2.5 Closing the target cost gap
Target cost gap = Estimated product cost – Target cost
It is the difference between what an organisation thinks it can currently make a product for, in order to make a required profit.
Alternative product designs should be examined for potential areas of cost reduction that will not compromise the quality of the products.
Questions that a manufacturer may ask in order to close the gap include:
§ Can any materials be eliminated, e.g. cut down on packing materials?
§ Can a cheaper material be substituted without affecting quality?
§ Can labour savings be made, for example, by using lower skilled workers?
§ Can productivity be improved, for example, by improving motivation?
§ What production volume is needed to achieve economies of scales?
§ Could cost savings be made by reviewing the supply chain?
