What is Kaizen Costing?

 This is a Japanese term for a number of cost reduction steps that can be used subsequent to issuing a new product design to the factory floor (first used in Toyota). Some of the activities in the kaizen costing methodology include the elimination of waste in the production, assembly, and distribution processes, as well as the elimination of work steps in any of these areas. Though these points are also covered in the value engineering phase of target costing, the initial value engineering may not uncover all possible cost savings. 

Thus, kaizen costing is really designed to repeat many of the value engineering steps for as long as a product is produced, constantly refining the process and thereby stripping out extra costs. The cost reductions resulting from kaizen costing are much smaller than those achieved with value engineering but are still worth the effort since competitive pressures are likely to force down the price of a product over time, and any possible cost savings allow a company to still attain its targeted profit margins while continuing to reduce cost.

The use of multiple generations of products to meet the challenge of gradually reducing costs. The market price continues to drop over time, which forces a company to use both target and kaizen costing to reduce costs and retain its profit margin. 

However, prices eventually drop to the point where margins are reduced, which forces the company to develop a new product with lower initial costs and for which kaizen costing can again be used to further reduce costs. This pattern may be repeated many times as a company forces its costs down through successive generations of products. The exact timing of a switch to a new product is easy to determine well in advance since the returns from kaizen costing follow a trend line of gradually shrinking savings and prices also follow a predictable downward track, plotting these two trend lines into the future reveals when a new  generation of product must be ready for production.
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