Common Sense 101 - Engineering - December 16, 2012 Edition

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25. The Numbers Game
hen you first said you were going to be an engineer, someone told you you’d have to be studying a lot
of maths, right? (“Maths”, “math”, what’s the difference.)
Well, they were right. This is an engineering text book, and it wouldn’t be complete without the maths.
So here’s some.
Suppose you make a product, and your annual profit margin after taxes and all other expenses is a
slim 3%. (Any slimmer than that and you might be well advised to get out of the business of manufacturing
altogether: you wouldn’t even keep up with inflation!) And suppose that the product you make isn’t even all
that good: let’s say that about one in a thousand units will need fixing within a year or so. And suppose
further that you offer only a one-year warranty … which is par for the course these days.
Now look at it through your customer’s eyes—the customer who got the dud unit that failed after the
warranty period. What do you think he’s be muttering under his breath? (Don’t answer that—it’s a rhetorical
question!)
Okay. Here’s what you should do in such a situation. You should offer to fix anything of yours that fails,
no matter when it fails; and while you’re fixing it, offer a temporary replacement of equal or higher value,
so that the customer still gets to use what he bought, or something even better.
And I’ll tell you why it wouldn’t be a problem for you: crunch the numbers. Suppose you have to actually
junk the dud: even so, you’ll only be 0.1% (i.e., 1/1,000) down. But your profit margin in even just one year
is 30 times greater! (And over two years it’s 60 times greater, and over three years, 90 times greater, etc.)
Do the math. Suppose you make a million units of your product in a year, and you sell each unit for
$99. You gross $99 million a year, and since your yearly profit margin is 3%, you have $2,970,000 in your
pocket free and clear at the end of the year. Now, since about one in a thousand units will be junked, you
will lose about $100,000 every year, which means your profit will go down to about $2,870,000. The
difference is next to nothing.
But the good will you’ll have generated—the “brand deposit” you’ll have made, in the words of Steve
Jobs—by giving any customer a replacement while you fix their unit, will be worth much, much more. Even
if you were to bump up the price of your product by less than a dollar, to a mere $99.99, you’ll gross
$99,990,000 in a year, which means your 3% annual net profit will turn into $2,999,700, which is $129,700
more than you used to net before. That’s more than enough to cover the $100,000 annual loss from junking
your dud units! And the likelihood is that you could bump up your sale price by much more than that, and
still gain customers, because who wouldn’t choose your product over your competitors’ if they could be
sure of never having to do without?
But we can do better than that. Suppose your product is made the way we’ve talked about: out of snapin
parts. Suppose there are ten parts in your unit, and suppose it takes an unskilled worker—like a college
student—ten whole minutes to take them apart and snap them back together: and that’s a lot of time to take
apart and then snap together just ten parts, but let’s suppose. The cause of the failure of your product is
likely to be just one of the ten parts, right? So all you have to do is junk that one dud part, replace it with a
new one and snap the parts back together. Assuming on the average that each part costs only a tenth as
much as the final product, and assuming that ten minutes of an unskilled worker’s time costs you at most
ten bucks, you have spent only twenty bucks repairing the customer’s unit. For a thousand units that’s just
$20 grand—a fifth of what it would have cost you if you had junked the entire unit and not just a part of it!
Even better for you—in the long run—is the opportunity you get to beef up the parts that went kaput.
(We already talked about this in a previous chapter, didn’t we.) Redesign and remake each part that breaks
down in such a way that it won’t fail again, and next year you’ve got a product that simply keeps going, and
going, and going … so that you never have to spend time fixing anything again, and everyone is happy.
There you have it. The study of engineering requires a background in maths, and the most important
maths in engineering is the maths that highlights the bottom line!
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