Optimisation approach to target costing under uncertainty with application to ICT-service

Abstract

Target costing is a modern approach applied during product development that defines cost targets for products and its components. These cost targets are driven by customer requirements and achievable revenues. The intention of this paper is the integration of target costing with modern concepts of modelling uncertainty and management of risk based on optimisation. Contrary to the traditional focus of target costing on cost targets, this paper prefers a strategy for achieving a target profit. Moreover, in this paper target costing is understood as a continuous process with incremental changes of cost drivers, product and component design as well as product prices. Therefore, the change in costs and profit with respect to aforementioned control parameters is modelled by linear approximations. Hence, improved decisions concerning design and prices are derived by linear programming models. In practice, information concerning product and component costs, demand or customer preferences are not given with certainty. Therefore, we apply a stochastic programming approach to manage the risk inherent in the target costing process. After a general presentation, we apply our approach to the provision of an information and communication technology service where the level of uncertainty is considerable.

Keywords:

• cost management
• optimisation
• risk management
• product design
• target costing

Acknowledgements

We would like to acknowledge Telenor ASA Trondheim (Norway) and particularly Josip Zoric for providing us with the practical case and useful knowledge concerning telecommunication services. We also like to thank two anonymous referees for suggestions that led to an improvement of this paper.