The 10% Rule: MBA School Lesson

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Lesson From Business School:

Have you ever wondered why Elon Musk is so hell-bent on building new battery giga- factories all over the world so quickly?

The reason why is because that manufacturers have learned that the more experience they garner in building widgets, the lower their cost of building each widget.

As they build widget after widget, they learn a little trick here and a shortcut there.  Pretty soon these little tricks and shortcuts add up to some real cost savings.  This leads us to The 10% Rule.

The 10% Rule:

Every time a manufacturer doubles the number of widgets that he has ever constructed, his cost to manufacture each widget falls by 10%.  In some cases, his cost per widget falls by 15%.

It is important to appreciate the word, “ever.”  If Elon Musk had manufactured one-hundred thousand electric auto batteries in the entire life of Tesla, at a cost of $1,000 per battery pack, by the time Tesla had manufactured TWO-hundred thousand batteries, the company could reasonably expect to be able to manufacture each battery pack for just $900 each.

The Japanese taught us this lesson.  In the late 1980’s, the Japanese were eating our lunch in manufacturing.  Their cars were cheaper, and their quality was outstanding.  Japanese chip makers were rising to rival Intel, Advanced Micro Devices, and Texas Instruments.

Their bread-and-butter D-Ram computer chips were as good as ours, and they were selling them at less than their cost.  “Dumping!” cried Texas Instruments, in a complaint and lawsuit before the Federal Trade Commission.  “They are bidding against us on big computer chip orders, and they are quoting prices that are lower than their cost.  They are dumping D-Ram chips at less than their cost, just to steal market share!”

Oops.  By the time the case reached trial, however, the Japanese were able to prove that they had actually made a handsome profit on that big order.  Even though their cost per chip was $100 at the time they bid on that big order, and they bid $99 per chip on that big order, the order was so large that by the time they delivered the chips, their cost had fallen to just $90 per chip.

They Japanese literally “schooled” us, and that is why this manufacturing lesson is now taught in most U.S. business schools.

So whenever Tony Stark… oops, I mean Elon Musk… opens another huge battery giga-factory somewhere in the world, just nod your head and say, “You go, Elon!  Pull even further ahead in lowering your costs.”Did you know that Elon Musk actually did a cameo in one of the Ironman movies?   Haha!  Anyone else out there think that Gwyneth Paltrow, playing Pepper Potts, looked absolutely outstanding in that white outfit?

By George Blackburne