Target Cost Management: Lisa Jack Tells Louise Ross about Her Research Exploring the Potential for Those in the Food Supply Chain-From Farmers to Retailers-To Adopt TCM

By Ross, Louise | Financial Management (UK), October 2008 | Go to article overview

Target Cost Management: Lisa Jack Tells Louise Ross about Her Research Exploring the Potential for Those in the Food Supply Chain-From Farmers to Retailers-To Adopt TCM


Ross, Louise, Financial Management (UK)


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Food prices have risen significantly over the past year and consumers across the globe are feeling the effects. Some countries have responded by limiting exports or imposing price controls, while others have experienced food riots and stockpiling. Whether it's poor weather, the high price of oil or the increased production of biofuels that's to blame, it's obvious that the food industry is changing dramatically and this is causing price volatility. More than ever, the sector needs transparent and sustainable food supply chains, where the value added by the different participants is fairly rewarded.

What motivated your research?

CIMA funded a previous research project of mine, which found that farmers and other participants in the food supply chain were using an intuitive form of target cost management (TCM), working backwards from assumed market prices. And there's plenty of anecdotal evidence that the contracts between producers and various corporate partners (processors, distributors or retailers) are based on cost targets. I was intrigued about why this wasn't formalised into more explicit TCM practices.

What do you mean by target costing?

For a start that's not a term I use. Target costing implies a specific management accounting technique. I prefer "target cost management", which reflects that this is a broad management philosophy and a market- driven approach; so it's both a way of thinking strategically and of gaining competitive advantage. Users establish what the market will pay, then factor in what profit they need in the long term to arrive at the target cost. Then they examine their processes to see whether that target is achievable. Once committed to a project, they continually monitor and re-engineer processes to reduce costs.

I grew up in a farming village, but nobody there talked about the business in such manufacturing terms.

I doubt you'll find anyone in the sector using the terminology of the factory floor, but producers are increasingly commercial. Whereas previously profit may have been only one issue among considerations such as the traditions of the farm, husbandry and how the business would be passed to the next generation, recent research shows that producers' focus is now firmly on profits and margins. They recognise that machinery and labour are their key overheads and may need re-engineering. For example, arable farmers may move to low-tillage methods to reduce the required number of passes by vehicles; dairy farmers may redesign milking systems to increase throughput; and farms may form joint ventures to share machinery or labour.

Is this where TOM can help?

That's right. Prior research has identified a good fit between TCM and the decisions made by forward-looking strategic producers and it is intuitive enough to be attractive to these people. Agriculture has a long history of benchmarking and data collection, so the operational side won't be too much of a stretch. TCM also has a key role in negotiating fair terms in relationships between links in the supply chain. It facilitates sharing and learning to enhance the reputations and bottom lines of all businesses involved.

So why isn't TCM used more?

It might be partly because of prejudice. TCM is often seen as a manufacturing technique requiring detailed reports and monitoring, which originated in Japan and is, therefore, applicable only in highly structured management reporting chains. But, to be fair, there are also real problems with TCM in certain conditions: where prices are imposed by powerful customers; where projects are one-off jobs or bespoke; or where products are complex, possibly including components that are themselves subject to TCM

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Does that mean that TCM is viewed as unsuitable for farming?

Yes. There's an implication that TCM is somehow "office-based", which puts farmers off it. …

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