Kotetsu, Ltd. (A): Target Costing System

Kotetsu Lid was one of Japan's largest heavy industrial manufacturers. Founded in 1917 as part of the Takeuchi Mining Co., Kotetsu Ironworks separated from its parent in 1921 to become Kotetsu Lid By 1991, Kotetsu was a large international firm with revenues of 989 billion and met some of 131 billion. The company was organized along three major lines of business: Construction equipment, industrial machinery, and electronic-applied products. Together these three Times of business generated about 80% of corporate revenues. Other operations, which accounted for the remaining 20% of corporate revenues, included construction, unit housing, chemicals and plastics, and software development. Construction equipment and industrial machinery were considered core businesses while electronics applied products and other operations were considered new businesses,

In 1989, the company adopted a "3G" strategy of growth, globalization, and group diversification. The growth objective required all divisions to expand aggressively, with 1995 sales expected to reach V1.4 trillion. The globalization objective was to achieve worldwide production by the year 2000. In 1993. the firm's equipment was used in over 160 countries and was manufactured on three continents in Il countries. The group diversification objective sought to aggressively develop hree new business areas: electronics, plastics, and robotics. By the year 2000, the firm expected all Deconstruction products, including these three areas, to account for 50% of group revenues.

Construction Equipment

Kotetsu was the world's second-largest manufacturer of a complete line of construction equipment. The firm's product line contained over 300 models, including bulldozers, hydraulic excavators, wheel loaders, and dump trucks. With a more than 30% share of the domestic excavator market, Kotetsu was the largest player in the Japanese market. There were four other major players in the Japanese market: Hitachi, with just under 30% of the market; Kobelco, with about 15%; Caterpillar Mitsubishi, with about 12.5%; and Sumitomo, with under 10%. Only Kotetsu and Caterpillar Mitsubishi produced both bulldozers and excavators. The other three firms produced only The number of competitors in the excavator market reflected the large market for those products in Japan. In the early 1990s, Japan represented over 50% of the world market for excavators; this was due to the mix of construction projects in that country. Most Japanese construction projects were in urban settings and were relatively small in size. Excavators were more practical than bulldozers for such applications because they were more versatile and less expensive. For example, excavators could perform applications such as digging, carrying, moving, and loading dirt, while bulldozers could only move dirt.

The Product Development Process

and Design for Manufacturability Cost Studies

The product development process at Kotetsu lasted two years on average. If the redesign was relatively minor, the process might take as little as six months, while complete redesigns might take as long as three years. The process contained four major stages: product planning, design, trial production (including testing), and preparation for full production.

The Product Planning Stage

The product planning process, which was last updated in 1981, began with the preparation of a long-range development plan. This plan, prepared at the same time as the firm's long-range production and sales plans, described the mix of products that Kotetsu expected to sell over the next five to ten years. For products that had yet to be designed, the plan described their functionality in conceptual terms only. The conceptual designs of these products were then developed before they entered the design stage. These conceptual designs consisted of detailed descriptions of the structure of the major subassemblies.

The Design Stage

The objective of the design stage of product development was to prepare the product for prototype production. The design phase consisted of three major steps: first, a conceptual drawing of the product: second, layout drawings for the product and third, detailed parts drawings. During the first step, the first of four design-for-manufacturability studies (the A study) was conducted. The A study evaluated the feasibility of achieving the target cost and the overall manufacturability of the design (Exhibit 1 outlines the major objectives of the A study).

The A study culminated in a meeting attended by the product manager, the design managers, and the production managers of the plants at which the product would be produced. If concerns about the product's design were voiced at this meeting, further analysis of its design was undertaken. Once the product passed through this evaluation stage, layout drawings were produced.

The layout drawings contained a more detailed description of the product and its subassemblies. The completion of the layout drawings allowed the second, or B, study to be conducted. This study evaluated in more detail the firm's ability to achieve the target cost (Exhibit 2 outlines the major objectives of the B study).

Once the product passed this hurdle, the preparation of the parts drawings was approved. The parts drawings allowed the third, or C, study to be undertaken. The purpose of this study was to ensure that the product could indeed be built at the target cost and to confirm the actual manufacturing process and the facilities at which the product would be manufactured (Exhibit 3 outlines the major objectives of the study). After the study, a meeting of the development committee authorized prototype production. This committee consisted of the directors of the three technical divisions, the executive managing director of the corporation, the managing directors of both the domestic and overseas sales divisions, and the manager of related departments.

The Trial Production Stage

The objective of the trial production stage was to finalize the design of the product Trial production consisted of producing prototypes of each product and was conducted at the plants at which the product was to be manufactured. The completion of trial production allowed the final, or D. study to be carried out (Exhibit 4 summarizes the major objectives of the D study). This study examined the ease of production and assembly of the new product and confirmed its quality. If any problems were encountered, a Trial-Manufacture Problem Document was issued. This document identified all of the problems that had to be resolved before mass production could commence (e.g. design changes to improve the ease of manufacturability and reduce assembly time). In addition, expected production costs were estimated at this time. After trial production was completed, the prototypes were subjected to a series of comprehensive tests designed to ensure the quality and durability of the final product. Any problems encountered during this testing phase were fixed before the product was prepared for full production,

The Preparation for Full Production Stage

Once the product achieved the desired quality targets, results of the trial production, estimates of final target costs, and the various studies were provided to the marketing committee for final approval to move into mass production. The marketing committee was the most senior committee in the firm. It consisted of the president, executive managing director, the managing directors of the technical and sales divisions, the plant managers, and the product manager. Once approved by this committee, the product was readied for full production. The production drawings were prepared, and the pre-production plans were developed. As part of the pre-production plans, any potential problems identified in the D study were confirmed and rectified. After this step, the product was released for mass production.

Reducing the Time to Market

Players in the highly competitive market for excavators and bulldozers had begun to compete based on the time it took to get new products to market. Part of Kotetsu's plan to improve its design for manufacturing was to change its relationship with its suppliers. In 1993, Kotetsu manufactured about 30% of its products, designed and subcontracted another 50%, and purchased from outside suppliers the remaining 20%. The firm set target costs for the subcomponents manufactured by its suppliers and expected its suppliers to find ways to achieve these targets. Though target costs were supposed to be negotiated with suppliers, Kotetsu management was concerned that these negotiations were relatively one-sided. Additionally, management felt that the suppliers were brought into the negotiations too late in the design process. To allow the suppliers to have greater input into the design process, Kotetsu initiated periodic meetings between the suppliers' research and development staff and its own. The aim of these meetings was to integrate the research and development efforts of the two groups, allow suppliers to provide input much earlier in the design process, and help ensure that target cost negotiations were more substantive.

Target Costing

Throughout the product development process, target costs played a critical role in ensuring that the product would be profitable when released for mass production. The preliminary target costs used in the long-range development plan for major subassemblies, such as the engine, power train, and cooling system, were developed from prior experience with similar subassemblies and discussions with production and engineering.

These preliminary target costs or target values, as they were known, were used to help identify when the application of cost reduction techniques was required. Three different cost reduction techniques were used at Kotetsu: design analysis, functional analysis, and productivity analysis. Design analysis was used to identify the approximate structure of the major subassemblies in new products; the other two techniques were used to identify target costs for the subassemblies. Design analysis involved identifying alternative designs for major subassemblies and selecting between them. Once the design approach for the major subassemblies was identified, their target costs were determined using either functional or productivity analysis, depending on who was responsible for designing the subassembly. Functional analysis, a procedure for identifying the target cost of a subassembly based upon its functional characteristics, was used for parts designed and produced outside of Kotetsu (such as cooling systems, hydraulic devices, and electrical subassemblies) because this procedure did not rely upon detailed knowledge of the production process. Productivity analysis, a procedure for identifying the target cost of a subcomponent based upon its manufacturing process, required more in-depth knowledge of the production process, and was therefore used for subassemblies designed by Kotetsu (such as vehicle mainframes, buckets, and gears) and either manufactured by Kotetsu or by one of its subcontractors.

Design Analysis

Product engineers were expected to identify several design alternatives for each major subassembly of a new product. Two factors were considered when choosing between these alternatives: quality and cost. A new design alternative was only adopted if it achieved both the desired levels of quality and cost. Frequently, one of the alternatives proposed produced a higher quality product but at a higher cost. The product engineers then explored ways to manufacture the higher quality alternative at a lower cost. If a cost-effective way to implement the new alternative was identified, then it was adopted; otherwise, the alternative was abandoned or subject to further study for future applications.

The process of design analysis at Kotetsu can be illustrated by a change in the way the engine and torque converter, transmission, and steering clutch and brakes were positioned in the firm's larger bulldozers. In the old design, these three modules were physically separate. This approach, however, required 86 hours to mount and dismount these modules during maintenance. Kotetsu's customers had identified this mount/dismount time as a critical factor when they selected a bulldozer.

Design analysis identified two different ways to position the three components. The first approach integrated the three modules into two, one consisting of the engine and torque converter and the other the transmission and steering clutch and brake modules. The integration of the transmission and steering clutch and brake modules into a single module reduced the mount/dismount time to 44 hours. The second approach also integrated the three modules into two, but this time the torque converter, transmission, steering clutch and brakes were integrated into a single module. This approach had the advantage of removing the need to change the oil, thereby reducing the mount dismount time to 33 hours (see Exhibit 5). Unfortunately, both of the new design alternatives were more expensive than the old design; the fastest design was also the most expensive.

This conflict between quality and cost was resolved by changing the way the ripper mounting bracket was attached to the bulldozer. Bulldozers were used for several tasks, and changeable attachments increased their versatility. For example, rippers were used for breaking up bard surfaces while dozers were used for removing loose material. The ripper mounting bracket enabled the ripper to be attached to the mainframe. The new approach allowed the mounting bracket to be welded, as opposed to bolted, to the mainframe. Welding was cheaper than bolting and the savings equaled the additional cost of adopting the alternative design of the engine, transmission, and torque convertor.

Welding, while less expensive than bolting, required that every bulldozer have a mounting bracket attached. Previously, Kotetsu was able to sell bulldozers with or without an attached mounting bracket. The effective cost savings from adopting the new attachment approach and welding the mounting bracket thus depended on the percentage of bulldozers that were ordered with mounting brackets. This mounting ratio varied depending upon the size of the bulldozer. the larger the bulldozer, the higher the ratio. When the mounting ratio was considered, the new approach was cheaper for large bulldozers but more expensive for small ones. Consequently, the new configuration of the engine, transmission, and convertor and the welded ripper mounting bracket approach was adopted for large bulldozers but not for small ones.

Functional Analysis

The process of functional analysis at Kotetsu can be illustrated by the development of the target cost of an excavator cooling system. The process began with an analysis of the functions of the cooling system and how they were achieved. The primary function of the cooling system was identified as its cooling capacity; secondary functions included how quickly it started cooling after the engine was first switched on and how stable a temperature it maintained.

The determinants of cooling capacity were ranked in the order of their importance. The most important determinant of cooling capacity was identified as the surface area of the radiator. The second most important determinant was the size of the fan, followed by the rotation speed of the fan, the volume of water in the system, and the ambient air temperature,

The functional analysis began by plotting the cooling capacity versus the radiator surface area for all existing products that used the same type of cooling system. This information was maintained in functional tables. From this plot the average and minimum lines for existing equipment were determined. The average line was determined using linear regression and the minimum line was drawn so that it passed through the most efficient cooling systems. The required cooling capacity for the new model was used to identify the minimum cooling area required according to the best designs, the minimum cooling area was that which generated the desired cooling capacity on the minimum line (see Figure 1).

The target cost for the cooling system was determined by a similar process, using surface area versus cost information for existing products. This information was maintained in functional cost tables. A graph of the cost of cooling systems against their surface area was plotted for all existing models using the same cooling technology. The average cost per surface area was determined using linear regression. The minimum cost line was again drawn passing through the most cost-efficient designs. The minimum surface area identified from the cooling capacity/radiator surface area analysis was used to identify the minimum cost of the new cooling system. This minimum cost for the minimum radiator surface area became the target cost for the radiator (see Figure 2).

The same techniques were used generate target costs for the other major components of the cooling system. For example, the target cost of the fan in the cooling system was determined by plotting the size of fan against cooling capacity. Identifying the average and minimum lines for the relation between fan size and cooling capacity. The minimum fan size-to-cooling capacity line was used to identify the minimum fan size. A plot of the cost of fans versus fan size was used to determine the minimum cost/size line and hence the target cost of the fan. This process was repeated for all major components of the cooling system.

The functional analysis approach was modified for components such as shafts, where the function could be approximated by a simple physical measure such as the weight of the component. The function of the shaft was to connect the rotating output of the transmission to the wheels: the weight of the shaft identified the torque that it was able to handle. A shall weight cost table was used to develop a plot of the weight of shafts in existing products against their cost. From this plot, the average and minimum shall weight/cost lines were identified and hence the target cost of the shaft. The target cost was the shaft cost predicted by the minimum cost line.

Productivity Analysis

Productivity analysis was used for major subassemblies designed by Kotetsu. At the heart of this analysis was a set of tables that identified the cost of each production step as a function of its physical characteristics. For example, information was maintained about the cost of each type of material, the weight required by each design, the cost per meter of welding, and the length of weld required by each subassembly.

In productivity analysis, the major steps in the production process of the new subassembly were analyzed and the sum of their cost compared to the subassemblies' target cost. If the expected cost was too high, the section leaders responsible for each step in the production process were asked to identify a cost reduction target for each step.

Ultimate responsibility for these cost reduction targets lay with the product manager, who was responsible for ensuring that the new product successfully entered production. If the initial aggregated cost reductions were insufficient to allow the subassembly to be manufactured for its target cost, then the product manager and the production staff negotiated to increase the expected productivity savings. The final aggregation of the negotiated cost reduction targets provided the latest estimate of the subassemblies' target cost.

The process of productivity analysis at Kotetsu can be illustrated by the redesign of a mounting socket in the mainframes of the firm's bulldozers. In the old design, the mounting socket consisted of a hole drilled through the body of the mainframe. This design was simple to manufacture but had the drawback of creating a stress zone around the hole. To ensure that the mounting socket was strong enough, that section of the mainframe had to be manufactured out of expensive, high-grade materials. Productivity analysis had identified the reduction of the level of high-grade material in the mainframe as one way to reduce costs. The new design consisted of welding to the vehicle mainframe mounting bracket that contained the mounting socket hole. The new mounting unit was designed to reduce the strain imposed on the mainframe so that normal-grade steel could be used.

Exhibit 1 Purpose of the A Study

a)Evaluation of prospects to achieve the cost target (Planning & Coordination Departments and Purchasing Department)

b)Evaluation of number of basic specifications and fastening capability of attachments (Planning & Coordination Department of each plant)

c)Evaluation of manufacturing possibility through current facilities and current techniques and confirmation of incorporating Production Technology AD Research Outcomes into products (Manufacturing Departments)

d)Evaluation of timing required for implementation of new techniques and new facilities (Manufacturing Departments)

e)Evaluation of whether main components and parts should be manufactured in-house or through outside contractors (Manufacturing Department and Purchasing Department)

f)Evaluation of problems associated with purchasing parts (Purchasing Department)

g)Evaluation of problems with the transportation of products (Purchasing Department)

h)Evaluation of periods required for solution of problems (1) and (g) above (Purchasing Department)

Exhibit 2 Purpose of the B Study

a)Follow up A study manufacturability study results (various related departments)

b)Evaluation of interchangeability and common ratios of use (Planning & Coordination Department of each plant)

c)Evaluation of VE Improvement Plan (Planning & Coordination Department of each plant, Manufacturing Departments, and Purchasing Department)

d)Evaluation of work lines for main parts (Manufacturing Departments)

e)Extraction of items to improve process capability in producing main components and main parts (Manufacturing Departments and Purchasing Department)

f)Evaluation of time required for mass-production preparation (Manufacturing Departments)

g)Selection of suppliers/subcontractors (Purchasing Department)

Exhibit 3 Purpose of the C Study

a)Extraction of manufacturing-process improvement items (Manufacturing Departments and Purchasing Department)

b)Evaluation of facilitating measures for work and assembly (Manufacturing Departments and Purchasing Department)

c)Confirmation of specifications for purchasing parts (Purchasing Department)

d)Extraction of mass-production preparation items (Manufacturing Departments and Purchasing Department)

Exhibit 4 Purpose of the D Study

Manufacturing Departments and Purchasing Department shall, during the process of trial-manufacture and quality confirmation, evaluate the process capability and other necessary matters and, if there is any discrepancy, issue a Trial-Manufacture Problem Document.

Exhibit 5 Design Analysis Example Mount/ Design Dismount Modules Time Existing 86 Hours Engine and Steering Clutch Approach Torque Converta Transmission and Brakes First Proposed 44 Hours Engine and Transmission, Steering Clutch Tongue Convertor and Brion Approach Second Proposed Ergha Torque Converter, Transmission, 33 Hours Steering Clutch, and Brakes ApproachFigure 1 Cooling Capacity versus Radiator Capacity Average Line Minimum Line Target Area Desired Capacity COOLING CAPACITYFigure 2 Radiator Capacity versus Cost Average Line Minimum HOOO Line Target Cost Target Area RADIATOR CAPACITY