Partline, a mechanical component manufacturer, is situated near Paris. At the outset of this fiscal year (April to April) in May the President made the year’s business plan and declaration address to the employees in the main auditorium. Part of that address was as follows:
“One of this year’s priorities is cost. It is essential that we all work to improve the Company’s cost situation. Our raw materials cost has risen by 3.5% in the past year. We cannot increase our prices above those of our competitors. We must therefore reduce all other operating costs and our performance to offset this increase.
I hope that you will all consider what you can do to bring our overall costs down.”
A few days after the President’s address, the manager of Logistics Control Division briefed the employees on the Division’s business plan for this financial year.
“Following the annual speech and declaration by the President, I have adopted ‘Operating Costs Reduction’ as the priority for the Logistics Control Division. This will be our contribution to offset the rise in raw material costs. Operating costs include all expenses associated with transporting and handling materials and components. Those costs for the division are currently € 12,000 higher than the monthly average for last fiscal year. Ideally therefore, I want you to achieve a 6% reduction in operating costs excluding payroll from last Financial Year’s level. Going forward I would ultimately like to achieve at least a 5% reduction year on year which will be included in the budget reviews during September.
The chart (over page) shows a comparison of last year’s costs. I want each of the Group Leaders to set targets for annual operating expenses in line with the company and division’s business expectations.
Each group leader will need to create a plan for the group’s cost reduction activities and present it at our next staff meeting. After we agree on your targets you can proceed with developing your plans.”
A couple of days later, Charles discussed the target for his group with Michael, a co-worker who previously held Charles’s job.
Charles: How should I set a cost-saving target?
Michael: I think you should apply what you’ve learned in the Problem Solving Training in April. Create a picture of the group’s situation. That will help you get a clear cost-saving focus.
Charles: I’m in charge of the Company’s vehicle fleet group. Ideally, the Division’s wants to reduce the operating costs not including payroll by 6%. Should that be my target?
Michael: Whoa! Wait up we don’t even know what the problem is yet and you’re your already setting a target! Let’s go through the process and then decide upon the target. Now, what is the first step we need to go through?
Charles: Step 1.0, Problem Clarification as I recall.
Michael: Good, and what are we trying to do here?
Charles: Understand what the gap is between the Ideal and Current Situation.
Michael: Excellent, so think about the Ideal Situation – where you need to be this year and the Current Situation where you were last year. By comparing the two you should see a gap hopefully.
Charles: Ok, and what about the Ultimate Goal?
Michael: Well, that’s where we are going, was anything mentioned about future expectations?
Charles: Ah, yes, 5% year on year to be included in the budget for next year.
Michael: Correct, you were listening well! So you also have an ultimate goal.
Charles: Yes, I can see it now, thanks for the advice, let me get to work.
Think about how you would answer the following Questions:-
Action Point :-
Hint – What Good Looks like for Step 1 – Problem Clarification
Answer Reveal for Step 1 – Problem Clarification
Evaluation for Step 1 – Problem Clarification
Your Evaluation Level :-
Summary – Key Learning points
Avoid common mistakes in the thinking way of step 1 :-