When Savings Kills: How a 1-inch Change is Costing Trinity Millions Kaitlyn McAvoy and Jason Busch - October 30, 2014 6:25 AM | Categories: Cost Management, Purchasing, Supply Risk | Tags: General News, L1 Earlier this month, we heard how Trinity Industries, the maker of many of the guardrails installed along America’s highways, will be fined hundreds of millions of dollars for making and installing defective guardrails without the federal government’s knowledge. How did this happen? How is it that so many of these supposed safety devices were modified and manufactured without meeting federal standards and then installed on the sides of so many roadways across the country? And, what is the price to the public for these dangerous devices? The Problem Guardrails are supposed to keep vehicles from straying too far off the road, into a ditch, or worse. The end terminals of the rails – those yellow and black striped rectangles where the steel rail ends – are expected to absorb the impact when a car crashes into it, slowing the vehicle down and reducing damage to the car and any passengers. Yet instead of protecting drivers as they should, the guardrails and end terminals designed by Trinity are reportedly to blame for putting motorists in danger, severely injuring or even killing them. When a car strikes the rail, it is supposed to ribbon out. But, Trinity’s guardrail “locked up,” “speared” cars and severed drivers’ limbs in some cases. That’s because the company made changes to the design of its ET-Plus rail end terminals in 2005. It also failed to tell the Federal Highway Administration of such modifications - an error Trinity will now have to pay for. A Texas jury found Oct. 20 that Trinity defrauded the federal government by not disclosing its design decision and will be fined $175 million. This amount, however, will reportedly be tripled to $525 million due to federal law. Whistleblower Case What may be one of the most curious aspects of this case is how exactly it began. Joshua Harman, who used to have a company that made and installed guardrails (a competitor of Trinity), brought the case to court. Harman filed the case on behalf of the public after discovering the undisclosed design flaw in Trinity’s guardrails. Modifications to Save Money Another unique angle of this case is how the design modification, which was saving Trinity about $2 per rail end terminal or $50,000 per year, may now cost the company millions. An internal company email disclosed that the company could cut costs by shrinking a metal piece used on the guardrail terminal by 1 inch. This cost-cutting decision was used as evidence in Harman’s case against Trinity. What also came out during the trial, which took place in Texas – home to Trinity’s headquarters – is how Trinity may have misled state governments. States are responsible for installing guardrails on their highways, and then receive federal reimbursements for the projects. The New York Times reported Trinity told Vermont in 2006 (a year after modifications to the rails began) that its ET-Plus guardrail was identical to the rail state officials and the FHA previously approved. A company official testified during the trial that this claim was inaccurate. Other states, including Missouri and Massachusetts, have banned any future purchases of Trinity’s ET-Plus rails. The rails were prohibited in Nevada earlier this year, as well. Lack of Oversight How did these guardrails, which are supposed to have federal government oversight, make their ways to highways where they malfunctioned and put motorists in danger? On one level, this is a situation where a strategic supplier to the public sector did not make customers aware of the impact of a design change (and possibly all elements of the change itself). But looked at another way, this is also a case where a company made a cost-focused decision that ignored the big picture to optimize for a smaller variable (in a not-to-dissimilar way to how looking at purchase price variance (PPV) can lead organizations down the wrong path in spend analysis). For the company, the costs could prove catastrophic. Trinity is also facing more than a dozen other lawsuits from people who blame the company’s rails for injuries and five deaths. While the company maintains that its failure to disclose the modifications it made to its ET-Plus products was accidental, the damage (clearly) has already been done. Yet there are many questions still unanswered. How many of these guardrails remain along US highways? What did it cost state and federal governments to buy and install these defective and dangerous rails? What would it cost to uninstall and replace them? Also, and perhaps most important, is Trinity still manufacturing these guardrail systems? Already, some states have banned these products from being placed along their roadways. But, Trinity said it plans to appeal the jury verdict and maintains its guardrails do not pose a risk to drivers. Perhaps this will mean business as usual for Trinity – the legal angles around internal changes now are important ones (and not making changes also sends a legal message). We will have to wait to see. The FHA said it will be evaluating the findings of the court case and determine the “continued eligibility” of the ET-Plus rail. Regardless, there are broader cost management lessons in this case for those on the outside. Related ArticlesPurchase Price Variance (PPV) in Procurement and Savings Strategy: Limitations and One Potential UseWhy Purchase Price Variance (PPV) Should Be Banished From Procurement Measurements and KPIsWhen Purchase Price Variance Turns Deadly Discuss this: Cancel reply Your email address will not be published. Required fields are marked *Comment Name * Email * Website Notify me of follow-up comments by email. Notify me of new posts by email.