Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 21

Why Go Abroad? Ralph Lauren, Apple, Kodak, and IBM

In competitive industries such as apparel, consumer electronics, and computers, manufacturers continuously look for ways to reduce cost and increase value throughout the value chain. These industries have chosen to locate extensive manufacturing operations and/or partners in Latin America to reduce cost and to benefit from innovative manufacturing methods and facilities. Wage costs are lower and, using target costing and value engineering, manufacturing processes are built around modular manufacturing methods that reduce the number of parts in the product, speeding the manufacturing process and reducing costs.

Consumer Electronics Why is outsourcing manufacturing to plants an advantage to IBM, Apple, and Kodak? The contract manufacturers’ manufacturing experience and technology give them a cost advantage. Flextronics and the other contract manufacturers also can focus on the manufacturing process rather than the entire product value chain. Moreover, they gain economies of scale by manufacturing similar products for different clients. The use of contract manufacturing is an important part of the strategy to achieve target costs while maintaining product leadership in design and customer service.

Apparel Manufacturing Liz Claiborne and Ralph Lauren are saving lots of time and money by outsourcing many phases of the product development, from design to manufacturing, to plants in China. Having the product development and manufacturing in one place has helped the firms introduce new products more quickly and has also allowed them to deliver their product more quickly around the world.

Sources: Gary McWilliams, “In Electronics, U.S. Companies Seize Momentum from Japan,” The Wall Street Journal, March 10, 2005, p. P1; Gabriel Kahn, “Making Labels for Less,” The Wall Street Journal, August 13, 2004, p. B1; Mark Heinzl, “Nortel and Flextronics Discuss $500 Million Outsourcing Pact,” The Wall Street Journal, January 23, 2004, p. A12; Justin Scheck, “Dell Plans to Sell Factories in Effort to Cut Costs,” The Wall Street Journal, September 5, 2008, p1.

Step 1 of 3

Target costing is a costing strategy where company gathers information about the price of the competition and then deducts the profit that company is desiring. And the cost that then comes is the target cost.