A New Way of Doing Business

On June 29, 1994, Secretary of Defense William Perry signed a memo titled “Specifications and Standards — A New Way of Doing Business.” It made performance specifications and commercial products the default. A performance specification says what an item must do, not how to make it. Detailed military specifications were allowed only “as a last resort, with an appropriate waiver.”

A 1997 Air War College paper gave examples of what the old system cost. The military had used its own specifications to buy “dog combs, tacos, fruitcakes.” A specification for white gloves “caused one manufacturer to set up a different assembly line.” The gloves cost $32 a pair. The same manufacturer sold “nearly identical gloves commercially for $20.”

Lowest Price Technically Acceptable

Federal agencies can buy goods and services by a method called “lowest price technically acceptable.” Each proposal is checked against the stated requirements and is either acceptable or not. The Federal Acquisition Regulation says that proposals are checked for acceptability but are “not ranked using the non-cost/price factors.” It also says: “Tradeoffs are not permitted.” The cheapest acceptable offer wins, even when another offer is better.

Outside the Department of Defense, a 2018 defense law limits the method. An agency may use it only when, among other conditions, it “would realize no, or minimal, value from a proposal that exceeds the minimum technical or performance requirements.” Buyers must avoid it, as far as practicable, for services such as cybersecurity and health care, and for personal protective equipment.

Satisficing

In 1956 Herbert Simon published “Rational Choice and the Structure of the Environment” in Psychological Review. He wrote: “Evidently, organisms adapt well enough to ‘satisfice’; they do not, in general, ‘optimize.'”

The term joins satisfy and suffice. A person who satisfices stops searching when an option meets the need. In 1978 Simon received the Nobel Prize in economics “for his pioneering research into the decision-making process within economic organizations.”

Fit for Ordinary Purposes

When a merchant sells goods, the Uniform Commercial Code adds an implied warranty that they are “merchantable.” This applies when the seller deals in goods of that kind. Section 2-314 says such goods must be “fit for the ordinary purposes for which such goods are used.”

Cornell Law School’s legal dictionary explains the standard. Merchantable goods “need not be outstanding or superior quality, they need only be fit for the ordinary purpose for which they are used.” In everyday terms, a toaster bought in a store must toast. It does not have to be the best toaster on the market.

Section 2-315 adds a separate warranty for a particular purpose. It applies only when the seller has reason to know that purpose and the buyer relies on the seller’s judgment.

The Reading Pipe Case

A builder put up a country house for more than $77,000. The contract called for pipe “of Reading manufacture.” Some of the pipe came from other factories. The owner refused to pay the last $3,483.46 until the pipe was replaced. The builder sued. The case, Jacob & Youngs v. Kent, was decided by the Court of Appeals of New York in 1921.

Judge Benjamin Cardozo ruled for the builder. Reading pipe differed from other brands “only by the name of the manufacturer stamped upon it.” Replacing it would cost a great deal. So the owner could claim only the difference in value, “which would be either nominal or nothing.”

The dissent said the owner “had a right to contract for what he wanted.” The majority used a different test: “We must weigh the purpose to be served.” American contract law calls the rule substantial performance.

Pareto

The Pareto principle: Also known as the 80-20 rule, stating that in many situations approximately 80% of the effects come from 20% of the causes.

Vilfredo Pareto, an Italian economist, documented in the early 1900s that 80% of the land in Italy was owned by 20% of the population. Pareto went on to observe that 20% of the pea pods in his garden contained 80% of the peas. It has become a common rule of thumb in business that 80% of sales come from 20% of clients.

The 80-20 rule could be a metaphor about the American approach to many things, or at least about an element or aspect of the Americans approach. Americans tend not to be perfectionists. Not because they do not recognize and honor striving for the best. But because in many cases attaining, reaching, accomplishing that extra 5% is in many cases “simply not worth it”.

Worth. Value. Does the customer want that extra degree of engineering excellence? Is it necessary to calculate that many digits behind the decimal point? Is that depth of analysis necessary in order to make a decision?

80% is often enough. For Americans, depending on the situation, 60% is enough. Depending on the risk-benefit relationship, even less is enough.

Designed in U.S. Made in China

American businesses have a history of designing products in America, but then sending the designs to companies abroad, especially to third world countries, to be assembled. Why would a first world country, with the capacity for better materials and production processes, outsource the building of their products to lesser developed nations? The answer is simple: cost.

One of the most common countries for assembling American-designed products is China. In 2011, there was an article in Forbes titled “Buying from China is in Fact Buying American.” In this article, the author talks about his friend Johnny, a middle class American who owns a couple of small restaurants. 

Most of the cooking utensils and furniture in Johnny’s restaurants were made in China. Like most middle-class Americans, he shopped at stores that sold primarily Chinese-made merchandise. Johnny’s reason for using these Chinese-assembled products: they were cheap and “good-enough.”

The article went on to talk about different American companies that sell products that are made in China (Apple, Dell, Gap, Hasbro, Nike, etc.) and how, according to a San Francisco Federal Reserve study, an average of 55% of the value of American imported goods from China goes to American companies and workers. 

This is compared to 36% for American goods in general. Not only can companies that outsource to China sell their goods at a cheaper price, but they actually make a lot more money in the process.

POSs

The book American Gods by Neil Gaiman, follows the adventures of a man called Shadow as he travels across America. At one point during his voyage, he finds himself stranded in the middle of the Wisconsin, attempting to rent or buy a car.

As it turns out, there is nowhere nearby for him to rent, so he has to settle for buying. In an attempt to find someone willing to sell him a car, he tries talking to a woman manning the till at a gas station:

“Car died a few miles down the road. It was a pieceashit if you’ll pardon my language,“ said Shadow.

‘Pee-Oh-Esses,’ she said. ‘Yup. That’s what my brother-in-law calls ’em. He buys and sells cars in a small way. He’ll call me up, say Mattie, I just sold another Pee-Oh-Ess. Say, maybe he’d be interested in your old car. For scrap or something.’”

Eventually, Shadow meets the brother-in-law, and although he has plenty of money with him, at this point in the story he only needs to drive about 500 miles, so he tries to buy the cheapest car that could take him the full way. 

“The piece of shit he chose was a 1983 Chevy Nova, which he bought, with a full tank of gas, for four hundred and fifty dollars. It had almost a quarter of a million miles on the clock, and smelled faintly of bourbon, tobacco, and more strongly of something that might well have been bananas. He couldn’t tell what color it was, under the dirt and the snow. . . The piece of shit had a radio, but nothing happened when he turned it on.”

Nevertheless, despite the poor performance of the vehicle, Shadow was content with his purchase because it was cheap.

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