The New Product Development (NPD) process has undergone some revolutionary changes during the past few years due to the emerging global economic scenario. Much has been written about the Japanese practices in NPD. The main strength of the Japanese companies, especially the automotive companies, appears to be their ability to manage the costs effectively. One of the many NPD tools that have emerged from Japan is target costing, which is gaining popularity in industries in the West. In this market-oriented economy, organizations are striving to offer the customers maximum value at a minimum possible price. Target costing has emerged as one of the powerful tools to address the apparently paradoxical situation, i.e., to offer more value at a lesser price and still maintain profitability. Literature has seen target costing primarily as a technique for profit management. Firms use target costing to ensure that new products are profitable when launched. The primary objective of this article is to address the reliability issues which arise in a target costing process due to cost reduction pressures. An analysisFailure Modes and Effects Analysis (FMEA)has been proposed in this work to help the product designers to ensure product reliability during target costing process. This work claims uniqueness in the fact that most of the literature on target costing has focused on the managerial accounting aspects and only a few have attempted to study the implementation issues like reliability concerns. The proposed FMEA model for target costing has been validated by using a case study conducted at an automotive component manufacturing company based at Coimbatore, South India.

Ever since the World Trade Organization’s (WTO) globalization initiative, the manufacturing sector has undergone a paradigm shift in its attitude towards cost management. In particular, the global automotive sector has come across a complex and bewildering situation with mergers and acquisitions, threatening the survival of the very organization. In developed and developing countries like India, a traditional “Cost Plus” approach used to exist in the market, wherein a supplier gets a price increase from the automaker every year, based on the increase in the input costs (raw material, labor, etc.). However, during the past decade, most of the automakers (Toyota, Suzuki and Ford to quote a few) insisted price reductions from their global suppliers and hence, the component manufacturers realized that the market determines the price, and that their cost determines their profitability. Cost management during the New Product Development (NPD) process becomes critical and one question which arises is managing the costs effectively without affecting quality and reliability.

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