Cost of Design Improvement
originally titled: A Wonderful
Development
[Prepared with David
Zacker.]
I
Philip Harding is an engineer at a small family business
called Wonder Products, Inc (WPI). The majority of WPI's work
involves designing and producing parts for larger products that
are sold by other companies. WPI is under contract to design
and produce a complex component for General Farming Implements'
(GFI) farm harvesting equipment.
Despite a nagging, though small, problem that does not find
a 'perfect' solution, WPI designs the part to GFI's
satisfaction, The price is set at $100 for each component. GFI
orders 1000 components, with the likelihood that since things
have gone so well, they will be talking to WPI and Philip about
other contracts.
WPI begins production and ships the first portion of the
order to GFI on time. GFI, at this point, is very happy with
the component and wants WPI to ship the final three quarters of
the order as soon as feasible. As Philip is working on the
component he thinks of an apparent solution to the 'nagging
problem' that bothered him in the design. It would involve a
small change in the production process, while increasing the
cost to three dollars more per component. Philip is convinced
that, had they known about this improvement earlier, GFI would
have wanted it.
Since he is in a rush to complete the order, Philip does not
have much time to work on anything other than the order. Should
Philip investigate this new idea immediately, or wait until he
has more time to test it?
II
Philip decides to spend the weekend experimenting with his
new idea. He quickly confirms the fact that the new design
solves the problem. Philip brings the development to the
attention of other members of WPI. He says that although they
can fulfill the original contract and be safe from legal
reproach if they say nothing to GFI, they have an ethical
obligation to offer the new design to GFI immediately, whether
or not WPI ends up picking up some of the costs for making
changes. He contends that the flaw in the initial design was an
oversight on WPI's part. "We contracted with GFI with the
understanding that we would provide them with the best design
we could come up with," Philip says. "So we ought to tell them
about the improvement."
The financial manager of the company, Connie, expresses her
concern about the three dollar per component cost increase. She
says that they are working on a narrow profit margin now; and,
although this only represents a one percent increase in cost,
it adds up to $2250 plus costs associated with recalling and
altering the components already sent to GFI. She thinks that
WPI would be better off introducing the development if and when
GFI makes another order.
Tim, in charge of Sales and Public Relations, suggests a
compromise between the two. He suggests that they offer to
share in the cost of the new product. Concerned with the image
WPI projects, Tim worries about GFI later complaining about WPI
not coming to them with the development during the first order.
Although they could insist that the design change was not
conceived of until after the first order was complete, there
would always remain the doubt, indeed a correct doubt, that WPI
held out on GFI by not offering them the best product. In the
long term this could mean mistrust and, in the worst scenario,
a severing of business ties between the two. "Granted," Tim
acknowledges, "the withholding of this information would mean
an increase in our short term income. But it could mean a
disaster to our future with GFI--and a setback in our standing
in the business community!"
They must now decide what it is best to do. What would you
recommend that WPI do?
- Tell GFI about the improvement and offer to share
expenses for the improvement.
- Tell GFI about the improvement and offer to pay the
additional expenses for the improvement.
- Tell GFI about the improvement and offer to make the
improvement immediately if GFI is willing to take care of the
additional expenses.
- Not tell GFI about the improved design until after the
order is completed.
- Other. Explain your choice, commenting on the views
expressed by Philip, Connie, and Tim.
III
The amount of money at stake in this case may seem quite
small. Suppose a much larger amount were at stake (say, $600
per unit). Would this alter the way in which you think through
the options in this case? Explain.