Target Pricing—A Challenge for Purchasing

One of the most controversial aspects of purchasing operations is proving cost reductions and cost savings. Target pricing and its adjunct, target costing, solve this problem. Coming from Japan where the concept is used extensively, these tools allow the buyer to set the price of materials—and using ESI and value engineering, the target price reduces the cost of materials in the product. In addition, other areas of waste are identified and eliminated. To reach this goal, it is necessary for the buyer to determine those areas in which price reduction must take place to meet the target without compromising the integrity of the product or the profitability for the supplier. This article defines target pricing and looks at options available to reduce product cost from the supplier. Target pricing and target costing are the concepts that operationalize the concepts of ESI, VE/VA, and partnering.