Striking the right balance between price and an appealing product concept is a major challenge for automobile manufacturers. During their deliberations in this regard, target cost management plays an important role as an instrument for market-oriented cost planning, management, and monitoring. The question here is not, “How much will a product cost?”; far more important is the consideration, “How much can we charge for the product?” At the core of this issue is the determination of a competitive market price based on customer requirements while keeping in mind the envisioned profit margin (Cf. Horváth, P./ Seidenschwarz, W.(1992): Zielkostenmanagement, in Controlling, Volume 4, 1992, Issue 3, p. 142.).

Future costs are determined right from the project initialization phase

Throughout their history, car makers have continuously expanded their product lines as a means of satisfying customer wishes with innovative products while remaining competitive. As complexity rises and cost pressures increase, the alignment of the process partners during the project initialization and concept phase, the time when the future costs are determined, becomes essential. A strict target cost management process during which development, purchasing, and controlling in particular are involved can assure transparency and security of planning in the early phase. The coordination of the involved corporate divisions with an orientation to benefits and costs lays the foundation for the achievement of the profitability targets of a series or of the entire company while simultaneously providing orientation to the customer.

As the fundamental decision to initiate a vehicle project is being made, the business case is calculated and a target cost framework is defined top down. Internal ideas and external customer expectations regarding a new product are appraised, and the target costs are derived from the expected sales and the planned profit on the basis of a retrograde analysis. In contrast, traditional cost management defines the sales price on the basis of existing costs, an approach which can lead to an excessive sales price and subsequently to a loss of competitiveness.