ABSTRACT
Component-level target costing sets the selling prices of the components manufactured by the firm's suppliers and focuses supplier creativity on finding ways to design components at low cost. It uses inter organizational costing to achieve this objective by opening new communication channels among suppliers, customers, and product designers. Target costing provides a powerful mechanism to discipline suppliers by allowing the firm to set the selling prices of the components they supply. The component-level target costing process consists of three major blocks. The first uses the component cost history as the starting point for estimating the new component-level target costs. The second applies the firm's supplier-base objectives to the selection of suppliers in general. The third deals with the selection of the supplier for a given component. Suppliers are selected based on three criteria: the competitiveness of their bids, their reputation, and the degree of innovation they have brought to the component.
