Monday, April 28, 2003

Challenging Assumptions

At a family celebratory event this weekend, I struck up a conversation with a man I hadn’t met before, a friend of my nephew. Amongst the chit chat, I discovered he was involved with the mergers and acquisitions department of a Very Large Corporation. Being an area of interest of mine since my MBA days, I asked him more about their work, exploring valuation models, intellectual property protection and SEC disclosures.

[note: this is a good reason not to invite me to any of your social events. I noted that others who had been standing near us seemed to suddenly have a need to check out the relish tray again...oh well, the two of us enjoyed the chat...]

During the discussion, my new friend described one acquisition that fell through due to deep financial losses by the target company. "Hey, how can you make money manufacturing in Connecticut paying $30/hour wages?"

I got thinking about his comment on the drive home, "Well, just why couldn’t that company make money? What are the assumptions sitting underneath that assessment?"

Do high wages mean high product cost? If the ratio of direct labor to materials remains the same, it will. If labor hour productivity does not increase, there is no alternative.

Do high wages require high capital equipment cost? Only if you subscribe to the notion that there is a one-for-one exchange between the two.

Does having a plant close to customers mean little? If we tolerate large inventories and infrequent product changes, it may mean little. If we don’t worry about currency fluctuations, dock strikes, SARS and international warfare, we can locate a supplier anywhere.

Must product development cost a huge proportion of the company budget? If it is only done by scientists and engineers retained on staff it probably will.

Must process improvement take a long time to implement? If the company culture demands only "big bangs", it probably will. If the people doing the actual work have no voice, changes will be slow.

It is entirely possible that this company had one or more of the above issues present. My bias, however, is that Lean concepts challenge each and every one of these commonly held assumptions. They are not as valid as many think.

Challenge some well-held assumption of yours today. Please.

Feel free to forward to a friend. Email me

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