Monday, November 12, 2007

Saving the Wrong Pennies

I am proud to be a capitalist. Having said that, capitalism can lead to some pretty stupid decisions.

Perhaps the stupidest mistake you can make is to save one more penny.

There's a famous story that John D. Rockefeller actually counted the number of drops of solder needed to make an oil barrel. After all, when you're making millions of barrels, the pennies add up.

Unfortunately, that story taken in isolation by an eager up-and-comer can lead to very bad results. It is very common for a business to set a standard and then begin cutting pennies here and there until they create a marginal product.

A marginal product is one with no tolerance for flaws. One drop of solder, more or less, can result in millions of leaking barrels.

Here's an example from the 21st century. About once every four months I go to the grocery store and there's leaking milk on the shelf. I believe that the company that makes the cartons has a training program that includes the famous story from Rockefeller. So every now and then, some schmoe tries to get ahead by reducing the glue in the cartons by one drop.

The result is that I now check the bottom of the milk carton before I put it in my basket. If it's leaking, I grab a plastic container from a different brand name. And I don't care what the cost is. I might pay twenty extra cents for milk, but I don't have to clean my refrigerator the next day.

Here's another example. I take a drug called Enbrel. It's an "injectable." (see here). It comes packaged in a little kit you need to assemble. Each little piece is sealed in plastic so it remains sterile. But they recently changed the plastic on one bit of packaging so that it's very thin. Still sealed, so still sterile. But now the plastic is so thin that the seal doesn't peal off easily. The result: it is now pretty easy to struggle with this package and send the "sterile" part rolling across the non-sterile counter.

You might argue: These are unintended consequences. OK. Unintended. But that doesn't mean they're difficult to foresee. In fact, these are obvious Unintended Consequences. That's very different from unforeseeable and unintended.


What has any of this to do with your business?

Consider this: Where do you count pennies and cut corners in order to squeeze another bit of profit?

Where might you have created a marginal product -- one that's truly on the margin between barely acceptable and not acceptable?

Alternatively, where do you come across as unnecessarily cheap?

When I first started my business I was telling my wife how expensive it is to park downtown. She said "I hope you're charging the clients for that." No. No I'm not. No one wants to spend $100/hr for tech support and get a reimbursement request for parking.

Of course we all need to make our businesses run better, and more efficiently.

Just don't get caught in the trap of saving the wrong pennies.

Don't live on the margin between acceptable and unacceptable. It doesn't take much to move well into the acceptable space.

1 comment:

  1. Anonymous11:10 AM

    Also the glue used in paper coffee cups is related to health hazards, especially the melamine used in coffee cups.
    For more information, visit


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