Simply put, because when you do, target costing becomes a reality. And with target costing, you can not only set, but achieve, realistic cost goals for key products. This is only achieved when you have good insight into end to end cost components from a raw material, energy, labour, and overhead perspective. And this is only achievable when you have the systems that allows you to gather real cost data right down to the raw materials, and not just average cost data from across buying organizations (that are used to feed statistical models).
Seven years ago today SI ran an article on how Target Costing Works and You can Do It Too! We quoted an article from the now-defunct Purchasing magazine on how purchasing learns cost modelling which noted that smart buyers are working with engineers, finance and suppliers to identify cost drivers in product development and eliminate them and that Whirlpol was able to close a gap of 30% between the target cost for a module on one product and the initial design cost.
We also noted that new players in the market, like Akoya (which was puchased by I-Cubed in 2014) and Apriori (which Whirlpool selected as a provider in 2013 [Source]) could be used to help set target costs as Akoya’s market intelligence and statistical models gave a decent target range and Apriori’s production cost models, when populated with raw material, energy, and overhead costs, gave an expected production cost.
But one thing these providers couldn’t necessarily do was figure out how low costs could go if the costs could be traced right down to raw material providers, which can only be done if the input component costs can be traced through the supply chain. But with a solution that allows all costs to be collected and correlated, aggregation and streamlining opportunities to be identified and captured, and high production / overhead costs to be identified, aggressive, but realistic target costs can be set and realized as the organization knows where to focus its cross functional teams. And that’s one of the big reasons why you want to get a grip on supply dynamics!