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Mercedes Benz AAV

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Lucien Ding

on 26 November 2013

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Transcript of Mercedes Benz AAV

Description of the target costing setting process at MB and factors involved in the overall process.


Is the target cost “final”? What are the advantages and possible constraints or impediments of the target costing approach at MB?
The accounting department serves as the
control mechanism
in the target costing process. On a monthly basis, actual production costs were compared with the standard costs developed during the cost estimation process to ensure costs would conform. The accountant’s role was to
provide data
that would be useful in analyzing previous performance against standard to
managers in future decision making. Knowing where costs are exceeding target is critical to manager’s success of achieving goals by making necessary changes quickly.

The role of the accounting department in the target costing process
MB used their supplier linkages to ensure their systems

of the
AAV development process
from the
concept phase
to the
production phase
. Decisions had to be made early in the development stages so suppliers were brought into the discussion early. MB used supplier knowledge to understand the
costs of the manufacturing process
tore down competitors’ products
and identifying components and their
related costs
. Combine with the
value engineering process
cost reduction
targets were established for each
function group
. Supplier linkages were used to develop function groups by which all components could be
grouped into and assigned costs
. Target costing was used in conjunction with suppliers’ knowledge to determine the costs of production on the
basis of MB's pricing strategy
so the AAV would earn the
desired profit
Supply chains and value engineering process in attaining target cost goals
The influences of competitive environment on the MB strategy and the lunch of AVV
1. Economic recession in 1990s
2. Product development and innovation
3. Price competition
4. Shorter product life cycles
5. Market share competition( BMW, Audi)
6. New segments (Sports Utility Vehicles market dominated by Jeep, Ford and GM)
7. New niches

The competitive global environment:
The process of achieving target cost for the AVV began with
an estimate of the existing cost for each function group
. The target costing was led by the cost planners who were
. Its manufacturing process relied on
high-value-added system suppliers
. To enhance function group effectiveness, suppliers were brought into the discussion at
an early stage
in the process. MB team members used
various indexes
to determine cost relationships. These indexes are constructed by the information from
, and
their own design team
. By using a streamlined management structure and the target costing process as a key management element, MB manufactured
the first production M-Class in 1997.
Question 1
Mercedes-Benz AAV
Target Costing

Lin Ding
Wenlei Xu
Chaitanya Kulkarni

Target Price
The first step
in the target costing process is to establish the AAV’s
target price
by analysis the market needs and competition.

MB spend a great deal of time employing sophisticated
market research
, to determine
what functions and features customers want and how much they might be willing to pay
for them.

Another major aspect of establishing the
target price is assessing what direct, or indirect, substitutes are available from competitors.
MB does this by estimating the cost of the competitors’ materials, simulating their conversion costs based on the
teardown analysis
Cross-functional Team
After determined
the target price
target profit margin
, MB take the several steps to achieve it.
First, MB established a
cross-functional team
that include
, and led by
cost planners
who were
, who could make reasonable estimates of costs that suppliers would incur in providing various systems.

Target Porfit Margin
Once MB has established the
target price
, a
target profit margin
should be calculated. Target profit margin in the case, comes from
NPV analysis
, which
suit the MB’s long-term strategic and financial objectives
resulting from the company’s profit planning efforts. That is,
return on sales objectives, earnings, return on invested capital and equity, and cash flows all may enter into the calculation of an appropriate target margin
. It also comes from the
MB’s own cost position
: MB is a not low-cost producer.
Value Engineering
Brought Suppliers at Early Stage
Second, because the AAV manufacturing process
relied on high-value-added systems suppliers
, MB
brought suppliers into the discussion at an early stage in the process
in order to enhance function group effectiveness.
Before the 1990 recession, Mercedes-Benz primarily operated in luxury car market. Due to the
economic recession
, the luxury car maker lost money for the first time and Mercedes-Benz struggled with

cost efficiency

material purchasing
, and problems in adapting to changing markets. In 1993, Mercedes had
suffered its worst sales
. In 1997, Mercedes-Benz introduced
M-Class All Activity Vehicle (AVV)
, which is the largest and most radical of MB’s new products. MB announced it would build its first passenger vehicle-manufacturing facility in United States to emphasize the company’s
globalization strategy
and move closer to its customers and markets. Mercedes-Benz decided
use target costing to design AVV
due to the competitive global environment.
Concept Phase
During the concept phase, market research revealed the
rapidly expanding market for sports utility vehicle
that was dominated by Jeep, Ford, and GM. In order to acquire project approval form the board of directors, team members estimated potential worldwide sales
rough cost
cash flow
of AVV.
Project Realization Phase
During project realization phase, Mercedes-Benz held
regular customer clinics
to know how customers received the new vehicle. MB
maintained quality standards
for components. They are not use target costing to produce the lowest price vehicle rather than
produce a vehicle that customer want and willing to pay for
. MB place the
design and testing team members in close physical proximity
to other functions within the project to promote fast communication and decision making because of changing dynamics.
During the production phase, the project was monitored by
annual updates of the NPV
, and
a three-year plan
was reported annually to the headquarters in Germany.
Monthly departmental meetings
were held to discuss actual cost performance compared with standards developed.
Production Phase
Background (Continued)
What was the competitive global environment and how did it influence the MB’s strategy, particularly in the launch of the AVV? (Specifically consider the Global Environment in which MB operates)
1. MB suffer its first loss in 1993
2. MB streamlined the core business, reduced parts and system complexity
3. MB started developing a range of new products in searching for additional market share, new segment, and new niches.
4. In 1992, MB started the concept about AVV.
5. Emphasize the company’s globalization strategy and desire to move closer to its customers and markets
6. MB United States International used function groups with representatives from every area of the company.
7. The AVV moved from concept to production only in 5 years.
8. Regular customer clinics were held to view the prototype
9. MB established simultaneous engineering programs with suppliers
10. Suppliers were brought into the discussion at an early stage in the process
11. Engineers are cost planners who to lead the target costing process

Finally, MB use
process to
examine the design of each function groups to determine the possibility of cost reduction
. To arrive at a product and process design is central to achieving the target cost.
Development and role of individual indexes in setting the target cost index
During the concept development phase, MB team members used
various importance indexes
help them determine critical performance, design, and cost relationships
for the AAV.
It helps managers in making
cost reduction decisions
by understand the
relationship of the importance of a function group to the target cost of that function group
Indexes less than one
may indicate a cost in excess of the perceived value of the function group. Opportunities for
cost reduction
consistent with customer demands may be identified and managed during the
early stages
of product development. Choices made during the
project realization phase
are largely irreversible during the
production phase
. Because of this, cost reduction decisions made by managers using
importance indexes
during the
realization phase
of a project are more likely to be successful than those used in future phases of the project.
The target cost remained
because of
changing dynamics
. Target cost should
change of designing and developing process
There are several advantages for MB to implement target-costing approach:
1. Foster partnerships with suppliers.

2. Minimized non value-added activities.

3. Break down barriers between departments.

4. Generate cost reduction and function enhancement.

Also, There are constraints:
1. It requires a strong market and customer orientation.

2. The implementation requires willingness to cooperate.

3. May reduce the quality of products due to the use of cheep components that may be of inferior quality.

3. What additional insights and suggestions could we provide the manager at M-B that may enable them to implement target pricing such that it would not only improve costs, but also provide an overall improvement in the bottom-line, particularly from the management aspects of planning, control and long-term strategy?

Are there other implications of the application of target costs, particularly behavioral? How should M-B address them?
Target costing requires a major change from the 'cost up, price up' approach to a price down, cost down' approach. This technique has key managerial implications. Some of the managerial implications in the key areas and suggestions for the same are as follows:
a) Planning:
The success of target costing relies heavily on comprehensive and detailed planning and financial analysis.
Target costing is a process which need involvement from virtually every department in the firm and also the suppliers and customers.
Training and educating the employees about target costing is critical.
The markets are changing at a faster rate and consumers' tastes and preferences are changing rapidly.
b) Control
The basis of target costing involves setting up a goal for costs and achieving it.
Periodic assessment actual costs verses the planned costs should be done and corrective measures should be taken to eliminate the discrepancies if any.
Important to track how well the financial and non-financial objectives are being achieved and are the demands and wants of the consumers' fulfilled.
MB should also monitor moves from its competitors:
MB's target costing objectives should be in alignment with the overall organizational strategy of MB.
Implementation of target costing may affect the approach towards costs.
MB should be consistent with its strategic objective to implement target costing which was not to produce the lowest cost vehicle in its class,
but to deliver products slightly expensive then the competitors' but the additional price should translate into greater perceived value on the part of the consumer.

MB should implement a Balance Score Card system to align all its activities to its vision and overall organizational strategy.

Long-term Strategy
Implementing Target costing is a big change for many companies and has major implications on organizational behavior.
Getting the real buy in from all the functional areas of the firm.
Over emphasis on planning and design phase may hamper the length of product development cycle.
Ability to think from different functional perspectives is critical.
Cross functional communication
Employee burnout
Organizational conflicts
Behavioral Implications:
Mergers, acquisitions, and consolidations continue to change the scope and size of many firms. Larger companies benefit from economies of scale and larger research and development departments, leading to lower production prices and increased competition. The companies have to match the lower manufacturing prices of the global competition and still offer the highest quality products customers demand. Target costing may serve as an effective solution in this scenario while developing new products, and minimizing costs.
Thanks !
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