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Chapter 8

Chapter 8 BU247.docx

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Wilfrid Laurier University
Greg Clark

BU247 Chapter 8 – Measuring and Managing Life-Cycle Costs Week 8 Managing Products Over Their Life Cycle -Companies that continually bring new products to the market quickly must also be concerned about the environmental impact from their innovation, as customers discard their now obsolete products -Societal concerns about pollution have caused companies such as Xerox, HP, and Sony to measure the total life-cycle costs of their products, including the impact of raw material extraction, energy consumption during use, and finally, salvage, recycling, and disposal -We refer to total-life-cycle costing (TLCC) as the approach companies now use to understand and manage all costs incurred in product design and development, through manufacturing, marketing, distribution, maintenance, service, and, finally, disposal -Known as “from the cradle to the grave” -Each part of a company’s value chain – new product development, production, distribution, marketing, sales, and post sales service and disposal – is typically managed by a different organizational function Research, Development, and Engineering Stage 1. Market research – emerging customers’ needs are assessed and ideas are generated for new products 2. Product design – scientists and engineers develop the technical specifications of products 3. Product development – the company creates features critical to customer satisfaction and designs prototypes, production processes, and any special tooling required Manufacturing Stage -Spends money on materials, labour, machinery, and indirect costs – to produce and distribute the product Post Sale Service and Disposal Stage -The actual service stage begins once the first unit of a product is in the hands of the customer -Three sub stages: 1. Rapid growth from the irst time the product is shipped through the growth stage of its sales 2. Transition from the peak of sales to the peak in the service cycle 3. Maturity rom the peak in the service cycle to the time of the last shipment made to a customer; disposal occurs at the end of a product`s life and lasts until the customer retires the final unit of a product -Disposal costs include those associated with eliminating any harmful effects associated with the end of a product’s useful life Target Costing -Helps engineers design new products that meet customers’ expectations and that can be manufactured at a desired cost -Important management accounting method for cost reduction during the design stage of a product’s life cycle and one that can explicitly help to manage total-life-cycle costs -After the product has been completely designed, the development team requests prices from raw materials and component suppliers, and production cost estimates from manufacturing engineers – this leads to the first estimate of the product’s cost -Target costing strives to actively reduce a product’s cost during its RD&E stage rather than wait until the product has been released into production to start the cost reduction, or kaizen process -Market research under target costing is not a single event as it often is under the traditional approach – BU247 Chapter 8 – Measuring and Managing Life-Cycle Costs Week 8 rather, the approach is customer driven, with customer input obtained continually throughout the process -Th product engineers attempt to design costs out of the product before design and development ends and manufacturing begins -Target costing uses the total-life-cycle concept by adopting the perspective of minimizing the cost of ownership
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