A REVIEW OF THE LITERATURE ON COST MANAGEMENT

A Review of the Literature on Cost Management



A Review of the Literature on Cost Management

Introduction

A significant portion of the profits that a product generates over its life is determined before the product reaches the market (Wheelwright and Clark 1992; Yli-Renko et al. 2001). During the product development stage, the organization designs the features that (1) give the product an edge over competing offerings and (2) affect the costs that will shape profit margins. Product design significantly affects the revenue side-technological performance, customer appeal, and timely market introduction-before the first unit is sold. The cost side follows a similar pattern; as a rule of thumb, 80 percent of the costs are engineered in during product development (Blanchard 1978; Cooper and Slagmulder 1997).

This paper examines practices other than target costing that high-technology companies use to manage costs during product development and provides tentative explanations for the desirability of these practices. These practices manage costs during product development but around the development team rather than inside it as target costing does. Following Young's (1999) classification of field research, the paper also intends to "raise new research questions."

Moving cost management efforts from the production stage to the product development stage translates into larger profits because cost reduction advantages accrue from the first unit. It also enables companies to deploy R&D resources to more innovative ideas, instead of modifying existing designs to reduce costs. Unless new knowledge about the technology or the market is gathered or new components become available, cost reduction projects after product introduction can be interpreted as quality problems (Anderson and Sedatole 1998; Carr and Tyson 1992). These cost reduction efforts can be compared to the costs associated with the rework of finished goods in manufacturing settings (Cole 1998). Finally, managing costs during the development stage-while the design is still fluid-is usually easier and cheaper than after the product is introduced (Ulrich and Eppinger 2000). Thus, managing costs during product development emerges as an important process to increase the profitability of future products. But product development projects face competing demands, and in some instances, focusing the attention of team members on product costs during product development does not generate the highest return.

Difficulties in Managing Costs during Product Development

Two forces help explain the difficulty of managing product costs during the development phase. First, technology challenges, fast time-to-market demands, and the complexity of managing knowledge located in different places inside and outside the organization limit the attention that product development teams can devote to cost considerations (Koga 1999). Cost reduction initiatives often get postponed until the product reaches the manufacturing stage, when price pressure from the market and the need to keep attractive margins redirects attention to costs.

The second force is the complexity of modeling the cost impact of product design decisions on shared resources such as logistics, customer support, or quality departments (Cooper and Kaplan 1997). Without appropriate models of cost behavior, design decisions to lower the costs for each particular product may lead to high ...