Mexican Ladders and the Process Edge

Monday, December 3rd, 2007

In Serious Play, Michael Schrage shares a story about Mexican ladders from Peter Keen’s The Process Edge to explain why you need to model the right thing to get the right results:

A leading Mexican manufacturer decided to reengineer how it built aluminum ladders. According to its sales and accounting model, the company had been making an operating profit of $4.50 per ladder. The reengineering initiative nearly doubled profits to $8.20 per ladder. Unfortunately, those profit figures proved meaningless. The reengineering had completely ignored the most critical cost issues because the company’s business model — and its accounting mechanisms — were flawed.

When the company switched to activity-based accounting to evaluate overhead, its managers were horrified to discover that the company’s legal expenses were higher for ladders than for any other product they manufactured. People who fell off ladders tended to sue the manufacturer. Those costs were crippling.

When the total litigation and settlement costs were tallied, the company discovered that it was losing almost $10 on every ladder that it made. And even after the reengineering initiative had slashed manufacturing costs by one third, it was losing more than $6 on every ladder.

With some legal finesse, the company found a way to offer its customers free accident insurance at a cost of just $2 per ladder.

Social Networking through Computer-Aided Design

Sunday, December 2nd, 2007

In Serious Play, Michael Schrage, of the MIT Media Lab, examines how organizations use models, simulations, and prototypes to stimulate innovation.

I enjoyed this anecdote about the Boeing 777′s then-new computer-aided design program and how it was misused:

Boeing’s new digital design infrastructure was so clever that engineers got computer-generated e-mail alerting them to “interferences” created by design conflicts. If the avionics team and the hydraulics team developed systems that competed for the same physical space in the digital simulation, for instance, CATIA alerted both groups to the conflict. the purpose was to settle conflicts before design prototype.

Much to their surprise, the 777 project’s managers discovered that several engineers deliberately built conflicts with other systems into their proposed designs. Sabotage? Rebellion against the new technology? Engineering humor? Abuse of the prototyping medium? No, the interferences were generated so that engineers in one part of the company could figure out which of their counterparts they should meet with to discuss future design issues.