Applying the Five-Step Decision-Making Process at Plastim

To decide how it should respond to the threat that Bandix poses to its S3 lens business, Plastim’s managers work through the five-step decision-making process introduced in Chapter 1.

  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 its technology and processes for the S3 lens are competitive with Bandix’s and (2) whether Plastim’s S3 lens is overcosted by the simple costing system.
  2. OBTAIN INFORMATION. Senior management asks a team of 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 lens with a history and culture of continuous process improvements. 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, senior management is happy that Giovanni Motors considers the price of the C5 lens to be competitive. Plastim’s managers are puzzled, though, by how, at the currently budgeted prices, Plastim is expected to earn a very large profit margin percentage (operating income ÷ revenues) on the C5 lenses and a small profit margin percentage on the S3 lenses:

<p>A table gives profit margin percentage expectations for Plastim.</p>

The table depicts revenues, total costs, operating income, and profit margin percentage for 60,000 simple lenses (both the total and per unit), 15,000 complex lenses (both the total and per unit), and the total for both kinds of lenses. The details of the table are as follows:

  1. Revenues
    • Simple lenses (S3), total: 3,780,000 dollars
    • Simple lenses (S3), per unit (total divided by 60,000): 63.00 dollars
    • Complex lenses (C5), total: 2,055,000 dollars
    • Complex lenses (C5), per unit (total divided by 15,000): 137.00 dollars
    • Total (simple lenses total plus complex lenses total): 5,835,000 dollars
  1. Total costs
    • Simple lenses (S3), total: 3,525,000 dollars
    • Simple lenses (S3), per unit (total divided by 60,000): 58.75 dollars
    • Complex lenses (C5), total: 1,455,000 dollars
    • Complex lenses (C5), per unit (total divided by 15,000): 97.00 dollars
    • Total (simple lenses total plus complex lenses total): 4,980,000 dollars
  1. Operating income
    • Simple lenses (S3), total: 255,000 dollars
    • Simple lenses (S3), per unit (total divided by 60,000): 4.25 dollars
    • Complex lenses (C5), total: 600,000 dollars
    • Complex lenses (C5), per unit (total divided by 15,000): 40.00 dollars
    • Total (simple lenses total plus complex lenses total): 855,000 dollars
  1. Profit margin percentage
    • Simple lenses (S3), per unit (total divided by 60,000): 6.75 percent
    • Complex lenses (C5), per unit (total divided by 15,000): 29.20 percent

 

 

  1. As they continue to gather information, Plastim’s managers begin to ponder why the profit margins are under so much pressure for the S3 lens, where the company has strong capabilities, but not on the newer, less-established C5 lens. Plastim is not deliberately charging a low price for S3, so managers begin to evaluate the costing system. Plastim’s simple costing system may be overcosting the simple S3 lens (assigning too much cost to it) and undercosting the complex C5 lens (assigning too little cost to it).
  1. 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 C5 lenses. Managers are fairly confident about the direct material and direct manufacturing labor cost of each lens because these costs are easily traced to the lenses. Of greater concern is how accurately the simple costing system measures the indirect resources used by each type of lens. The managers believe the costing system can be substantially improved.
  1. Even as they come to this conclusion, managers want to avoid biased thinking. In particular, they want to be careful that the desire to be competitive on the S3 lens does not lead to assumptions that bias them in favor of lowering costs of the S3 lens.
  1. 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.
  2. 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 the S3 lenses to predicted costs and learn why actual costs deviate from predicted costs. Such evaluation and learning form the basis for future improvements.
  1. The next few sections focus on Steps 3, 4, and 5: (3) how Plastim improves the allocation of indirect costs to the S3 and C5 lenses; (4) how it uses these predictions to bid for the S3 lens business; and (5) how it evaluates performance, makes product design and process improvements, and learns using the new system.