A target-costing based strategic decision

support system
By Chen, Richard C W
Publication: The Journal of Computer Information Systems
Date: Tuesday, October 1 2002

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HEADNOTE

ABSTRACT

HEADNOTE

Most Strategic Decision Support Systems (SDSSs) are general DSS in nature. Very few
SDSS have been designed specifically

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based on particular competitive strategies. In this paper, we present an SDSS that is
designed based on a marketdriven target costing (TC) strategy. We present both the
structure and subsystems of the TC-based SDSS. To effectively accomplish strategic
goals, such an SDSS should be incorporated into a firm's enterprise system (ESs).
Existing enterprise systems such as enterprise resource planning (ERP) systems are really
"a patchwork of enterprise programs." An ERP system intends to integrate and automate
traditional back office functions such as finance, human resources, operations, etc. These
functions are transaction-oriented. Tremendous potential can be cultivated through
enhancing the decision support capability of ESs. The TC-based SDSS integrates
transactions with strategies and therefore provides an excellent model for enhancing
decision support capabilities of enterprise systems.

INTRODUCTION
During the past two decades, much has been written about Japanese manufacturing
practices as well as their management accounting methods. In addition to operations-
related concepts such as Just-in-Time (JIT), Total Quality Management (TQM), KAIZEN
(Total Continuous Improvement), etc., various accounting methods such as activity-based
overhead allocation, activity-based costing (ABC), target costing, etc., have also received
substantial attention. These new concepts and practices promote the roles of accounting
from "informing" to "influencing" (11). Management accounting no longer stresses
optimization within existing systems. Rather, it aggressively reshapes the systems.
Therefore, accounting plays an important role in a firm's competitive strategies.
Unfortunately, such an important role and its need to be incorporated into a firm's
strategic decision support systems (SDSSs) have not been adequately addressed in the
current literature. As Cook et al. (7) point out, most SDSSs are general DSS in nature and
very few SDSSs have been designed specifically based on particular competitive
strategies.

In this paper, we present an SDSS that is designed based on a market-driven target

costing (TC) strategy. The TC strategy entails some unique decision support
requirements. These requirements are then incorporated into both the structure and
subsystems of the SDSS. To effectively accomplish a firm's strategic goals, such an
SDSS should be incorporated into the firm's enterprise systems. Unfortunately, existing
enterprise systems such as the widely referred enterprise resource planning (ERP)
systems are really what Kirkpatrick (14) calls "a patchwork of enterprise programs." In
general, an ERP system intends to integrate and automate traditional back office
functions such as finance, human resources, operations, etc. These functions are basically
transaction-oriented. Tremendous potential can be cultivated through enhancing the
decision support capability of enterprise systems. Since target costing is a market-driven
strategy, the TC-based SDSS provides decision support to a firm's strategic planning
process that can play the roles of both informing and influencing. Furthermore, the
TCbased SDSS integrates transactions with strategies and therefore provides an excellent
model for enhancing the decision support capabilities of enterprise systems.

The rest of the paper will be organized into five sections. Section 2 briefly reviews the
key ideas of the target costing strategy. Section 3 discusses the decision support
requirements of the TC strategy. Section 4 integrates these requirements into the structure
and subsystems of the TC-based SDSS. Section 5 then discusses the need for and the
relevant issues of integrating the TC-based SDSS with a firm's enterprise systems.
Finally, Section 6 summarizes the study and suggests directions for future research.

TARGET COSTING

For decades, a commonly used pricing method for either new or existing products is a
cost-plus approach. Using this approach, firms would set their products' prices by adding
a certain amount of profit margin to the product costs that are usually estimated by
engineers. An implicit assumption behind this practice is that product costs are relatively
fixed - at least in the short run. The desired profit margin usually consists of what is
necessary to satisfy the firm's stakeholders and the need to fund the research and
development of future products. It sounds logical to add the profit margin to the product
cost so as to determine the selling price. Unfortunately, the product prices thus set may
not be competitive in the market.

Target costing, on the other hand, is a market-driven approach. Cooper and Kaplan (8)
describe this approach as a very simply syllogism:

1. Let the marketplace determine the selling price of the future product.

2. Subtract from this selling price the profit margin the company wants to achieve.

3. This yields the target cost at which the product must be manufactured.

It should be noted that the selling price is not really determined by the market passively.
In fact, a firm would set the selling price at the level that it believes would give the firm
the best competitive advantage (e.g., a certain target market share). The target costs
derived from the above syllogism are often well below the currently achievable costs
which are based on the standards established by product/process engineers. The target
costs then become both the benchmarks and the driving force for the company's (cost)
improvement activities.

Three engineering techniques are typically deployed to achieve the target cost reduction
objectives: Value Engineering (VE), Quality Function Deployment (QFD), and Design
for Manufacture and Assembly (DFM/DFA). Value Engineering (sometimes called Value
Analysis, VA) is a technique for evaluating the design of a product to assume that the
essential functions are provided at minimum overall cost to the manufacturer and user.
The heart of the VE/VA approach is the evaluation of functions. The technique is a
systematic effort which is based on an analysis of the functional requirements of systems,
equipment, facilities, procedures and supplies to achieve essential functions at the lowest
total cost consistent with needed performance, reliability, safety, etc. (12, 13). VALVE
can be also used to redesign the product, its manufacturing process, and its distribution
and service systems (15). QFD, also known as the "house of quality," originated in 1972
at Mitsubishi's Kobe shipyard site (10). It is a set of planning and communication
routines linking the marketing, (design) engineering, and manufacturing functions.
Customer requirements, called customer attributes (CAs), are first identified via various
customer survey techniques. Engineering characteristics (ECs) that are likely to affect
one or more of the CAs are described and evaluated. The house of quality helps engineers
specify the various engineering features that have to be improved collaterally. It also
helps the design team to set targets for improvements including cost reduction. DFM and
DFA aim to simplify the product structure, material costs, processing costs, etc. The
secondary benefits of DFM/DFA include improved reliability, reduction of inventory and
production costs, improved quality, etc. (2).

In addition to the above three engineering techniques, Chen and Chung (4) developed a
procedure, based on the CauseEffect Analysis (CEA) approach, for implementing the TC
strategy. With the TQM and KAREN philosophies, everyone in the organization should
constantly engage in improvement activities in every aspect of the organizational tasks.
CEA is an easy-to-understand and easy-to-use method that can be employed by everyone
in the organization. It serves as a powerful tool for cost analysis and can be used to
support or complement the aforementioned three engineering methods.

In summary, the target costing approach helps a firm integrate its accounting function
with operations management and effectively support the firm's competitive strategies.
Therefore, the TC strategy should be incorporated into the firm's SDSS. Better yet, an
SDSS that is specifically designed based upon the TC strategy would become one of the
firm's most formidable competitive weapons.

CONSTRUCTING A DECISION SUPPORT SYSTEM FOR THE TC STRATEGY

Figure 1 describes the decision support requirements for a target costing strategy.

The left-hand-side of Figure 1 depicts the role and the tasks of target costing in a firm's
overall strategic process. Obviously, target costing is not a one-time project. Rather, it is
a dynamic process of continuous improvements in operations and continuous driving
down of costs so as to improve the firm's competitiveness.

The heart of a target cost strategy is the analysis of product costs. A product's cost usually
consists of three components: material cost, (direct) labor cost, and overheads. The
pursuit of reduction in both the material and labor costs usually involves a critical review
of the firm's product and process designs. The notion of producibility or
manufacturability as a design principle used in DFM/DFA is very helpful for the
effective cost improvement. The objective of producibility is to design a product (and the
process of making the product) in such a way that the product is easy to make. This can
be accomplished through product/process simplification that is based on the value-added
concept. That is, any component or part that does not add value to the final product or to
customers is a waste and should be eliminated. Any operation or processing that does not
add value to customers should be eliminated. Simplified products would usually lead to
simplified processes. It is also possible to reengineer the processes without changing the
product designs. With unnecessary components/parts and unnecessary processing
eliminated, the material and labor costs can be reduced. Furthermore, with products and
processes simplified, the production processes are easier to control. This leads to better
quality. With less defects, less scrap, and less rejects, the quality-related costs can also be
reduced.

The improvements triggered by target costing are not limited to the firm's
product/process designs. It may also involve the review and reengineering of other
aspects of the firm's complete supply chains. A firm's business activities consist of two
value chains: horizontal and vertical (6). The horizontal value chain represents the firm's
logistics system. Operations in manufacturing systems involve the physical
transformation of materials, components, or subassemblies into a higher level component
or assembly. These conversion activities are usually coupled with a process involving
material flows that entail movement of materials from suppliers to the manufacturing
firm, from one location (department) to another within the firm, and from the
manufacturing firm to customers. At each stage of this flow process, values are added to
the product. The series of the flow is thus called a (horizontal) value chain. The vertical
value chain, on the other hand, connects the firm's product/process design with its
manufacturing and field service activities. Again, at each stage of the process of going
from the conception of a product to the manufacturing of the product and to after-sale
services, values are added to customers.

The improvements in product/process designs are usually direct and quick results of
target costing. In the long run, the firm will need to reengineer its horizontal value chain
to achieve breakthroughs and further cost reductions. Improvements along the horizontal
value chain usually produce substantial reductions in overheads.

The right-hand-side of Figure 1 shows the decision support requirements related to the
TC strategy. There are four types of decision support requirements associated with the
TC strategy. The first is the general strategic decision support activities such as
environmental scanning, technological forecasting, scenario planning, market analysis,
etc. (5, 7). These tasks are essential to a firm's overall strategic planning process. The
second group of requirements belongs to the company's Activity-Based Management
Systems (ABMS). One of the key tasks of an ABMS is the analysis of activities and costs
and their relationships. The analysis of activities is to identify and separate the core and
non-core activities of the complete supply chain - including both the horizontal and the
vertical value chains. Cost analysis involves the evaluation of the contents of products
and processes and their costs. Furthermore, the review of the supply chain activities is
usually part of a firm's Business Process Reengineering (BPR) efforts - an important one
indeed. Therefore, the third group of decision support requirements is referred to as the
firm's BPR activities. Here, the evaluation of the impacts of information technology (IT)
often becomes a dominant consideration. Finally, the analysis of product/process costs is
one of the most important tasks in a firm's product/process design activities. In addition
to "traditional" Computer-Aided Design (CAD) and Computer-Aided Process Planning
(CAPP), support for design team (i.e., concurrent engineering) project management is
needed to facilitate the design activities and to reduce design lead time.

IMAGE ILLUSTRATION 17

FIGURE 1

Figure 2 presents a construct for the TC-based SDSS that is built upon a general SDSS
framework developed by Chung et al. (5). The framework consists of four subsystems:
User Interface Subsystem (UIS), Problem Processing Subsystems (PPS), Knowledge
Subsystem (KS), and Subsystem Interface Management Software (SIMS). The supports
for strategic decision making are performed by various programs within these
subsystems. For example, there is a mission/goals elicitation program in the UIS. There
are strategic problem description program and ad hoc strategic problem processing
program in the PPS. The decision support requirements for the TC-based strategy, as
depicted in Figure 1, are incorporated in various model bases of the Knowledge
Subsystem. The Subsystem Interface Management Software will facilitate the group
decision making process. This is particularly important for the TC-based strategy since
the implementation of this strategy inevitably involves more than one decision
subsystem.

TC-BASED SDSS IN THE ENTERPRISE SYSTEMS ENVIRONMENT

Figure 2 shows that a TC-based SDSS involves many business functions and their
relevant information (and decision support) systems. Logically, such an SDSS should be
incorporated in a firm's Enterprise Systems (ESs).

Enterprise systems have been one of the most important developments in information
systems. From the information technology perspective, ESs are a "natural development"
as the result of the local area and global networks. These network systems enabled
diverse users to share data and resources. The Internet is now a reality of the production
and operations environment and is much more than simply a means of communication.
From the operations management perspective, ESs are an extension grown out of the
evolution of MRP (Material Requirements Planning) and MRP lI (Manufacturing
Resources Planning). In the 1970's MRP became popular particularly in manufacturing
firms because of its capabilities in developing schedules for the procurement and
production of subassemblies, components, parts and raw materials. An MRP system
provides a powerful aid for a firm's inventory, priority and capacity management. In the
19 80's, MRP was extended to include the "front end" planning activities such as demand
management, production planning, master production scheduling, resource requirements
planning, etc. Such a comprehensive Manufacturing Planning and Control (MPC) system
is called MRP II. The MRP logic can also be extended to the firm's distribution systems,
resulting in a Distribution Requirements Planning (DRP) system. A DRP system ties
warehousing operations to transportation and reconciles demand forecasts with
transportation capacity and inventory. When DRP is linked to MRP in a typical
manufacturing firm, the demand forecasts could be driven through the organization from
distribution to manufacturing and on to procurement. In the 1990's, along with the notion
of Supply Chain Management (SCM), MRP II was further extended to include
engineering, finance, human resources, etc. in the context of not only the procurement-
manufacturing-distribution dimension (i.e., the horizontal value chain), but also the
product and process design activities (i.e., the vertical value chain). When necessary, it
includes not only domestic, but also global operations. This new type of systems are
called Enterprise Resources Planning (ERP) or simply Enterprise systems. When
successfully implemented, an ERP links all areas of a company's business including sales
and order management, manufacturing, human resources, financial systems and
distribution with external suppliers and customers into a tightly integrated system with
shared data and visibility. Potential benefits include drastic declines in inventory,
breakthrough reductions in working capital, abundant information about customer wants
and needs along with the ability to view and manage the extended enterprise of suppliers,
alliances, and customers as an integrated whole.
Unfortunately, most of the existing ESs are transactionoriented. They are typically
software that integrates various business processes including front- and back-office
activities. Their decision support capabilities are generally "underdeveloped." A TC-
based SDSS can remedy this by integrating both the firm's transactions and its decision
support activities. Figure 3 shows how such integration can be achieved in an ERP
environment. It also shows how the TC-based SDSS ties together the firm's horizontal
and vertical value chains. Indeed, a firm's SCM (and therefore ES) should cover both
value chains. The target pricing module is linked with the firm's (transaction oriented)
point-of-sale (POS) information systems. Together with the firm's general strategic
planning modules, the target pricing module also supports the strategic decisions in areas
such as Marketing (e.g., product/service packaging) and Engineering (e.g.,
product/process designs). On the other hand, the target costing module not only interfaces
with the transactions occurring in the activity-based costing and management systems,
but also supports the vertical value chains via its linkage with CAD, CAPP, CAM, etc.
Consequently, the TC-based SDSS provides an excellent vehicle for enhancing the
decision support capabilities of an ES.

CONCLUSIONS

During the past decade, researchers and practitioners have recognized the need to
integrate a firm's information systems so as to provide better support to the firm's
strategic, tactical as well as operational activities. Many enterprise systems have been
developed to meet such a need. ERP systems and implementation become a multiple
billion-dollar industry. Unfortunately, existing enterprise systems have not lived up to the
above expectations and are criticized for being "a patchwork of enterprise programs."
While an ERP may have successfully integrated and automated traditional back office
functions such as finance, human resources, operations, etc., these functions are
transaction-oriented. The decision support capabilities, particularly those for strategic
planning activities, of the existing ERP are generally lacking. On the other hand, most of
the existing SDSSs are general DSS in nature. Very few SDSSs have been designed
specifically based on particular competitive strategies. In this paper, we present an SDSS
that is designed based on a market-driven target costing (TC) strategy. We present both
the structure and subsystems of such a TC-based SDSS. To effectively accomplish
strategic goals, such an SDSS can and should be incorporated into a firm's enterprise
system. The TC-based SDSS integrates transactions with strategies and therefore
provides an excellent model for enhancing the decision support capabilities of enterprise
systems. Indeed, the development of such an integrated enterprise system will be the next
logical step following the research reported here.

IMAGE ILLUSTRATION 25

FIGURE 2

IMAGE ILLUSTRATION 28

FIGURE 3
REFERENCE

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AUTHOR_AFFILIATION

JUUN-MIN LEE

Fu-Jen Catholic University

Taipei, Taiwan

AUTHOR_AFFILIATION

INJAZZ CHEN

Cleveland State University

Cleveland, Ohio 44115

AUTHOR_AFFILIATION

RICHARD C.W. CHEN

Eastern Kentucky University

Richmond, Kentucky 40475

AUTHOR_AFFILIATION

CHEN H. CHUNG

University of Kentucky

Lexington, Kentucky 40506-0034

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