Target costing for supply chain management: An economic framework

Abstract

Facing mounting evidence of their inability to sustain competitive advantages in product quality, functionality, or cost, many companies have begun adopting the principles of supply chain management. However, to realize the benefits promised by this management innovation, companies must first discontinue reliance on deficient cost management practices. This article contends that both traditional and activity-based cost management practices are deficient, then offers an economic framework for replacing them in supply chains with target costing processes. The framework combines the two market variables, customer requirements and supply chain agility, to define strategies for performing target costing. The contents of these strategies set the key features of three unique target costing processes for supply chains. Thus, the article provides an economic rationale for applying target costing to supply chain management. © 2000 John Wiley & Sons, Inc.