is the commercial aviation division of The Boeing Company. The
Boeing Company (Boeing) is the world's largest manufacturer of commercial jetliners and military
17
aircraft combined. The Boeing Company also produces network and space systems, and global
services and support [7].
Boeing Commercial Airplanes comprises five programs of in-production airplanes: 737, 747, 767,
777, and 787. Boeing Commercial also offers aftermarket services and support (e.g., maintenance,
spares, modifications, and training) through Commercial Aviation Services (CAS). Boeing
Commercial primarily serves airlines throughout the US and abroad. Table 2-1 below highlights
some key facts about The Boeing Company and Boeing Commercial.
Table 2-1: Boeing - Key Facts
The Boeing Company
Boeing Commercial
Headquarters
Chicago, IL
Puget Sound, Washington
Revenue
$81.7 billion
$49.1 billion
173,781
84,778
Employees
Boeing Commercial is organized into airplane programs, and those organizations that support the
airplane programs. Commercial Aviation Services, Supplier Management, Finance, and Marketing
are all separate organizations with support organizations for each of the programs. The
organizational structure relevant to this study is illustrated in Figure 2-3 below.
Figure 2-3: BCA Organizational Structure
18
Boeing Commercial operates in an industry with very long lead times. The 787 program, for
example, was launched April, 20042, and the first 787 was delivered in September, 20113. If we
ignore the time invested prior to program launch, The Boeing Company had to sustain the program
for seven and a half years before the first airplane was delivered and The Boeing Company could
begin recognizing revenues. Because of these lead times, The Boeing Company must take a large
risk with each new airplane program.
2.3 Boeing program development process
Boeing Commercial follows a standard product development process. New products begin with an
initial design assignment, followed by design phases that become increasingly detailed with each
phase. The Boeing Company's product design process is illustrated in Figure 2-4. This figure
illustrates the process that occurs during detailed design up to the point when drawings are
released to manufacturing. During each phase of design, design engineers coordinate with other
stakeholders. This coordination must occur with anyone who might be impacted by the design or
who has an impact on the design (e.g., other design engineers, stress analysis, weight analysis, etc.).
Once each design phase is complete, the design must pass a design review before the engineer can
begin work on the next phase of design.
Figure 2-4: Boeing Product Development Process
k
Initial Design
Assgnm
ntInitial
A designer has been
assigned a piece
of work
Desig
Detailed
D sgn
Affected parties have
Design is maturing,
been engaged and verify
impacted groups
Design has the final
design concept is within
scope of engineering
coordinated with and
single design concept is
selected to mature
requinal
Desi n
information required
plan
Approved
Dsg
Final Design
All stakeholders agree
that design defines a
producible, certifiable,
and service-ready
airplane configuration
Since an airplanes cannot be designed by one design team alone, The Boeing Company splits its
design teams by airplane section (Appendix 2 illustrates these sections for the 787) and by
component type (e.g., systems, structures, propulsion). Due to the complexity of airplanes, this
development process requires significant communication between design teams.
2
According to the Boeing Logbook: http://www.boeing.com/boeing/history/chronology/chron17.page
3 Boeing press release: http://boeing.mediaroom.com/index.php?s=20295&item=1939
19
2.3.1 Development of the 787
The 787 was developed conjointly between The Boeing Company and its partner companies. These
partner companies were responsible for not just the "build" portion of product development, but
also for much of the initial design work. In many cases, the selected partner was responsible for the
majority of the design work, with The Boeing Company providing inputs and oversight. These
partners were awarded major statements of work, typically covering an entire section of the
airplane, as described above.
20
3
Target Costing Best Practices
Target costing is being used increasingly by manufacturing companies around the world. Target
Costing originated in Japan, and by 1999, 100% of Japanese automotive manufacturers employed
Target Costing [1]. As discussed in Section 1.1, in the aerospace industry, 95% of a product's
lifecycle cost is determined by the time designs are released for production. Because of this, costs
must be addressed earlier in the product development cycle. Target Costing has provided
manufacturing companies, and in particular automotive manufacturing companies, with a
framework that allows them to address costs early.
This section will discuss best practices in Target Costing based on a combination of literature
review and interviews. Where possible, research was focused on the aerospace industry and the
automotive industry since automotive design and manufacturing bears many similarities with the
aerospace industry, and Target Costing is more widely used in the automotive industry. This
section will describe individual process steps as well as tools and techniques that should be
employed. It will also discuss some key considerations and potential barriers that an aerospace
company like The Boeing Company might face.
3.1 Benefits of Target Costing
Many production-heavy industries have adopted Target Costing, including manufacturers of cars,
cameras, and heavy machinery [8]. In one study, all firms with medium to high Target Costing
maturity reported reduced costs, retained or added features and functionality, faster non-recurring
design, reduced new product risk, and improved intrafunctional communications [9]. It is
important to note that companies that implemented Target Costing did not trade off quality and
functionality for cost. While Target Costing focuses on reducing lifecycle costs, all companies were
able to simultaneously improve quality and increase functionality of their products. Separate
research also shows that companies without good cost estimates during conceptual design are
more likely to have programs behind schedule with higher development costs than those
companies that know detailed costs throughout the development cycle [2].
3.2 High Level Process
One guide on Target Costing notes, "a well-designed target costing system integrates all three
elements of the strategic triangle: quality, cost, and time" [10]. Aerospace companies have
traditionally focused primarily on quality (technical requirements) and time (schedule), with cost
considered only after the first two have been met. While quality and time are important factors to
21
prioritize, the ideal Target Costing process balances all three factors. According to the same guide,
the key principles of Target Costing are [10]:
"
Price-led costing
"
*
Customer focus
Focus on design of products and processes
"
Cross-functional teams
*
Lifecycle cost reduction
*
Value chain involvement
Figure 3-1 illustrates the ideal Target Costing process. The product's features, target selling price,
and target cost should all be determined independent of historical costs. The target selling price
should be based on the customer's willingness to pay, not historical production costs of similar
products. The target cost should also be independent of historical costs. The target cost should be
equal to the selling price minus a target profit. This target profit will be determined by leadership
and will be based on company goals as well as competitive forces. Once this target cost has been set
for the product, the target cost can be allocated to the material or component level. This exercise
requires a cross-functional team since all stakeholders possess subject matter expertise that is
important to determining reasonable costs.
Once target costs have been allocated down to the material or component level, the development
team is challenged to close the gap between expected costs based on historical costs and the target
costs that were just set. While this step is illustrated below as a single step, this is where a lot of the
work happens. While the "concept design" and "detailed design" phases of product development
have been compressed in the figure above for the purpose of highlighting the Target Costing
process, we can infer that this step will dominate the majority of the product development timeline.
22
Figure 3-1: Target Costing Process (Adapted from Ansari et al. [10] and Cooper & Chew [8])
Product Definition
Based on customnera
Concept
Detailed
Design
Design
ucinae
Production
otn
cndoiosto hstrca cs
It is important to note that the Target Costing process is not strictly sequential. The process is
iterative, and design decisions can be revisited at any time [4]. As the team performs the design
work to meet technical requirements, schedule, and cost, they may have to make tradeoffs, which
would change some of the requirements determined earlier in the process.
While it is understood that tradeoffs may be necessary, the most important rule of Target Costing is
that only products that have met their target cost will actually be produced [11]. While the act of
setting targets is a step forward for many companies, this alone will not impact product costs. If
target costs are not adhered to, the process becomes ineffective. Products that will not meet their
target costs must be abandoned. When determining whether to cancel a project, it is important for
the management team to consider which costs are sunk and which are not. The team should
consider the NPV of continuing with the project versus not, understanding that some costs may
already be sunk. Cancelling a project should only be a last resort, and should only be used once all
other tradeoffs and design improvements have been considered.
Target Costing should also involve a multi-disciplinary team at every stage of the process. Every
process step should include Engineering, Finance, Manufacturing, Marketing, and Supplier
Management. These organizations must coordinate throughout the Target Costing process, and
should be held equally accountable for both setting target costs and achieving them.
While the benefits of Target Costing are clear, implementation of Target Costing requires far more
effort and discipline than is required of traditional costing [1]. Target costing requires high effort
23
activities that involve multi-disciplinary teams and a lot of coordination, but the organization will
achieve significant results in terms of value and creative thinking [9]. Any company wishing to
implement Target Costing must understand this additional effort and be willing to invest fully in the
process.
Now that the high level process and some key considerations are understood, the following sections
will discuss each process step in more detail.
3.2.1 Desired Product Features
The first step in the Target Costing process is to define the product and the desired product
features. These features should be based on customer requirements and the segment of the market
that the company is targeting. The focus on this phase is on the customer, rather than on the details
of technical design. The Boeing Company demonstrated its ability to design to customer
requirements with the 777 [10]. Through customer workshops and customer feedback, The Boeing
Company was able to identify features the customers valued to incorporate into the 777 (e.g., larger
stow bins, quick interiors reconfiguration capabilities).
During this phase, the "nice to have" versus the "need to have" should be identified [8]. The
development team should work with the customer to identify how much they value particular
features, and should use rough order of magnitude (ROM) estimates to determine which features to
include in the new product [9]. For example, The Boeing Company had a large accumulator
designed for the 777 to ensure the parking brake would hold for 12 hours. After discussions with
the customer, The Boeing Company discovered that customers never left an airplane parked for
that long, and if they did, they had the airplane "chocked up, or on jacks". This allowed The Boeing
Company to design a smaller and far less costly accumulator onto the 777 [12].
This first process step must involve the entire multidisciplinary team. Marketing will have the best
understanding of customer wants and needs, and Finance and Engineering will be required to
create ROM estimates that will be used to determine which features to include in the product. It is
important to involve Engineering, Manufacturing, and Supplier Management so they understand
where customer requirements are coming from. Manufacturing and Supplier Management may
have important input for the ROM estimates as well.
3.2.2 Target Selling Price
Once the product features have been determined, the team must set the target selling price. This
target selling price should be independent of cost, and should be based on the specific market
24
segment that the company is targeting [8]. The price should be based on customer input
(customer's willingness to pay) and the competitive market conditions (i.e., are there competitors
with similar products?). The customer's willingness to pay will be based on the proposed features
of the new product, so the target selling price relies on a clear definition of the proposed product
features from the prior Target Costing process step.
While many companies have traditionally used cost-plus to determine cost, this is not a
recommended approach because it does not consider the customer. As with product definition,
customer focus is very important here. For a product to be successful, the team must fully
understand what customers are willing to pay for and how much they are willing to pay. If the
selling price is too high, there won't be enough demand for the product, and if the selling price is
too low, the company will have a lower profit margin.
3.2.3 Target Product Cost
The target cost should be based on the selling price and the required profit margin set by company
leadership. Target cost is the total lifecycle cost of a product, and should be calculated using the
simple equation:
Target Cost = Selling Price - Profit Margin
Note that historical costs and cost estimates are not in the target cost equation. Target costs should
be based on customer features and desired profit margin rather than historical costs.
When determining the target profit margin, it is important to establish targets that are realistic. One
method of checking profit targets involves comparing the target profit with the profit margins of
previous products [10]. The profit margins of previous products will provide a good "gut check" of
the profit margins being set for the new product. The target costs are also a reflection of the
competitive market in which the product will sell. The required profit margin should reflect the
capabilities of the most effective competitors [13]. If the target profit is lower than the most
effective competitor, the company is not operating as efficiently as its competitor, and if the profit
target is too high, it is likely unrealistic.
Finally, when setting the expected profit margins remember to consider lifecycle costs [10]. For
products requiring a large non-recurring investment upfront, the team must remember to consider
revenues for the product throughout its production life. Additionally, if the selling price is expected
25
to change over the products lifecycle, this must be taken into account when establishing the
product's target cost.
3.2.4 Target Cost to Material or Component Level
Once the target cost has been set, the team must allocate the target cost down to the component
level. It is important that costs be broken down to the individual design team level [1]. In order for
individual design teams to be held accountable to their cost targets, the cost targets need to be
flowed all the way down to their level.
Allocation of cost to different sections / components should be done using a combination of:
*
Historical / expected costs: historical and expected costs must be tracked down to the
component level, and form the basis for understanding how much different components
cost under current conditions
"
Subject matter expertise: Engineering, Manufacturing, and Supplier Management will
have intuition and expertise to identify where cost reduction is feasible, and where it will be
extremely difficult. The team cannot simply take historical costs and apply a 10% cost
reduction across the board [8]
"
Quality Function Deployment (QFD): QFD analysis should be used to determine target
costs at the component level. QFD analysis determines the cost that should be assigned to
each section / component by assessing them in terms of their value to the customer. Each
feature/function of the product can be mapped to the components that impact that feature.
Figure 3-2 provides an example of the mapping for a pencil sharpener. A pencil sharpener's
appearance is primarily impacted by its casing and the drawer, whereas its ability to
sharpen pencils is impacted mainly by the motor and by the blades. In Figure 3-2, the
customer highly values the functionality provided by the drawer, whereas the customer
knows that pretty much every pencil sharpener can cut as well as the next so does not value
the blades highly. By mapping this "relative importance" to the relative cost of each
component, the team can identify where costs should be reduced and where features could
be enhanced.
26
Figure 3-2: Value Index Chart of a Pencil Sharpener (Ansari et al. 1997 [10])
50
Reduce Cost
Motor
40
U)
30
Casing
M
Blades
20
Drawer
1
10
Enhance
---
0
0
10
20
30
40
50
Relative Importance
This process of allocating costs must be done by a cross-functional team. Design leaders from each
section of the product must be involved in the decision-making process or they will not feel
responsible and accountable for their cost targets [4]. Engineering leads will be relied upon to
identify where product costs reductions can reasonably be achieved, but they will require input
from Manufacturing and Supplier Management. Marketing resources provide customer insights and
estimate the value customers place on various features and functionality. Finance provides the cost
estimates. Table 3-1 illustrates each organization's involvement in the cost allocation activities
described above.
Table 3-1: Involvement of Resources In Cost Allocation Activities
Activity
Engineering
Finance
Manufacturing
Marketing
Supplier
Manage
Management
Historical / Expected Cost
X
Subject Matter Expertise
X
QFD
X
x
x
x
x
x
x
x
3.2.5 Current Production Costs
In parallel with target cost determination, current production cost information should be gathered.
These production costs should represent lifecycle costs and should be gathered down to the
component level. These current production costs will help determine the expected cost of the new
product, wherever there are similarities between current / previous products and the new product.
It is important to note, the current production costs should not impact the target cost. Target cost
should be kept independent of current production costs at this point.
27
3.2.6 Expected Costs
Using current production costs, Finance should work with Engineering, Manufacturing, and
Supplier Management to estimate the lifecycle costs of the new product. Finance can use
similarities in the products to exploit historic costs, and should use parametric estimates (estimates
based on high-level features like weight, using regressions of previous product costs) as well as
input from Engineering, Manufacturing, and Supplier Management to estimate the cost of the new
product where there are dissimilarities. In the aerospace industry, parametric estimates have
proven to work well for estimating the entire airplane cost, but are less accurate for individual
sections / components [14]. We will discuss cost estimating techniques in further detail below.
These expected costs will most likely be higher than the target costs, but will indicate the expected
costs of various components of the new product. These cost estimates will be an input for allocating
target costs to the material / component level.
3.2.7
Closing the Cost Gap
Once current cost estimates are understood and target costs have been established, the product
development team will be challenged to close the gap between expected cost and the cost target.
This will be the real challenge for the team. Actual cost reduction activities are the most expensive
and time-consuming for companies [9]. The design engineers will be challenged to reduce costs
while continuing to meet other requirements.
The success of these activities hinges on a multi-disciplinary team approach. Since target costs were
set by the entire team, the entire team must be held accountable for achieving those targets [4]. The
benefits of cross-functional teamwork for cost reduction were demonstrated with the Boeing 777
program. The 777 program created teams comprising resources from Engineering, Manufacturing,
Materiel (Supplier Management), Customer Service, Quality, and Finance. The members of these
cross-functional teams were collocated to facilitate communication [15]. These cross-functional
teams were able to achieve reductions in recurring product cost and a reduction in change, error
and re-work as demonstrated in Figure 3-3 below.
28
Figure 3-3: 777 Program Success [15]4
F*-77? pvc
Coot,
Ch,w~
MIAM
S
77?Iq
M
MonFige 17.t 777 oga suces
I~owving
ftcuffft
777 process
Pr*-777 procew
Figure 18. Program Cost Comparison-777 Process
Vermus Pra-777 Process
Figure 17. 777 Program Succams
Closing the cost gap may require trade-offs. Some trade-off decisions may include:
*
Functionality
*
*
Trading cost targets between components / sections
Trading cost targets for cost components (e.g., spend more upfront in R&D to save more in
production costs)
In order to effectively assess these tradeoffs, engineers must get used to thinking in terms of
business cases. In aerospace, a typical tradeoff is weight versus cost. Since the customer values a
lower-weight airplane, we should assign value to any weight reduction engineers might be able to
achieve in their design. Similarly, engineers may be able to reduce costs significantly by increasing
weight a little. When aerospace companies prioritize weight over cost as a blanket rule, an increase
in weight would never be allowed. Instead, the team must pre-define a weight versus cost tradeoff
[14] so that engineers can determine if a design change that impacts weight really makes sense.
Cost reduction efforts will be an iterative process, and savings will be diminishing [11]. Figure 3-4
provides an illustrative pattern of cost reduction we can expect to see. It is important to note, that a
lot of the changes will be minor improvements, not major innovations [1]. This process of cost
reduction will look a lot like continuous improvement, except that it will occur earlier in the
product development timeline.
4 Black bars indicate non-recurring cost
29
Figure 3-4: Reduction of Cost with Design Iterations
Design Iteration
As mentioned above, tradeoffs may be necessary between design groups and cost targets may need
to be traded between components to ensure the total product cost meets the cost target. While
individual design teams may be tempted to stop cost reduction effort as soon as their component
meets the target cost, they should not stop looking for cost savings until the entire product has met
its cost target.
Engineers and managers must be careful with design iterations. Every time a team has to go
through design iterations, the team has increased the non-recurring design costs of the products.
The expectation is that the cost savings the team will achieve will be at least as great as the
additional upfront cost incurred. Teams should only choose to go through additional design
iterations as long as the expected recurring savings are at least as great as that additional
development cost.
Finally, as discussed above, only products that meet their cost target should be produced. If a
product cannot meet a minimum NPV set by management, it should be abandoned. This should only
be used as a last resort option once all other cost-reduction possibilities have been explored.
3.2.7.1
Cost Components
Target Costing relies on having a full understanding of lifecycle costs of the product. While the
temptation is to just consider the upfront non-recurring design activity and recurring production
costs, other cost components contribute significantly to the cost of the product. Profitability can
only be determined if all costs are considered along with all revenues associated with the product.
Total lifecycle costs include [10] [14]:
.
R&D, design, and test and evaluation
30
*
Manufacturing and acquisition
*
Sales and marketing
*
Distribution
*
Service
*
Operations and support
*
Disposal
Cost of capital (including depreciation) is an important cost component that needs to be included in
Target Costing calculations [11]. Such costs will typically fall under development and
manufacturing, and will include buildings, machinery, and IT assets.
Manufacturing and acquisition costs are often over-emphasized during design [10], and sales and
marketing are often considered fixed overhead costs. In reality, all costs are variable, and the team
must understand how they can impact cost when setting cost targets. With cross-functional teams,
the Marketing organization is involved in development throughout, so this issue should be
addressed.
3.2.7.2
Techniques for Cost Reduction
Closing the cost gap will not occur naturally and companies will typically need to employ cost
reduction techniques to meet their target costs. Several formal techniques have been proven
effective for reducing cost during design, including [2] [9] [6] [16]:
*
Value engineering / value analysis
*
Tear-down analysis
*
Quality Function Deployment (QFD)
*
Design for "x" (DfX)
*
Cost Deployment Flowcharts
*
Working with suppliers to improve capabilities, identify areas where they can reduce costs
*
Change to design, or features
*
Accept higher start-up costs for larger savings later
Table 3-2 illustrates which techniques should be used to reduce cost in each cost category over the
development lifecycle. In addition to the strategies listed above, companies should use long-term
agreements with suppliers to foster cooperation of the supplier and get future cost reduction
guarantees [9].
31
Table 3-2: Techniques for Cost Reduction Over Development Cycle (Adapted from Ansari et al., 1997 [10])
R&D, design, and test
and evaluation
Manufacturing and
acquisition
Sales and marketing
Distribution
Service
Operations and
support
Disposal
-
Multi-year product plan: trade-off features, accept high one-time costs for future cost reduction
-
Cost deployment flowcharts
-
Reverse engineering / tear-down analysis
-
Reverse engineering /
tear-down analysis
-
Trade-offs
-
QFD
-
Value engineering
QFD
Supplier value
-
Value engineering
Value analysis
-
Design for
manufacturing and
assembly
Continuous
improvement
-
QFD
-
Supplier value
engineering
-
Negotiation with
supplier
engineering
-
Supplier benchmarking
-
Benchmarking
-
QFD
-
Trade-offs
-
Value Engineering
-
Value Engineering
-
Value analysis
-
QFD
-
Design for distribution
-
Design for distribution
-
-
Coordination with
suppliers
-
Coordination with
suppliers
Continuous
improvement
-
Trade-offs
-
Value Engineering
-
Value Engineering
-
Value analysis
-
QFD
-
Design for maintenance
-
Design for maintenance
-
Continuous
improvement
-
Trade-offs
-
Value Engineering
-
Value Engineering
-
Value analysis
-
QFD
-
Design for use
-
Design for use
-
Continuous
improvement
-
Trade-offs
-
Value Engineering
-
Value Engineering
-
Value analysis
-
QFD
-
Design for disposal
-
Design for disposal
-
-
QFD
-
QFD
Continuous
improvement
Each component should have its cost broken out into the categories indicated in Table 3-2. These
catagories will ensure total lifecycle costs are addressed and will help focus discussion on those
components driving cost in particular categories. Japanese firms, with mature Target Costing
processes, use detailed cost tables to determine costs of individual components [11]. These cost
tables contain granular cost information on every component, which enables them to quickly
identify cost drivers and aid cost reduction efforts.
A lot of the work will be workshop based. The techniques listed above will enable the teams to
identify the areas and components where cost is high, but the teams will need to work together to
brainstorm ways to reduce costs. Here, the diverse backgrounds of multi-funtional teams will be
critical, since the success of the workshops will hinge on the team's ability to come up with creative
solutions. The workshops will require a lot of upfront preparation so that they can be focused and
they will require an owner to ensure they are productive.
32
3.2.8 Design Release and Production
Product designs should only be released for production if technical requirements, schedule, and
cost targets have all been met. Leadership must be held accountable to all three components, and
this accountability must be flowed down to the lowest level engineer. Every engineer must know
what their targets are; if they don't know their targets, it would be unreasonable for them to be held
to them. In order to achieve this, the development team must be able to allocate targets to the
individual design teams.
3.2.9 Continuous improvement
Continuous improvement is a well-established framework used in manufacturing companies.
Continuous improvement should be a continuation of Target Costing. The tools and methodologies
used in Target Costing to close the cost gap are the same as those used in continuous improvement.
The biggest difference between the two is timing. Any company that has introduced continuous
improvement has the tools and processes available to them to implement Target Costing.
Companies often rely almost entirely on continuous improvement to realize cost reduction, but as
discussed above, by the time continuous improvement starts to affect the product, the majority of
costs have been committed. Target Costing efforts need to be incorporated in the design stage of
product development, followed by continuous improvement once production begins. Figure 3-5
illustrates the activities that should occur during the product development lifecycle.
Figure 3-5: Product Development and Cost Reduction Timeline
Target Costing
Continuous Improvement
-
3.3 Organizations Involved
As discussed above, Target Costing is a cross-functional process. Organizations involved in Target
Costing include Engineering, Finance, Manufacturing, Marketing, and Supplier Management.
Suppliers should be included in discussions and design decisions, and should be considered as
another organization within the company. Table 3-3 below lays out the key responsibilities of each
organization during product development.
33
Table 3-3: Responsibilities of Organizations During Product Development
Engineering
Finance
Manufacturing
Marketing
Supplier Management
Suppliers
Perform design work to drive lifecycle cost down
Provide SME input to aid financial estimating
Provide SME input into areas where cost reduction is possible and into Quality Function Deployment (QFD)
Cost Engineers should be dedicated to the cost of parts (function like weight engineers)
Create estimates on cost based on input from other organizations
Provide historical cost to the material / component level
Identify cost-drivers (i.e., what Engineering should focus on from a cost perspective)
Identify ways to reduce manufacturing costs
Provide SME input into Quality Function Deployment (QFD)
Provide SME input to aid financial estimating
Provide customer insights for product definition and tradeoff decisions
Provide customer insight for Quality Function Deployment (QFD)
Coordinate with engineering to create solutions to changing customer requirements
Identify ways to reduce marketing costs
Provide input on new suppliers / technology available
Provide SME input to aid financial estimating
Benchmark suppliers
Identify ways to reduce cost through redesign or contract change
Provide input on new manufacturing techniques / technology available
Identify ways to reduce cost
Agree to cost targets set and find ways to hit those cost targets
While Target Costing is a team effort across the organizations listed above, many Japanese
companies with established Target Costing processes created a separate business unit dedicated to
Target Costing [10]. It is the responsibility of this organization to provide enough cost information
to the design team early enough in the design cycle so they can make cost-based decisions [2]. All
organizations involved in the Target Costing process will have accountability for their cost targets,
but this dedicated organization must ensure implementation of and adherence to the process.
3.3.1 Role of Supplier Management
Supplier Management will be held to cost targets set by the product development team. Since
Supplier Management is held accountable for target cost set by the team, Supplier management
should be involved in setting the target [17]. Supplier Management should be included as early as
the product definition phase, and should continue to be involved throughout the development
process since Supplier Management can provide high-level input into what features or sourcing
strategies drive costs [1]. Supplier Management can also provide insight into new manufacturing
techniques and technologies that might be available to suppliers. In one study, eight of eleven
companies using Target Costing included Supplier Management during product definition [9].
Additionally, Supplier Management is typically involved in continuous improvement activities;
since continuous improvement is really a continuation of Target Costing activities, Supplier
Management should be just as involved in Target Costing [4].
34
Supplier Management should have a close working relationship with Engineering [17] [9].
Decisions that design engineers make can impact supplier requirements, so there needs to be a
feedback loop to design engineers. When the design team makes a design decision, they need to
understand how they are driving cost. Additionally, since the sourcing and negotiation process is
extremely lengthy, Supplier Management will need to be kept aware of design decisions so that they
can be incorporated properly in any agreements with suppliers. By keeping Supplier Management
in the loop, the design team will also identify early on when design decisions will force the company
to single-source (e.g., a patented sub-component). Single-sourcing can drive significant costs
because, with no competition, the supplier has the ability to inflate prices.
By involving Supplier Management early, companies are able to leverage new supplier capabilities
in product design. In some cases, suppliers are chosen early in the development process. As one
Boeing engineer pointed out, when suppliers have been determined early, the design team should
be aware of the capabilities and limitations of those suppliers since certain design features can
increase cost significantly for one supplier and not impact cost for another.
Target Costing is dependent upon supplier involvement and supplier agreement to cost targets. The
most difficult aspect of Target Costing can be getting suppliers to buy-in [18]. Supplier Management
must be able to create incentives for the suppliers that will ensure their cooperation. Target Costing
can also provide a framework that will enable the team to discuss both justification and need for
target costs with its suppliers [16]. Suppliers must believe that the project will be canceled if target
costs are not met [9]. This is one of the most powerful incentives the team can give suppliers to
meet their own targets. Unless this is a real threat, suppliers will have very little incentive to play
along.
While Supplier Management must create the incentives and penalties to ensure supplier
cooperation in the Target Costing process, Supplier Management must also ensure that supplier
margins are not eroded. Suppliers will be weary of Target Costing because they may see it as a
process that does nothing but erode their profits (this does not need to be the case). The product
development team must treat suppliers like partners, and ensure that all involved understand the
common goals [10] [8]. The team needs to recognize that successful Target Costing depends on
successful implementation by the suppliers. The team must enable and support suppliers in their
implementation to ensure the success of Target Costing. Manufacturing companies are recognizing
the value of this longer-term approach to supplier relationships and squeezing suppliers for
35
immediate savings is losing credibility [1]. In other words, companies are moving towards longterm cost reduction relationships over short-term savings.
It is important for Supplier Management to recognize situations where suppliers might take
advantage to increase their own revenue. Complex, long lead time engineering projects will incur
design changes. Suppliers tend to offer great introductory rates, but will capitalize on these
changes, and this is where they make their profits [19]. Supplier Management must set up the
relationship and contract that ensures the company's profits are not diminished by supplier fees as
changes occur.
3.4 Techniques for Estimating Costs
It is very important that costs are known and considered during every step of the product
development process. Since the accuracy of cost estimates tend to be low during product definition
and conceptual design, cost is often given low priority [19]. Cost estimates typically have a -30% to
+50% accuracy during conceptual design, and this improves to -5% to +15% during detailed design
phase [20]. Since 65% of cost is committed during conceptual design (as discussed in Section 1.1), it
is incredibly important to understand costs, even at a high level. Design engineers have historically
focused on technical specifications during conceptual design [10], but they need to start factoring in
cost at this point as well.
Various cost estimating methodologies are appropriate at different stages of product development.
Bottom-up estimates are typically used when the design concepts are new and the user wants to
eliminate unknowns [19], and parametric / historical cost estimates are used for products that are
similar to previous products. Parametric estimating is typically done at the early stages of
development. It is an excellent predictor of costs when the Cost Estimating Relationship (CER) is
reasonable, data is accurate, and assumptions are clear [2]. As the team moves through the
development cycle, it should shift from using parametric estimates to more bottom-up approaches
[19]. Figure 3-6 illustrates the various cost estimating methods that should be used during each
phase of product development.
36
Figure 3-6: Cost Estimating During the Development Process
Actual costs
Supplier Quotes
Feature-based (CAD)
Feature-based (cost
tables)
Neural networks/
a)
fuzzy logic
L_
Parametric estimates
Historical data
CERs for parametric estimates need to be clearly identified, and validated regularly (i.e., the team
needs to compare estimates to actual to determine accuracy of the CERs). Aerospace companies
typically use factors such as weight and material [19] for their CERs. While these CERs work well at
an airplane level, they start to break down at the more granular levels (e.g., weight is not a good
CER for estimating the cost of systems). CERs should include design cost as well as manufacturing
cost components. Companies should use statistical analysis to ensure their CER is based on features
that well define cost [19]. When developing CERs, companies must:
*
Understand the design process
*
Do not mix dissimilar products for CER development
*
Use as many data points as possible
*
Break out cost by cost component
*
Use common sense and experience
*
Do not use too many variables [21]
Once CERs have been developed, the design team needs to be educated about the cost drivers [19]
[11]. Although the team may not be able to identify costs with a high degree of accuracy, they can
still use historical costs and subject matter expertise from engineers and suppliers to determine
features and functionality that tend to increase cost. This information could be shared through
actual historical costs, or through more qualitative graphs that provide engineers with an indication
37
of cost drivers. This information is important to share with engineers so they can make more
informed design decisions.
Companies are increasingly using neural networks and fuzzy logic to determine costs during early
phases of product development. Neural networks and fuzzy logic have proven to provide more
accurate cost estimates, particularly where suitable CERs have not been identified [2]. While
weight-based CERs provide good, early cost estimates for airframes, for example, estimating costs
for systems is a little more difficult. Neural networks can quickly identify cost patterns and
determine more accurate cost estimates based on other parameters. Fuzzy logic can handle
uncertainty and imprecision when traditional, deterministic cost models don't handle this as well.
Fuzzy logic is particularly applicable when human decision-making is core to the downstream
process [22]. For these reasons, neural networks and fuzzy logic can provide enhanced capabilities
to traditional parametric cost estimates early in the development process.
As the team moves towards detailed design, and creates part-level specifications, feature-based
estimates can be used. Feature based costing (FBC) has been used increasingly by a leading
European aerospace manufacturer [2]. FBC makes sense to use both during concept development
and during detailed design. Any component can, at a high level, be described as a combination of
features. Table 3-4 illustrates some example features that can be used to describe individual parts.
Since these high level features are typically known during concept development, a company could
use a feature-based cost table to estimate the cost of the end product.
Table 3-4: Feature Based Costing Example Features
Feature Type
Geometric
Attribute
Physical
Process
Assembly
Activity
Examples
Length, Width, Depth, Perimeter, Volume, Area
Tolerance, Finish, Density, Mass, Material, Composition
Hole, Pocket, Skin, Core, PC Board, Cable, Spar, Wing
Drill, Lay, Weld, Machine, Form
Interconnect, Insert, Align, Engage, Attach
Design Engineering, Structural Analysis, Quality
Since FBC at this level uses cost tables, current and historical costs must be tracked to the part level.
The features of those parts must also be tracked to ensure the team can associate features to costs.
While cost tables must be used during early design phases, CAD-based FBC should be used once
engineers work on detailed design, with 3D CAD drawings of their parts. Many tools exist in the
38
marketplace, which can integrate with CAD programs like CATIA, so engineers can get accurate
should-cost estimates for the parts they are designing. We will discuss these tools in more depth in
the next section.
As designs become more hardened, supplier quotes and actual costs can be used to track costs. As
Figure 3-6 illustrates, cost estimating techniques become more accurate further along the
development timeline. Since all estimating is based on assumptions, it makes sense to include a risk
assessment with estimates at every stage of the process [2]. This risk assessment can be as simple
as reporting cost estimates as expected ranges (e.g., high, expected, low).
Some of the techniques described above require significant setup and tools to be in place in order to
be effective. The next section will describe some of the cost estimating tools that are currently used
by manufacturing companies.
3.4.1 Tools
The cost estimating process requires comprehensive IT systems and significant cross-functional
coordination [1]. During every phase of product development, tools are needed to help create cost
estimates and central databases are needed to store the cost estimates so that Finance can
aggregate costs to the product level. This section describes some cost estimating tools currently in
the marketplace. This is not an exhaustive list of all tools available, but is intended to provide an
indication of what functionality is available.
aPriori: provides manufacturing cost estimates of parts and assemblies using CAD files. Users
can drop the CAD file into aPriori, define a couple of parameters, and see price [23]
Costimator: provides manufacturing cost estimates based on parametric estimates, featurebased, or individual operations required to manufacture part [24]
COSYSMO: a parametric systems engineering cost model, which is used in various industries
including aerospace [25]. It is being incorporated into systems like PRICE-H and SEER. [19]
Geometric: provides manufacturing cost estimates of parts using CAD files. Users must
manually define tolerances and other features, but the tool provides tips for features that tend
to increase or decrease cost [26]
PRICE-H: provides parametric estimates based on a database of costs from other products.
Both estimates on recurring part costs and program management are included. Enables
39
engineers to understand costs of alternative solutions. This tool was used by BDS in the 1990s
[27]
PTC Windchill: general purpose life-cycle cost estimating tool. User defines the cost
breakdown structure, and compares the cost and sensitivity of various product options [28]
SEER-DFM: uses historical data to estimate cost to manufacture and assemble parts. Each
operation required to manufacture and assemble the parts must be manually input into the tool
[29].
Vanguard Studio: general purpose life-cycle cost estimating tool. Models are built as
hierarchical trees. Users can build complex systems, but users have to build the trees and
populate with data, which requires a large amount of effort [19]
Table 3-5 summarizes some key features of the tools identified above. There are a variety of tools
available in the market that provide a variety of cost modeling capabilities. Companies may choose
to use multiple tools to estimate costs at various stages of product development.
Table 3-5: A Sample of Cost Estimating Tools
Vagad
Costimnator
SEER-DFM
aPriori
Geometric
Product
definition
Product
definition
Conceptual
design
Conceptual
design
Detailed design
Detailed Design
Program
management,
recurring part
cost
High level
lifecycle costs
High level
lifecycle costs
Recurring part
cost
Recurring part
custs,
pastt
costs, cost to
assemble
Recurring part
ecusts ad
costs and
assembly cost
Recurring part
cost
Manual input
Manual input
Manual input
Manual input
Manual input
Drop CAD
into tool
into tool
into tool
into tool
into tool
model into tool
COSYSMO
PRICE-H
PTC Windchill
Product
definition
Product
definition
Costs calculated
Non-recurring
CNnrecring
engineering
costs
Input method
Manual input
into
spreadsheet
p d
Development phase
Aerospace specific
data included
Parametric
Feature-based
Trade-off
Includes composites
The ideal, comprehensive tools would include the following features [19]:
*
Mix of parametric and bottom-up estimates
*
Sensitivity and risk analysis
*
Lifecycle cost (not just manufacturing)
40
CAD model,
manually input
each
manufacturing
process
While homegrown tools are highly customizable, they create barriers with suppliers since suppliers
don't have access to those tools and cannot keep up with development of their own [30].
Additionally, homegrown tools can quickly become obsolete if they are not properly maintained.
The cost estimating tools available in the market have become mature enough that companies
should not have to rely on homegrown tools to estimate costs.
3.5 US Versus Japanese Companies
Since Japanese companies have demonstrated success with Target Costing, it is important to
identify differences in US and Japanese firms that might impact companies' ability to implement
Target Costing successfully in the US.
The biggest difference between US and Japanese firms is their relationships with their suppliers. US
supplier relationships are not well aligned to partnering [17]. In Japan, customers and suppliers
have long-term personal relationships, so a buyer will stick with its suppliers, which leads suppliers
to more readily trust buyers. In the US, however, suppliers cannot rely on long-term loyalty from
buyers, so buyers must find other ways to incentivize suppliers to cooperate [17]. Even if a US
buyer intends to honor a long-term relationship, suppliers to US firms do not trust the strength of
the relationship, so US firms must have contingencies that increase commitment from the suppliers,
or decrease risk in the case the supplier doesn't cooperate.
In the US, Target Costing is a relatively new practice from an operations and supplier management
perspective [9]. While Japanese firms have mapped costs to customer needs and desires, in
accordance with lean thinking, no US companies have a formalized approach for looking at
weighted value of a feature versus price [9]. This concept is core to Target Costing and must be
implemented if Target Costing is to be successful.
3.6 Implementation
A successful implementation strategy depends on the product's complexity, both internal (from a
manufacturing point of view), and external (from a customer point of view). Products can be
separated into one of four categories [30], which are depicted in Figure 3-7 below.
41
Figure 3-7: Product Complexity
External
Complexity
C
D
Customer-driven
products
Complexproducts
B
A
Compon ent-driven
productsInternal
Simple products
Complexity
Aerospace companies, such as The Boeing Company, fall into the category "D" highlighted in Figure
3-7, and need to combine the latest technology with a multi-disciplinary team [30]. While some less
complex products might be able to get away with either technology, or a multi-disciplinary team,
the high complexity of aerospace products means there must be a high level of coordination, and
companies need to use the latest technologies to remain competitive.
As with any implementation, executive sponsorship is necessary[19]. Implementation of Target
Costing will only be successful if there is an executive who will be measured against the success of
Target Costing. Only then will that executive continue to drive implementation despite barriers that
may arise.
The most successful companies are those where team members have a good understanding of how
their work translates into dollars [31]. Team members must be used to thinking in terms of
business cases, and must have visibility into the cost impact they have when making design
decisions.
3.6.1 Barriers to Implementation
Many barriers exist to implementing Target Costing, and it is important for companies to
understand these barriers so they can be planned for and overcome. Some companies will find it
difficult to implement Target Costing unless the market conditions force them to be more careful
about costs. Target costing will be found in highly competitive markets, where the competitive
pressure forced companies to reduce cost to remain in the market. Firms that are not in competitive
42
markets may not feel urgency around cost the will have to compensate for the lack of pressure that
would normally come from competition.
Companies must be careful about how they message Target Costing. Employees must understand
the relevance of Target Costing. Employees might see cost cutting as a reason to fear for their jobs,
and may even work against Target Costing. Management must educate and reassure employees [1]
that Target Costing will help them not hurt them.
Target Costing should lead to lower cost without impairing design quality or total development
time, but companies need to be careful to avoid setting overly aggressive time constraints on the
design team. Research has shown that under high time pressure, design engineers will work longer
hours without a corresponding cost decrease [32]. According to this research, providing cost
targets will only result in lower cost products when the design engineers face low time pressure.
This means, that while development time reduction might be a goal for the company, this must
come organically from the improved designs (e.g., fewer errors, less rework, shorter production
lead times). Although upfront increases in design time may be concerning, companies must invest
in adequate time upfront to allow for Target Costing. If companies put overly burdensome time
pressure on its designers, the designers will get burnt out [33], and will not be able to think
creatively to identify ways to reduce cost.
Companies must also be careful about supplier relationships. Target Costing can intensify problems
with suppliers when cost-reduction requirements are passed down to them [33]. Suppliers with
less power (particularly smaller suppliers) may feel over-burdened with the responsibility to find
cost reduction, particularly when the more powerful suppliers defray cost targets by using their
influence on the company [1].
Finally, companies must think carefully about how to estimate costs for features and technologies
that are new. Target Costing is best suited to industries where products are incrementally different
from the previous product [2] because companies have to have a good understanding of current
cost breakdown in order to predict cost breakdown of future products. For products that are
significantly different from previous products, companies cannot rely on historical information.
Management must understand the risks associated with cost estimates for such products, so it is
imperative that the development team reports risk in cost estimates.
43
3.7 Final Thoughts
Since the majority of costs are committed by the time product design is released, the potential
savings from Target Costing are significant. Target Costing requires significant upfront investment
and commitment, and for some companies, requires a major shift in costing strategy from
traditional cost-plus to market-based costing. Target Costing can increase the non-recurring cost of
a product, but should only do so if there is a positive business case to do so. Under the Target
Costing framework, activities that do not result in value will be identified and removed.
Aerospace companies, with more complex products, will require more coordination and face a
more complicated problem, but the tools and techniques employed by companies in other
industries can be applied to help with the Target Costing process. Above all, Target Costing requires
executive buy-in and ownership, as well as a clear understanding of the process by all team
members involved in the process.
44
4
Study at The Boeing Company
With the best practices described above in mind, this study will now use the implementation of a
standards cost and availability tool to provide insight into The Boeing Company's position relative
to these best practices. This study will also explore case studies, where Target Costing should have
impacted the design decisions already made. These case studies will help identify areas to focus
Target Costing efforts.
4.1 Standards Cost and Availability Tool
The standards cost and availability tool is an internally developed, web-based tool intended to
provide pricing, inventory, and usage information on standard parts to design engineers. The tool
was created specifically for parts that The Boeing Company classifies as standard parts. These
"standard parts" comprise parts such as nuts, bolts, brackets, etc., which are not custom-designed,
rather are typically industry standard parts that have a price catalog. These standard parts range in
price. The tool was developed by The Boeing Company's Supplier Management organization to
provide cost visibility to engineers to make more cost-effective design decisions.
With the 787 program, the organization saw a lot of new parts. Based on interviews with Supplier
Management analysts, there is a belief that this proliferation of parts was a contributing factor to an
industry-wide shortage of fasteners in 2007 [34]. This shortage of fasteners caused delays to the
787 program and increased costs to The Boeing Company. While some of these part selections were
necessary due to technical reasons, people within the organization believed that much of the cost
could have been avoided if the working-level engineers had better visibility to the cost and
availability of the parts they were selecting.
The intent of the tool is to enable the engineering population to make more informed decisions,
which will enable design-for-cost and reduce overall supply chain costs. The tool was designed to
impact design cycles as little as possible. The tool itself runs on The Boeing Company's internal
server, and once an engineer has taken the appropriate training and has been granted access, (s)he
should be able to look up a standard part or standard part family within seconds. The tool provides
cost per part, current inventory of that part and average monthly usage of that part. Engineers
using the tool are expected to use all three pieces of information when selecting a standard part:
*
Cost: if all other design criteria can be met by multiple standard parts, engineers will select
the most cost effective standard part
45
*
Inventory: if an engineer wants to select a part for which The Boeing Company has a low
inventory, (s)he can consider lead time implications of getting enough inventory to satisfy
the design change
*
Average monthly usage: cost of a part decreases as the volume used by The Boeing
Company increases both in terms of the price per part and in terms of inventory holding
costs. Engineers should consider this when selecting a part
4.2
Pilots
The intent of the pilots was two-fold. First was to determine the effectiveness of the pilots by
defining metrics (see Appendix 3 for the metrics chosen) and measuring those metrics to determine
whether they were impacted when engineers used the tool for their design work. Second was to
gather user feedback to determine engineering response to the tool and to gather lessons learned to
incorporate into development of future versions of the tool. Supplier Management predicted the
tool would be successful, but needed to validate the tool and collect user feedback before rolling it
out to the general engineering population.
Project identification followed a bottom-up approach. Since the timing of this study meant that new
product design could not be used, the team relied on engineering changes. The team started in the
787 organization, where most of the engineering changes were being driven by cost reduction
efforts. The team identified projects for which the following criteria were met:
*
Timing: design decisions needed to be made within the pilot time window
*
Type of change: the team identified projects that impacted standard parts. For example, a
material change might impact part thickness and therefore fastener selection, whereas a
change to the coating on a part would not impact standards
Once individual projects had been identified, the team approached the individual engineers
/
engineering teams assigned to those projects to request that they pilot the tool.
The tool was being driven by Supplier Management and there was no engineering management
championing the tool. Because of this, there was no engineering directive forcing the engineering
population to use the tool. The team instead relied on its ability to convince individual engineers
that the tool was worth trying.
46
After limited success identifying enough viable projects within the 787 organization, the team
reached out to other programs within Boeing Commercial. By the end of the pilot, the team had
reached out to engineers from every program in Boeing Commercial.
4.3
Pilot results
4.3.1 Pilot Selection
The team identified 111 potential projects. Of those projects, 39 were viable projects to pilot the
tool. The reasons projects were not viable are illustrated in Figure 4-1 below. Projects were not
viable for the following reasons:
*
Not suitable: potential projects were identified primarily by their name in various project
tracking tools. While project names suggested relevance to standard parts, these projects
did not involve standard part selection (e.g., one "standards" project involved renegotiating
the contract for those standard parts. This was not the intended use of the tool)
*
Wrong timing: the pilots had to occur in line with the timing of this study. Suitable projects
were those where design decisions were being made within the six month time period of
this study. For many of the projects identified, design decisions had either already been
made, or were not going to be addressed until after the period of this study
"
Project canceled: many of the potential projects identified were being driven by expected
cost savings. For some of those projects, the expected cost savings were not sufficient for
The Boeing Company to continue with the design change so the projects were cancelled
47
Figure 4-1: Pilot Project Selection
120
100
80
60
40
20
Total Leads
Not Suitable/ Relevant
Wrong Timing
Project Cancelled
Viable Projects
Of the 39 viable projects, 20 projects could not be used for the pilot because the engineers were
unable to obtain access to the tool. The Boeing Company is very careful with supplier information
(in this case, supplier pricing), so has very specific access requirements for supplier information.
Due to the organizations some of the engineers belonged to, those engineers were not able to gain
access to the tool.
Of the remaining 19 potential projects, 11 were not used for the pilot because the engineers were
unwilling to use the tool. While those engineers generally agreed that the tool would help enable
better decisions for the company, they were unwilling to pilot the tool either because they were not
measured against the cost of their design and were unwilling to take on the extra work that would
be required of the pilot or because they already felt overburdened with the workload they had. This
response left the team with 8 projects to pilot the tool.
4.3.2
Feedback and Results
The engineers who used the tool universally liked it. While the tool itself was very simple, it
provided the engineers quick and easy access to pricing and availability information that they
previously could not see. All eight project groups reported that the tool helped them make more
informed design decisions, and two groups were very concerned with how quickly this tool could
be rolled out to the larger engineering population.
48
When this study ended, two of the eight design projects were complete. Table 4-1 below displays
the impact of these projects on the metrics measured. Although the other six projects were not
complete by the end of the study, they were mature enough to determine whether the tool had
impacted standards decisions for the designs. The tool had impacted the design decisions for five of
the eight projects.
Table 4-1: Completed Pilot (as of February 2014) Results
Metric
Project 1P
Total Cost of parts
Decreased 44%
No change
# of low use SKUs
Decreased 17%
No change
# of high use SKUs
No change
No change
# of different SKUs
No change
No change
4.3.3 Analysis of Results
As mentioned earlier, the intent of the pilots was to determine effectiveness of the tool in impacting
design decisions and to gather user feedback so that improvements could be made to the tool prior
to it being rolled out to the broader engineering population. Based on the results above, the tool
impacted the design decisions for more than 50% of the users, and the tool received very positive
feedback from all users. While there were three projects that were unaffected by the tool, this result
was expected. The team expected that in some cases, the most cost-effective parts would have
already been chosen, and in those cases the tool would not impact part choices. This was the case
with two of the three projects whose designs were not impacted by the tool. For the remaining
project, less costly parts were identified, however, the design team determined that the savings
would not be sufficient to justify the time that would be required to implement the change.
The results were promising enough for management to move ahead with the plan to roll the tool
out to the broader population. Through "lessons learned" workshops, the team identified bugs in
the tool and features that could easily be added to the tool that would greatly improve the user
experience for the engineering population.
While the pilot was successful for the eight projects that moved ahead, the pilot suggested some
underlying barriers to design-to-cost at The Boeing Company. 11 out of 39 (almost 30%) of the
viable projects did not move forward because the engineers did not have the bandwidth nor the
49
appetite to use the tool. This was because cost was not a priority for the working-level engineers.
Since working-level engineers were not measured on the cost of their designs, they only considered
cost if there was time to do so. The engineers were not provided additional time to identify lower
cost solutions. Additionally, engineers were not rewarded for reducing cost, so the only incentive
they had for finding cost savings was to "do what is right for the company". Finally, cost targets
were not known at the engineer level, so engineers were not aware if there was a cost gap they
needed to fill.
It is important to note that this goodwill towards the company was very strong at The Boeing
Company. While loyalty to the company was the only motivator the team had to convince design
teams to pilot the tool, it was remarkable that eight teams were willing to take on the additional
work required of a pilot. The Boeing Company is a company filled with employees who want to do
what is best for the company, so leadership is well positioned to steer them in the right direction.
4.3.4 Current Status of the Tool
Through the pilots, the tool gained traction in the engineering population and by the end of this
study, was being implemented on the 777X program. The 777X program was in its early design
stages, so this tool could provide the design teams access to pricing information when they have the
most ability to impact product cost. The tool will be evaluated for impact on the 777X program and
is expected to be rolled out to other programs during the following months.
4.4 Case Studies
While the implementation of the standards tool revealed that working-level engineers did not
prioritize cost, there are other barriers to Target Costing at The Boeing Company. The following
case studies will explore situations where Boeing design teams chose more costly design solutions
than necessary and will explore why those more expensive design decisions were made. These case
studies were chosen to explore barriers to Target Costing at The Boeing Company, so focus will be
on how more cost efficient design decisions could have been made.
4.4.1
Bolt Grip Lengths
When engineers select a fastener, the fastener selected depends on the technical requirements of
the fastener (e.g., strength, corrosion) as well as the stack-up of parts. Engineers will select the
fastener length (grip length) that most closely fits the stack-up to minimize excess weight. This
method of selecting parts can result in low-use fastener sizes being selected. This increases costs
for The Boeing Company because there are significant economies of scale with standard parts due
to high set up costs and low marginal production costs. When The Boeing Company consumes large
50
volumes of a particular grip length fastener, the price per part is low, whereas when The Boeing
Company consumes low volumes of a particular grip length fastener, the price per part is high.
A study by The Boeing Company's Value Engineering organization determined that demand is
grouped around certain grip lengths, which results in uneven pricing of bolts. Figure 4-2 illustrates
the price pattern for one family of bolts.
Figure 4-2: Price Pattern for a Family of Bolts
I..JL...LJL..LILLLIII1.Iii1.1.11
i
Grip Length
The Boeing Company's Value Engineering organization identified those expensive grip lengths on
the 787 and determined that significant savings were possible by increasing certain grip lengths. In
some places, a grip length change was not technically feasible and, where possible, the increased
grip length added weight, but the total cost reduction far outweighed any weight increase to the
airplane. This project was "Project 1" in the standards tool pilot and, as discussed in Section 4.3.2,
the cost of those parts was reduced by 44%.
This was a case where the more cost effective solution was not complex. Any design team with
access to the pricing data would have understood how volume drives cost and would have
produced a more cost-effective solution similar to the one described (where low volume bolts are
avoided). At The Boeing Company, however, the more expensive solution was initially selected
because the design team did not have access to the relevant cost information and because weight
was prioritized strongly over cost. During initial design, any solution perceived to add cost to the
airplane would not be approved because the priority was to produce the most lightweight airplane
possible. While the cost reduction more than offsets the weight increase, this solution would not
have even been considered during initial airplane development because weight was prioritized so
intensely.
51
4.4.2 Temporary Fasteners
For the 787 program, The Boeing Company receives subassemblies from its partners around the
world and puts them together in its final assembly factories in South Carolina and Washington. One
of these subassemblies, the wing box, comes from Fuji Heavy Industry (FHI) in Japan. These wing
boxes use temporary fasteners that are replaced when the wing is joined to the body in final
assembly. When Boeing final assembly replaces the temporary fasteners, they are discarded
because they cannot be reused due to airplane certification requirements. These fasteners cost
several thousand dollars per airplane.
Boeing's Value Engineering organization is looking into more cost effective solutions. These
solutions include:
*
Selecting less expensive temporary fasteners: the fasteners currently used satisfy far
higher technical specifications than is necessary. These fasteners have a limited use since
they need to support a static load rather than fatigue loads
"
Reusing the temporary fasteners: while the temporary fasteners cannot be reused in
service, they can be refurbished and then reused as temporary fasteners. With this solution,
The Boeing Company would contract a 3rd party to refurbish the fasteners and then would
ship the fasteners back to FHI to be used on future airplanes
Both of these solutions would provide significant savings to FHI and to The Boeing Company. If The
Boeing Company and FHI had addressed this temporary fastener issue upfront during program
development, they might have been able to produce a more cost effective solution than those
described above. This cost issue was not addressed during program development because the
Boeing design team was not aware of the difference in cost between fasteners.
4.4.3 Material Selection
Early in the 787 Program, Boeing engineers changed the material for two large parts of the fuselage
from aluminum to an alloy. This change was intended to reduce the weight of each airplane. The
design team assumed that the alloy was comparable in price to the aluminum. The Value
Engineering organization has since discovered that the alloy is many times more expensive than the
aluminum because it is in less plentiful supply than the aluminum and because it is more difficult to
work with (i.e., more difficult to machine).
52
The Boeing Company has since changed the material for these parts back to the original aluminum.
While this change reintroduces the weight saved by the original change, the cost reduction more
than offsets the increase in weight.
The original design team responsible for the first change would not have initiated the change if they
had a good understanding of the real material costs. Instead, they generated a change that would
have to be reversed later.
53
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54
5
5.1
Recommendations
Three Lenses
The MIT Sloan School of Management uses a framework called the three lenses for analyzing
organizations. Each lens offers a different perspective on human nature, functions of the
organization and information needed to make sense of the organization, but are distinct enough
that they cannot be combined. The three lenses are: strategic lens, political lens, and cultural lens.
The strategic lens focuses on the strategy and design of the organization. This lens focuses on the
idea that organizations have goals that are achieved by its people carrying out their tasks.
The political lens takes the view that instead of the organization having goals, it comprises
individuals who each have their own interests. This lens sees the organization as a struggle for
power between different stakeholders. It looks at coalitions that form and at negotiations that can
occur between stakeholders.
The cultural lens takes the view that individuals behave in response to the meanings they take from
situations. This lens looks at the symbols, stories, and experiences from which meanings are
derived and shared with new members of the organization. Underlying these artifacts are attitudes
and beliefs that are not easily changed.
The following Sections will analyze The Boeing Company's readiness for Target Costing through the
three lenses.
5.2
Five Key Enablers of Target Costing
This study's research into best practices for Target Costing revealed 5 key enablers: Culture,
Organizations Involved, Process, Tools, and Market. These key enablers represent a slight tweak to
the MIT Sloan three lens framework. While the three lens framework is a very useful tool for
analyzing an enterprise in general, the key enablers identified above provide actionable
recommendations that will enable successful Target Costing. These key enablers are illustrated in
Figure 5-1. All five enablers need to be in place for successful Target Costing. Without any single
enabler, Target Costing will not be successful.
55
Figure 5-1: The Five Key Enablers of Target Costing
0
Culture is probably the most difficult enabler to impact, but is also the most important to have in
place. Culture motivates resources, and that motivation must be pointed in the right direction.
Successful Target Costing requires a culture with a cost focus. Even if all other enablers were in
place, Target costing will fail if the resources are not motivated to enable it.
Organizations Involved is a crucial enabler because cross-functional teamwork is important for
Target Costing. The key to successful Target Costing is ensuring good communication between
organizations that are typically siloed. Successful Target Costing requires that the right functions
are included in every step of product development.
Processes must ensure cost is a focus and be set up to encourage cross-functional collaboration.
Since process dictates how work is performed, it must be set up to enable Target Costing. If Target
Costing is embedded in processes and process documentation, it will become institutionalized and
will become part of normal operations.
Tools are necessary to enable accurate financial estimating and to provide cost visibility to the
product development team. Target Costing requires that cost can be tracked and allocated down to
the individual design team level.
Markets are typically the driving force for Target Costing. Markets with a high degree of
competition force companies to pay attention to cost so companies in these markets have a large
56
appetite for frameworks that reduce costs [35]. While companies have a limited ability to change
the market they are in, companies can compensate for market conditions that do not encourage
Target Costing.
While the political lens of the MIT Sloan three lenses is not called out as an enabler, it is important
to address as a potential barrier to successful implementation. Political considerations will affect
any company's ability to put any of the five key enablers in place. Any change will rely on the
authority of the leadership driving the change and on the ability of the implementation team to
influence others within the enterprise.
The following Sections will discuss each of the five key enablers and the political barrier and how
The Boeing Company can address each of them. While the recommendations in these Sections will
be directed at The Boeing Company, they will be relevant for any company attempting to implement
Target Costing.
5.3
Culture
Boeing employees have a very strong drive to do well by their company and its product. This is
apparent with the model Boeing airplanes employees keep at their desks and by the number of
employees who make their way down to the factory for the first roll-out of a new airplane. Boeing
employees are proud of the product they make and of the company that makes them.
While this drive has motivated Boeing engineers to design impressive airplanes, The Boeing
Company needs to shift the culture to one that is more focused on cost in order to keep costs
competitive. The standards tool pilot revealed that, while cost targets exist, they were not being
flowed down to the individual engineer level. Additionally, while cost is a priority for the airplane
programs, the working-level engineers in this study were not being measured by cost nor are they
given the tools to make cost decisions. The bolt grip length case study demonstrated that weight
took priority over cost for design decisions during development. The temporary fastener case
suggested that schedule (i.e., completing design on time) took priority over cost. Cost needs a
higher priority and needs to become a key measure upon which the organizations are measured.
This could be achieved by making product cost a key metric for organizations as well as for
individual engineers.
As mentioned above, culture is typically the most difficult enabler to influence, but it will also have
the greatest impact on the success of Target Costing. The MIT Sloan three lens framework provides
57
a helpful strategy for influencing culture. This strategy, illustrated in Figure 5-2, involves three key
steps: see the culture, socialize participants, create symbols.
Figure 5-2: How to Change Culture
See Culture
Socialize
Participants
Create Symbols
The first step involves understanding the culture as it currently exists. This culture will be
understood by looking at symbols that exist, language people use, and norms or behaviors that
people adhere to. The current culture will inform what needs to change. In The Boeing Company's
case, the culture was identified as one where employees are proud of the product and their
company, and where weight and schedule dominate over cost. While weight and schedule are
important to hold on to, price must be given a priority as well.
The second step, socializing participants, involves communication and reinforcement. Leadership
needs to communicate that cost will become a priority and help employees understand why. As
discussed in Section 3.6.1, employees might be weary of this focus on cost and assume their jobs at
risk. Leadership will have to reassure employees and help them understand that reducing product
costs through Target Costing is what will keep the company cost competitive and enable them to
keep their job security. These communications must be repeated. Culture will not change based on
a single communication, rather this shift in priority will need to be reinforced until it sticks.
The final step, creating symbols, will ensure the culture change spreads throughout the
organization. At The Boeing Company, weight and schedule are key metrics that the engineering
organization is held to during product development; product cost should be another key metric.
The organization's performance to these metrics could be made visible through dashboards or
other forms to remind employees of the goals of the company, and how they are performing
relative to those goals. In addition to making product cost a performance metric, the company could
create incentive plans that align with its goals. Individuals who are visibly rewarded (e.g., through
promotion or bonus) can also be symbols for their coworkers.
58
5.4
Organizations Involved
Successful Target Costing relies on cross-functional coordination throughout product development.
Best practices recommend the following organizations be involved: Engineering, Finance,
Manufacturing, Marketing, and Supplier Management. All organizations should be involved during
every phase of product development. Additionally, suppliers should be treated as an organization
within the company and should be involved in every phase of product development once they are
brought on.
In The Boeing Company's case, CAS should be involved in product development as well. The CAS
organization maintains constant communication with the customers through the maintenance,
spares, modifications, and training services it provides to The Boeing Company's customers. Since
CAS interacts with customers while they are using the product, they have unique insight into
technical problems faced by customers (often avoidable with design changes upfront) and they
receive feedback that would be valuable to determining features and functionality to include on
future airplanes.
The Boeing Company demonstrated the benefits of this cross-functional coordination during
development of the 777 program. As discussed in Section 3.2.7, The Boeing Company's crossfunctional coordination contributed to decreased change, error, and rework, and decreased
program cost [12]. More recently, the 787 Value Engineering organization involved in this study
demonstrated the benefits of cross-functional coordination. In this group, design engineers have
been collocated with Finance, Supplier Management, and with Boeing Partners. Through this
collocation, the engineers have been able to quickly coordinate with the other groups to identify
efficiencies that have significantly reduced the cost to produce the 787.
The case studies suggest that The Boeing Company's development teams need more coordination.
In the temporary fastener case study, if Finance and Supplier Management had been involved
earlier in the process, they might have highlighted the large cost of the temporary fasteners and the
design team might have paid attention to removing this cost. In the material selection case study,
the engineers who made the decision to switch materials did not understand the cost of the
material they were switching to. If there had been more coordination with the Finance and Supplier
Management organizations, they may have better understood the financial impact of the design
change and chosen not to pursue it.
59
Best practices emphasize that all organizations should be involved throughout the development
process. For The Boeing Company, the standards tool pilot indicated that cost targets were not
being flowed down to the engineer level. Engineers interviewed believed that part of the reason this
was happening was because the Engineering organization did not feel involved in the process of
setting those targets. Engineering, Manufacturing, and Supplier Management should all be involved
in the Target Costing process upfront because they have valuable subject matter expertise that
could inform whether cost targets are realistic. Since these organizations will also be held
accountable to those cost targets, they should be involved in setting them.
This concept of including organizations in the conversation to set cost targets since they will be
held accountable to them should also extend to the suppliers. Since The Boeing Company partners
with suppliers to design large sections of its airplanes, it should follow the same rules and process
when assigning target costs to sections designed in-house versus those designed by partners. Those
rules, assumptions, and processes should be communicated to the suppliers to encourage supplier
buy-in. If The Boeing Company uses the same assumptions to set targets for supplier-designed
sections as it does sections designed in-house, The Boeing Company should have the same level of
confidence that those targets can be met. Put another way, according to best practices, if the
supplier does not agree to and adhere to those cost targets, The Boeing Company should be
confident that it could hit the cost targets by bringing that section back in-house or by giving that
section to another supplier. The suppliers should be treated as an extension of The Boeing
Company, and should therefore be treated like any other organization within the company.
For some, it seems counterintuitive to involve Marketing as late as detailed design. When the design
team needs to make functionality tradeoffs or perform QFD analysis to determine where the
product costs are too high, these organizations can provide valuable input to help guide the
designers' focus. While it would be a waste of resources to include Marketing in every design
discussion, it is important to recognize that these organizations need to be involved throughout the
product development process.
5.5 Process
Since process dictates how resources perform their work, process must be in line with Target
Costing. Process determines who is involved in performing certain tasks, what tasks need to be
performed, and what the business rules are for performing those tasks. Changing process involves
more than documenting the change; stakeholders need to agree to the change, those performing the
60
work need to understand the change, and the change needs to be carefully designed so that it adds
value without adding unnecessary work.
As described in Section 2.3, The Boeing Company follows a fairly standard product development
process (illustrated in Figure 2-4) with review gates at the end of each phase of design. This process
is well set up to align with Target Costing. The Boeing Company needs to infuse cost into the
development process by dictating that product cost is one of the criteria reviewed during each
review gate. Boeing managers currently review a standard list of criteria (e.g., strength, weight,
corrosion) during each review gate, so product cost simply needs to be added to the list. By
requiring that individual engineers report out on product cost, Engineering will have to coordinate
with other organizations such as Finance to determine those costs. If cost had been a review criteria
for the temporary fasteners case study, the cost of those fasteners would have been highlighted and
the overly expensive design / manufacturing methods would not have been approved.
Since weight, schedule, and cost will be reviewed during each review gate, The Boeing Company can
expect that tradeoffs between the three may have to occur. The Boeing Company should set tradeoff
values between the three metrics (e.g., lbs versus dollars per airplane, days of non-recurring design
work versus dollars per airplane). In the grip length case study, if the design team had been armed
with these kinds of tradeoff rules, they would have selected more cost efficient grip lengths.
For each of the case studies discussed, a review of cost during these review gates would have
resulted in a more cost effective design, which would not need to be revised at a later stage. The
initial designs would not have passed the cost review and the design teams would have developed
less costly designs upfront. Additionally, since the design changes are not complex, this design
review for cost should not add significant time to the design process.
Additionally, since process dictates who performs the work, the product development process
should include CAS, Marketing, Finance, Engineering, Manufacturing, Supplier Management, and
suppliers throughout. As discussed in Section 5.4, successful Target Costing relies on the
coordination of these organizations throughout the development process.
5.6
Tools
As described in Section 3.4, various estimating techniques should be used throughout the product
development cycle. As the product development becomes more mature, the cost estimating tools
available will become more accurate. The Boeing Company should employ each of these cost
estimating techniques during the appropriate phases of product design.
61
As illustrated in Figure 3-6, The Boeing Company will have to rely on historical data to estimate
product costs during early product definition. These estimates will be subject to uncertainty and
that uncertainty should be reported with every estimate. This historical data should be tracked
down to the individual design team level since the product development team will need to estimate
and allocate target costs to this level.
As The Boeing Company moves into conceptual design, it will be able to improve on initial
estimates with parametric estimates. As described in Section 3.4, these parametric estimates rely
on CERs to provide cost estimates. These estimates are only as good as the CERs, so The Boeing
Company should constantly review and revise its CERs to ensure it is getting the most accurate
estimates possible. The Boeing Company could also use neural networkss and fuzzy logic 6 to
improve on those parametric estimates.
As the development team moves into detailed design, feature-based cost tables can be used. This
study observed that The Boeing Company has multiple home-grown feature-based tools that can
provide accurate cost estimates, but these are not widely used. If the design team had access to
these tools to estimate the cost of the initial material change in the material selection case study,
they might have better understood the cost implication of that design decision. The Boeing
Company should standardize financial estimating processes to include tools like these so that
design teams have the best information available to them when making cost-based decisions.
Once the design has been drawn in CAD systems, The Boeing Company could make use of featurebased CAD software available. This software would enable design teams to determine the expected
cost of a part in very little time. This kind of cost estimate should be shared with Supplier
Management since it provides them with a "should cost" or a baseline cost with which to negotiate
with suppliers.
Finally, The Boeing Company's cost estimates will become more accurate when supplier quotes and
actual costs begin to be reported. Best practices suggest this cost information should be tracked to
the individual design team level since it will provide the basis of cost estimates for future products
and will provide the company with visibility into cost drivers.
s Neural networks are effectively "machine learning" programs whereby the program will make connections
between key features of different products and provide estimates of the new product based on the
connections it makes
6 While traditional statistical methods use 0 or 1 to describe a true/false statement, fuzzy logic adds more
possible points (e.g., warm, neutral, cold). It determines how much a variable is in a set rather than how
probable it is that the variable is in a set
62
These tools are critical to Target Costing because they provide the ability to estimate the cost of the
product. The Boeing Company should leverage existing tools and identify gaps in cost estimating
capabilities. If the design teams in the bolt grip length and the temporary fastener case studies had
access to existing cost tools (such as the standards tool piloted as part of this study), they might
have been able to release a more cost effective design upfront.
When determining gaps, The Boeing Company must ensure it has the ability to estimate total
lifecycle costs. As highlighted in Section 3.2.7.1, design and manufacturing are not the only areas
where there is opportunity to reduce cost. All cost elements (e.g., R&D, manufacturing, acquisition,
sales and marketing, operations support, etc.) must be reflected in cost estimates so that product
development teams can properly assess the tradeoffs.
The Target Costing toolset is not limited to cost estimating tools, but also includes standard
frameworks and techniques that help teams identify and remove costs. In addition to cost
estimating tools, The Boeing Company should employ the techniques for cost reduction described
in Section 3.2.7.2. This study observed that The Boeing Company has made significant investments
in continuous improvement, so the tools employed should mirror those already being used for
continuous improvement. QFD should be used both to inform tradeoff decisions and to help allocate
costs down to the individual design team level.
5.7
Market
As discussed in Section 5.2, while the market a company is in can be difficult to change, it can be a
key driver for Target Costing. Although companies may not be able to change the market they are
in, if the driving forces for Target Costing are understood, the market forces can be compensated
for to enable Target Costing. The key driving market conditions for Target Costing are:
*
Degree of competition: companies in highly competitive markets will be more sensitive to
cost. These companies will have the energy and motivation required to implement Target
Costing
"
Strategy of product differentiation: companies with a strategy of product differentiation
are more likely to implement Target Costing than companies with a strategy of price
competition [35]. Companies with a strategy of product differentiation will have invested in
understanding what their customers want and will have mature methods for placing a price
on what the customer wants. Since Target Costing relies on a customer focus, these
companies are well positioned to implement the framework
63
"
Frequent release of new products: since accurate cost estimates are integral to successful
Target Costing, companies with frequent product releases, and therefore recent cost
information, will be able to estimate the cost of new products more accurately
"
Well-established technology: it is difficult to estimate the cost of new technologies, so
companies designing products with well-established technologies will be able to more
accurately estimate costs
Although The Boeing Company currently operates in a duopoly, competition is increasing. Airbus
has been steadily taking market share away from The Boeing Company, and potential new entrants
to the market pose a threat for the near future. Despite this competition, there are varied levels of
concern within the company. In order to motivate and energize employees enough to successfully
implement Target Costing, leadership must instill a sense of urgency.
The Boeing Company positions itself against Airbus through product differentiation. While Airbus
can offer lower price tags to airlines, The Boeing Company sells airplanes based on the difference in
their value (e.g., more fuel efficient, less maintenance required). As discussed in Section 3.2.1, The
Boeing Company proved with the 777 program that the company has the customer in mind and can
value the functionality its airplanes provide. The Boeing Company should emphasize this customer
focus throughout the product development process into detailed design.
The Boeing Company faces a challenge estimating the cost of future airplanes. Since new programs
are typically the result of new technologies that improve airplane performance, those new
technologies will make new airplanes difficult to cost. Additionally, The Boeing Company does not
release new airplanes frequently, adding to the cost estimating challenge. Because of this challenge,
The Boeing Company should leverage all cost estimating tools available to them to improve the
accuracy of cost estimates. The Boeing Company should also report uncertainty in cost estimates so
that decision makers understand the risk.
5.8
Politics
In addition to ensuring the five key enablers are in place, The Boeing Company will have to pay
attention to politics within the company. Politics in not an enabler, but could create barriers to the
implementation of Target Costing within The Boeing Company.
The first issue to address is which organization has the most influence. Based on interviews
conducted with working-level engineers, the Engineering organization emerged as a powerful
organization. This was justified with the reason that The Boeing Company is an engineering
64
company that prides itself on the technical excellence of its products. Engineering could present a
barrier to Target Costing because the organization might fear that Target Costing will detract from
the technical excellence of the product. Leaders will have to reassure this organization that cost
reduction is possible without diminishing quality, as discussed in Section 3.1. Additionally, the
Engineering organization might object to involving other organizations such as Marketing and CAS
in the detailed design phase of product development. Detailed design is the phase of the process
traditionally owned by the Engineering organization and Engineering might believe that these
additional stakeholders will distract from the design work. Leadership will have to lay clear
boundaries regarding when Marketing and CAS should be involved and who holds the authority to
make decisions.
Other organizations will need to collaborate for Target Costing to be successful. As identified by this
study, working-level engineers do not have access to product cost information. This norm needs to
change and Finance and Supplier Management need to openly share financial information with the
engineering population. Additionally, best practices research found that the Finance organization
often gets pegged as an auditing function. The Boeing Company will need to be aware of this
tendency and avoid it. The Finance resources on each design team should enable the product
development team by identifying cost drivers to help focus cost reduction activities.
Finally, leadership will need to provide the product development team with adequate time. As
discussed in Section 3.6.1, overly aggressive timelines will lead to the design team working longer
hours without producing a cost decrease. If employees are burnt out, they will not find creative
solutions and they will make mistakes, leading to delays caused by required rework. Leadership
will need to remember that an upfront investment in time will pay off through more cost effective
designs and fewer errors and rework.
65
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66
6
Conclusion and Next Steps
6.1
Conclusion
Target Costing is not easy to implement. It requires a large upfront investment and a lot of
commitment to be successful. Companies that have successfully implemented Target Costing have
seen the benefits not just through lowered lifecycle costs, but also through improved quality and
reduced production timelines.
Based on this study, The Boeing Company has the right infrastructure in place, but needs to focus
more on cost. With potential new entrants to the market, this is The Boeing Company's opportunity
to get ahead of the competition by implementing Target Costing.
In order to successfully implement Target Costing, The Boeing Company should focus on the five
key pillars:
*
Culture: follow the three key steps (see culture, communicate change, create symbols).
Prioritize cost and include it as a key metric for product development
*
Organizations Involved: create cross-functional teams and ensure all organizations (CAS,
Engineering, Finance, Manufacturing, Marketing, and Supplier Management) are involved in
every phase of product development
*
Process: include product cost as a review gate criteria. Dictate the organizations that
should be involved in each phase of product development
*
Tools: review existing cost estimating tools and identify gaps. Standardize financial
estimating tools and processes. Regularly update and improve CERs used for parametric
estimates and evaluate new tools available. Use continuous improvement techniques to
identify and remove cost
*
Market: create a sense of urgency to drive Target Costing. Improve accuracy of cost
estimates to the extent possible and report uncertainty in cost estimates
Additionally, The Boeing Company needs to mitigate the potential barriers it faces. Since The
Boeing Company relies on its suppliers for much of the product development work, The Boeing
Company should treat those suppliers as true partners; setting the same targets and expectations
for its suppliers as it does its own internal organizations, and also providing the same support to its
suppliers as it does its own organizations. The Boeing Company will need to manage employee
67
perception of Target Costing, ensuring resources understand that Target Costing will not detract
from the technical excellence of the Boeing product.
6.2
Opportunities for Improvement
While the standards tool pilot and the case studies provided key insights into The Boeing
Company's readiness for Target Costing, this study would yield more telling results if it could have
followed the full implementation of Target Costing at The Boeing Company. This kind of experiment
would have required high level leadership sponsorship and significant coordination upfront,
however, with an organization specifically pursuing Target Costing, this study might have
generated more specific insights into the ability of aerospace companies to implement Target
Costing.
Additionally, this study only explored groups within one aerospace company. It would be
interesting to see commonalities and differences between various aerospace companies with
respect to their ability to address product costs.
6.3
Areas for Further Research
This study provides a high level picture of the The Boeing Company's ability to implement Target
Costing. While this study covers the major issues The Boeing Company will face, further research
could be done in some of the specific areas of focus. This study discusses the difficulties associated
with working with suppliers while trying to implement Target Costing. Since The Boeing Company
relies heavily upon it suppliers, further research could be done to investigate best practices in this
area and The Boeing Company's interactions with its suppliers compares to those best practices.
Additionally, this study discusses some of the cost estimating tools available to aerospace
companies but does not provide a comprehensive view of all cost estimating tools and techniques
available. Further research could reveal new tools and techniques that might improve the accuracy
of cost estimates drastically. Finally, this study discusses cost estimating relationships used in
aerospace. While weight-based metrics have been used throughout the aerospace industry for
years, statistical analysis into other cost drivers might reveal other factors that can be used to
accurately estimate costs.
68
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Appendices
Appendix 1 - Boeing 777 Payload-Range Graph
Boeing 777 Payload-Range Graph for GE Engines [36]
General Electric engines
Payload, 1,000 kg (1,000 Ib)
80
(160) -
777-300ER
351,630-kg (775,000-b) MTOW*
70
N
(140) 1 60
(120)
_
777-200LR
N
(100)
(80)
(60)
40 368 passengers'_
30
365 passenger
a.............
305 passengers*
__
..........
301 passengers
(40)
20
(20)
10
(0)
0
---
-
0
I
(0)
" Typical mission rules
- Three-class seating
1
I
(2)
347,450-kg (766,000-4b MTOW*
K
..........
.........
777-200*
247,200-kg (545,000-b) MTOW -
-------. .. . . . .
2
1
(4)
3
I
(6)
4
I
(8)
5
I
(10)
-
-
777-300*
299,370-kg (660,000-4b) MTOW
- ---
6
I
(12)
7
Range, 1,000 nmi (1,000 km)
-"Vrb
a rules
Highest opbonal weigt, loading restricions apply above 750K (777-200LR) and 766K (777-300ER)
Includes three opbonal 7,095 L (1,875 U.S. gal) auxiary fuel tanks
-Medunio&
777-200ER
297,550-kg (656,000-1b) MTOW -
73
I
(14)
8
I
(16)
9
I
(18)
10
11
I
(20)
Appendix 2 - Boeing 787 Sections
Boeing 787 Sections [37]
Wlngtips
KAL-ASD
(Korea)
Forward
fuselage
PARTS NOT SHOWN
Tall fin
Boeing (Frederickson, Wash.)
Landing gear
Messier-Dowty
(England)
Horizontal stabilizer
Alenia (Italy)
-I
Wing/body fair' g
Boeing (Canada)
Center fuselage
Alenia (Italy)
Kawasa kr
(Japan)
Landing gear doors
IKiiiiaE
Forward fuselage
Spirit (Wichita, Kan.)
Boeing (Canada)
Aft fuselage
Cargo access doors
Vought
(Chadeston, S.C.)
Saab (Sweden)
Main landing gear wheel well
Kawasaki (Japan)
Fixed trailing edge
Kawasakl (Japan)
Movable
trailing edge
Boeij
(Australia
Wing
Mitsubishi Fixed and movable leading edge
(Japan)
Spirit (Tilsa, Okla.)
Center
wing box
Fuji Japan)
Passenger entry
Latecoere (France)
Engines
GE (Evendale, Ohio)
Engin
Rois-Royce (England)
Engine nacelles
Goodrich
(Chula Vista, Calif.)
Appendix 3 - Standards Tool Pilot Metrics
Standards Tool Pilot Metrics
Area
Impacted
Costs
Control Product
Standard Proliferation
Goal
Metric
Reduce unique part numbers
# of different SKUs / part families
Reduce average cost per part by reducing the number
of low use / high price parts. Savings from selecting
lower cost parts and reduced inventory management
costs
# of low use parts (<1000 / yr)
# high use parts (>20,000/ yr)
Total cost of parts
Reduce proliferation to eliminate unnecessary new
standard part additions
# of low use parts (<1000
Simplify the supply chain
# different SKUs
Optimize standard part supplier capacity
# low use parts
Supply Chain
*Note: parts were classified as low, medium, or high use
74
/ yr)