To decide how it should respond to the threat that Bandix poses to its S3 lens business,Plastim’s management works through the five-step decision-making process
Step 1: Identify the problem and uncertainties. The problem is clear: If Plastim wants to retain the Giovanni business for S3 lenses and make a profit, it must find a way to reduce the price and costs of the S3 lens. The two major uncertainties Plastim faces are (1) whether Plastim’s technology and processes for the S3 lens are competitive with Bandix’s and (2) whether the S3 lens is overcosted by the simple costing system.
Step 2: Obtain information. Management asks a team of its design and process engineers to analyze and evaluate the design, manufacturing, and distribution operations for the S3 lens. The team is very confident that the technology and processes for the S3 lens are not inferior to those of Bandix and other competitors because Plastim has many years of experience in manufacturing and distributing the S3 with a history and culture of continuous process improvements. If anything, the team is less certain about Plastim’s capabilities in manufacturing and distributing complex lenses, because it only recently started making this type of lens. Given these doubts, management is happy that Giovanni Motors considers the price of the CL5 lens to be competitive. It is somewhat of a puzzle, though, how at the currently budgeted prices, Plastim is expected to earn a very large profit margin percentage (operating income ÷ revenues) on the CL5 lenses and a small profit margin on the S3 lenses:
Step 1: Identify the problem and uncertainties. The problem is clear: If Plastim wants to retain the Giovanni business for S3 lenses and make a profit, it must find a way to reduce the price and costs of the S3 lens. The two major uncertainties Plastim faces are (1) whether Plastim’s technology and processes for the S3 lens are competitive with Bandix’s and (2) whether the S3 lens is overcosted by the simple costing system.
Step 2: Obtain information. Management asks a team of its design and process engineers to analyze and evaluate the design, manufacturing, and distribution operations for the S3 lens. The team is very confident that the technology and processes for the S3 lens are not inferior to those of Bandix and other competitors because Plastim has many years of experience in manufacturing and distributing the S3 with a history and culture of continuous process improvements. If anything, the team is less certain about Plastim’s capabilities in manufacturing and distributing complex lenses, because it only recently started making this type of lens. Given these doubts, management is happy that Giovanni Motors considers the price of the CL5 lens to be competitive. It is somewhat of a puzzle, though, how at the currently budgeted prices, Plastim is expected to earn a very large profit margin percentage (operating income ÷ revenues) on the CL5 lenses and a small profit margin on the S3 lenses:
As it continues to gather information, Plastim’s management begins to ponder why the profit margins (and process) are under so much pressure for the S3 lens, where the company has strong capabilities, but high on the newer, less-established CL5 lens. Plastim is not deliberately charging a low price for S3, so management starts to believe that perhaps the problem lies with its costing system. Plastim’s simple costing system may be overcosting the simple S3 lens (assigning too much cost to it) and undercosting the complex CL5 lens (assigning too little cost to it).
Step 3: Make predictions about the future. Plastim’s key challenge is to get a better estimate of what it will cost to design, make, and distribute the S3 and CL5 lenses. Management is fairly confident about the direct material and direct manufacturing labor costs of each lens because these costs are easily traced to the lenses. But management is quite concerned about how accurately the simple costing system measures the indirect resources used by each type of lens. It believes it can do much better. At the same time, management wants to ensure that no biases enter its thinking. In particular, it wants to be careful that the desire to be competitive on the S3 lens should not lead to assumptions that bias in favor of lowering costs of the S3 lens.
Step 4: Make decisions by choosing among alternatives. On the basis of predicted costs, and taking into account how Bandix might respond, Plastim’s managers must decide whether they should bid for Giovanni Motors’ S3 lens business and if they do bid, what price they should offer.
Step 3: Make predictions about the future. Plastim’s key challenge is to get a better estimate of what it will cost to design, make, and distribute the S3 and CL5 lenses. Management is fairly confident about the direct material and direct manufacturing labor costs of each lens because these costs are easily traced to the lenses. But management is quite concerned about how accurately the simple costing system measures the indirect resources used by each type of lens. It believes it can do much better. At the same time, management wants to ensure that no biases enter its thinking. In particular, it wants to be careful that the desire to be competitive on the S3 lens should not lead to assumptions that bias in favor of lowering costs of the S3 lens.
Step 4: Make decisions by choosing among alternatives. On the basis of predicted costs, and taking into account how Bandix might respond, Plastim’s managers must decide whether they should bid for Giovanni Motors’ S3 lens business and if they do bid, what price they should offer.
Step 5: Implement the decision, evaluate performance, and learn. If Plastim bids and wins Giovanni’s S3 lens business, it must compare actual costs, as it makes and ships S3 lenses, to predicted costs and learn why actual costs deviate from predicted costs. Suchevaluation and learning form the basis for future improvements.
No comments:
Post a Comment