In my last series I have discussed about the application and adoption of Costing methods for the improvement of the economy and Mercedes Benz http://taxguru.in/chartered-accountant/cost-management-costing-methodskenya-2030-series-3.html. I have tried my best to portraying the picture the importance of the profession in the global context since India is keen on abolishing the same where as the history as well as the future of the global corporate/industries/economy is adopting more the costing methods. Today I will be sharing an historic research being conducted and adopted Cost Management and adopted costing methods by a Fortune 500 company named Toyota. The company made a historic turn around in the year of 1997-2000 by adopting costing methods. It not only adopted but made it a cultural change within the employees of the company to abide the same. The company did not have the liberty of making unique designs and model for country specific. They had one universal rule that they will launch and built unique models for every country irrespective of country specific models.
Before I get into the cost management details I would like to give short introduction to the company operating in Australia. Toyota Motor Corporation Australia Ltd (TMCA) is a fully-owned subsidiary of Toyota Japan. The Australian operations commenced in 1959 with the import of the LandCruiser, and in 1963 a passenger car assembly plant, which initially produced the Tiara, was opened at Port Melbourne, in Victoria, Australia. In 1987, the Camry superseded the Corona. Both the Corolla and Camry are now produced at the state-of-the-art plant at Altona (about 10 kilometers from Port Melbourne), which was commissioned on March 31, 1995. In addition to its domestic sales, TMCA supplied a number of markets overseas including Japan, New Zealand, Thailand, Malaysia, South Africa, Turkey and Oceania. In 1996 new markets opened in the Middle East (Saudi Arabia, United Arab Emirates, Oman, Kuwait, Bahrain and Qatar). TMCA began producing left-hand drive Camry cars for these new markets (cars in Australia are right-hand drive).
Toyota Australia competes with a number of importers from Korea (Hyundai, Kia and Daewoo),USA (Chrysler and Jeep) and Japan (Nissan, Mazda and Honda) in the year of 1997. The company was facing many problems which are as follows:
All these above problems created more challenges for the company .On the other side consumer demands were increasing in matching with the foot prints of increasing overseas market penetration like requiring options like air conditioning and power steering as standard equipment, as well as improved fuel efficiency and safety features), has meant that achieving high levels of cost efficiency is an important priority for the company. In 1998 the company took the step of to position themselves as one of Toyota’s global manufacturing and supply bases which required significant performance improvements. Tariff reductions had created additional pressures to achieve international standards in quality, cost and delivery performance. Also, the company needed to develop new export markets to justify the large investment by Toyota in a new plant. The company was planning to expand and become big. The company wanted to earn Australian dollars in terms of making its production cost competitive to the export markets in terms of automobile and parts and become No.1 in the production quality. But the group company of Toyota was having the plan of that by 1998, it was expecting that 60% of all vehicle sales for the group would originate outside Japan. Thus, the main objective for Toyota is to manage profitability from a global viewpoint and maximize group results rather than those of individual companies. Achieving this objective, inter alia, involves globalized design work, sharing design and cost information among partners and developing close partnerships with overseas suppliers from an early stage of product development. Well this prime target of any company to achieve group strengths and this place where the company implemented/adopted costing tools and cost management actively.
There was little scope of increasing prices to improve margins as the market and the company was facing intense pressure. Toyota was having the biggest challenge of increasing its competitiveness beyond its competitors. Hence the company adopted the following policies in term of cost management
While grilling into the cost planning the company adopted the value engineering and value analysis in the process of the production. This helped to design the products matching with the demand of the consumer. It helped to develop new and healthy relationship with the Supply Chain Management as Value Engineering helps to develop cost competitive designs. Another role of the VE is that replacing the existing production design and implementing it into long term product designs hence the cost savings achieved during production of the current vehicles may be used in cost savings plans for the new models.
Target costing was engineered into Value engineering process so that models of cars could be matching with the preference of demand matrix. In simple terms choosing the demand rankings and designing the cost of production accordingly. Target costing was implemented and extended between the cross divisional departments like engineering, purchasing and manufacturing so that stream lined process could be created. The most interesting part over here is that Target costing was not applied on the product alone but also on the departments so that cost benefit and cost competitiveness could be achieved. Now a question might come up how Target costing was applied to the departments. The information of the trade-offs that may be required to assess the viability of changes in design, material and assembly activities which entails the sharing of knowledge across the business. Also, the major cost saving initiatives arise from the engineering, purchasing and manufacturing functions, as staff in these area are in the best position to identify opportunities for cost savings, and initiate activities and changes that may reduce cost. This is way through which cost management and costing methods to develop a well cultured, knowledgeable MANPOWER.
Coming to the story of the culture of Cost Management one of the employee of Toyota said that buyers cost management strategies helps to’ IMPROVE THE SUPPLIERS PROFITABILITY’. Well Costing methods and its data analysis are not dangerous for the companies-they are helping other industries to improve jointly. Well India cost audit is not being given such high values but real truth is that the same data can be utilized in multiple industries to improve the company/business/industry. In the case of Toyota it was found that the employees has to formulate, plan and achieve individual cost targets buyers (Toyota),hence employees needs to have expertise knowledge for costing methods and including design variance estimation and the full estimation of the cost of a part. History says that Toyota staff have written various costing modules that are used to help buyers assess the impact of various improvements in supplier operations. For example, buyers can assess the cost impact of a 50 percent reduction in floor space. In most cases buyers have open access to suppliers’ costs. This is the place where it becomes Win-Win position for the Automobile manufacturer and as well as the Auto Ancillary industry. This resulted significant improvement for the purchasing department and inventory management which is one of the core areas of Cost Audit and Cost Management.
Standard costing helped the company to identify the loopholes and block same. One of the classic examples being given by the Toyota company employees which I quote directly “The company used to track paint as a total. We were saying cost per unit of the car for paint is roughly x dollars – but that wasn’t showing us anything. We would study the process for a month: what are we using, where are we using it, and where is the cost. We now set down usage targets and every month we track them, and inside the plant they’re tracking it every week. For example, a report is prepared by paint color – some paints are easier to apply and so on. What we were doing also is if we were having a problem with the paint application, we would rub the paint back to bare metal, then putting on another primer and another sealer. This led to a focus on re-paints. We asked quality control to go into the paint shop and start monitoring the process. Instead of worrying about the end usage, we concentrated on the process – if you control the process the usage is an outflow of it”.
The company started analysis the cost report to identify the cost control areas. Specific production areas may be targeted where there is the greatest potential for cost savings. For example, the paint shop has the highest energy consumption in terms of gas and electricity, so this provides a potential area for savings. This how the Toyota made its business competitive and improved its margin by reducing prices and gaining market share. Hence its proved dually that costing methods and cost reports has helped not only manufactures of automobile but also other ancillary industries in terms of the raw materials being supplied.
Remember that he level of competitiveness within the automotive industry is expected to increase in the future, due to tariff reductions and the ongoing cost improvements of competitors. But in India Cost Audit and Cost Methods are treated like inferior quality reports and tools. Rest is all know and I don’t need to repeat the same. My concern is only in one area does Indian government really known the use of reports and their utilities. Indian macro and its industries are at huge risk which might not be visible now but will be visible when dumping of overseas production will happen and domestic will lose to import.
Well all my previous and upcoming articles inspiration is being provided followed with necessary inputs by Mr. Amit Apte ,Mr.Vijendra Sharma & Mr.Sanjay Bharghav.
Global Macro Economic Researcher and Business Strategist
Master of Economics, MBA in International Business Management, ICWAI (Final)/CWM Final/Journalist