Optimizing Profit


Let’s look in on Patty and her colleagues …

Sam Watkins, ACME New Hampshire site GM, had just finished meeting with his boss, ACME CEO Mike Madigan. He was embarrassed that these meetings always stressed him; Mike was an intimidating character. Still, why should he be nervous? Things were going really well. Profits were up at all sites since NMAC/I/O was implemented as their new profitability metric. Patty Coleman, who suggested this metric, visited all of the ACME sites with weaker NMAC/I/O and profits, and, after performing process audits, helped these sites get their acts together. Oh, and we can’t forget Pete Ortiz, who works for Patty. They seemed to have a terrific synergistic relationship. He was an integral part of this success story.

Sam started writing an email to Patty. He and Mike concluded that, building on the recent NMAC/I/O success, they need to make ACME a “copy exactly” company. They agreed that if they were implementing a copy exactly strategy they should do it with the most cost effective assembly equipment and materials. It seemed to both of them that that the lowest “cost of ownership” should be the most important metric in this strategy. Sam finished his note to Patty asking (ordering) her to implement this strategy. She was to present a plan to achieve this goal to Sam and Mike in 6 weeks. Her presentation was to include the recommended equipment and materials, a phase-in plan, the budget needed to achieve the goal, and the projected ROI of the endeavor.

Patty was in her office having lunch while reading Golf Digest and USA Today. She looked up at her laptop screen and saw Sam’s email. Reading it energized her. She was happiest when working on a significant project. After digesting the contents she thought she would call The Professor and ask his advice. Sam and Mike had insisted that she put The Professor on a retainer as he had added so much value to ACME. Patty had to chuckle, it was hard to get him to send in his bill; he seemed little motivated by money.

The Professor would never tell her how many languages he spoke, so she was going to try a little French on him.  She and Rob had been studying it at home.

Bonjour Professeur, comment ca va?” Patty cheerfully said as The Professor answered the phone.

Très bien Patty. Comment sont Rob et vos fils? Ma femme et moi avons été inquiets au sujet de Rob. Est-ce le dos guérit bien?” The Professor replied with a Parisian accent. (Very well Patty. How are Rob and your sons? My wife and I have been worried about Rob. Is his back healing well?)

Patty sighed and thought, “Well that makes about 10 languages I have verified so far.”

“Rob is doing quite well. Word got around and my Lean Six Sigma Green Belt instructor, Jim Hall called and shared his thoughts with me about over doing it in exercise programs. Jim is a fitness instructor and a big believer in moderate exercise. Rob has promised me to tone it down a lot,” Patty answered.

“I’m relieved,” said The Professor, “Rob needs to be healthy to keep up with your sons.”

“But, I imagine you have some business to discuss,” the Professor went right to the point.

“Yes, Sam and Mike want me to head up implementing a copy exactly program with equipment and materials, and they are strongly suggesting that the equipment and materials have the lowest cost of ownership,” Patty summarized.

“Copy exactly can be very beneficial, if the materials and equipment are good choices,” The Professor answered thoughtfully.

“But I have real problems with ‘Lowest Cost of Ownership.’ It is a good metric to compare something like automobiles, but to compare equipment or materials that are used to generate a profit it can be misused,” he replied.

Patty felt she understood where he was going, but wanted to hear it from him.

“Can you give an example?” she asked.

The Professor answered, “Let’s say a man mow lawns for a living. He considers two lawn mowers for his business, one is a push mower that cuts a 20 inch path and costs $300. Assume he takes 3 years to pay off the loan to buy it. Maintenance is $150 per year and fuel is $1200 for a 30 week season. The other is a sit down lawn mower that costs $3000, with $500 maintenance per year and it uses $3,000 in fuel per year. It cuts a 50 inch path. Which has the lower ‘Cost of Ownership?’”

“That’s easy,” Patty said, “the 20 inch push mower.” “But clearly the lowest cost of ownership is meaningless,” she went on.

“Explain,” replied the professor.

Patty answered, “Well, the man is in business to optimize profit. Clearly he can mow more laws with the sit down mower. Let’s say with the push mower he can do 4 lawns a day and with the sit down mower he can do 10 lawns a day. We can also assume he gets $35 per lawn. So, for a New Hampshire 30-week lawn mowing year, he earns 4x7x30x$35 = $29,400 with the push mower and 10x7x30x$35 = $73,500 with the sit down mower. Let me make a spreadsheet to determine the profit in each case.”

Patty was one of those young people who could type so fast that it made The Professor’s head spin. In seconds she had a spreadsheet developed.

“Wow, with the push mower he only makes $27,950 and with the riding mower he makes $69,000!” Patty exclaimed.

“And the same is true in electronics assembly. The best equipment, solder paste, solder preforms, underfill, cored solder wire, and solder fluxes are the ones that help your company make the most profit. Not the ones that have the ‘lowest cost of ownership,’ ” The Professor summed up.

To be continued …

Dr. Ron

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About Dr. Ron

Materials expert Dr. Ron Lasky is a professor of engineering and senior lecturer at Dartmouth, and senior technologist at Indium Corp. He has a Ph.D. in materials science from Cornell University, and is a prolific author and lecturer, having published more than 40 papers. He received the SMTA Founders Award in 2003.