The Rule of 72

Four years ago, the big boss, 6′ 6″ tall, 350 pound Mac Savage, said that the goal for the sales of a new product was at least 20% growth rate per year. The team is in a room prepping for a review with Savage (sometimes called Big Mac or, in jest, “The Whopper”) when the person responsible for analyzing the data, Charlie, comments:

“Well in 2016, sales were 100K units and four years later in 2020 they are 200K. So, in four years, sales increased 100%. Therefore, the yearly increase was 100/4 or 25%. So, we beat the goal by 5. So, Big Mac should be happy,” Charlie says.

There is a murmur of agreement among the 10 or so people in the room. And a few comments like, “It’s always good when The Whopper is happy,” were quietly said.

Helen chimed in, “That’s not true; using the ‘Rule of 72,’ the growth rate is 72/4 = 18%. So, we are a bit short.”  

Fred, who was always a bit annoyed at smarty-pants Helen chimed in, “I think Charlie is right, 100% growth in four years is 25% per year.”

Helen responded, “With your logic, if the growth rate was 25% after the first year, sales would be at 125%, right?”

Everyone in the room murmured in agreement.

Figure 1. The Team: Helen is to the far left. Charlie is the bald guy with the beard holding a sheet of paper. John is the chap wit his laptop open. Fred has the red shirt on and June is to the right with the long blond hair. 

“But would second year sales be 150%?” Helen went on.

There was some mumbling, then John, a young new hire said, “You would add 25% of 125%. My calculator says the total would be 125% plus 31.25% equals 156.25%, not 150%.”

John, then got excited and did some more calculations, “The third year is not 175% with 25% growth per year, but 195.3%, and then the fourth year is 244.14%… much higher than 200%. The growth compounds.”

Everyone groans anticipating the disapproval of “Big Mac.”

Charlie finally asks, “is Helen’s 18% growth rate right?”

John makes a few trial and error calculations and says, “18% seems a little low; it’s more like 18.9%, but it’s not 25% or even 20%. But 18% was a pretty good first estimate.”

“The rule of 72 is an estimate, it gets more accurate around 8 years,” Helen chimed in.

“Jeepers, look at the clock, we only have 45 minutes before Mr. Savage comes to the meeting and wants our report,” June warned.

After a brief chuckle that June was the only one to call the big boss Mr. Savage, instead of Big Mac or The Whopper, the team got to work putting together Power Point slides for Charlie’s presentation. They finished with 5 minutes to spare, enough time to freshen their coffee cups or hit the restroom.

At 11AM sharp, Savage came into the room and Charlie started his presentation. Everyone was nervous about Savage’s response.

Charlie summarized that by using the Rule of 72, the growth rate was short of the 20% per year target, but was more like 72/4 or 18%. He pointed out that a more precise calculation showed that the growth rate was 18.9%.

The entire group expected that Savage was going to blow his top that the 20% target was missed. But, he calmly said, “Well, the 1.1% shortage is unfortunate, but I’m impressed that you didn’t say the growth rate was 25%. I am more impressed that that you knew to use the Rule of 72 and more so that you were able to fine-tune your work to get the more precise. Great work Charlie!”

Everyone in the room rolled their eyes, especially Helen and John. Someone from the group was about to speak up, when Charlie, red faced said, “Sir, I should point out that Helen suggested using the Rule of 72, and John did the more precise calculations.”

“Charlie, you are a good leader, giving credit where it is due. Let’s have this team develop an action plan to improve the growth rate. We should meet in a week to review your plan,” Savage said.

There was a palpable sigh of relief among the team.

Savage, ended with, “Who is this new guy John?”

John was introduced by Charlie as a recent grad of Tech.

“John, I got my MBA from Tech,” Savage said.

“John, I want you to derive The Rule of 72; it will be a good experience for you. See if you can do it without looking anything up,” Savage went on.

John was a bit shaken, but he was able to derive The Rule of 72. See his derivation below.

The derivation of The Rule of 72


Dr. Ron

The Professor’s second visit to ACME … continued


“Well what should we do Professor?” John said weakly. 

“Clearly, not shut the line down over the lunch break,” The Professor responded quickly. 

“We can’t!” said John, “The operators are all friends and they count on having lunch together.” 

“How much are they paid per hour?” asked The Professor. 

“Ten dollars,” replied John. 

 “You can pay them $15 per hour and still make more profit if they keep the line running over the lunch break,” The Professor opined. 

“Fifteen dollars per hour for the lunch time or the entire 40 hour week?” John asked nervously. 

“For the whole week,” was The Professor’s reply. 

“I find that hard to believe,” John shot back.

“Consider this,” said The Professor. “Your line is up only 9.7% of an 8 hour shift, that’s only 47 minutes. Today you lost 95 minutes over the lunch hour. You may be able to increase your uptime to greater than 15% by keeping the line running over lunch. I modeled your business with ProfitPro3.0 cost estimating software. Your company will make millions more per year if you keep the lines running over lunch. I have worked with other companies to make this change; it is really easy with a 30 minute lunch period. If 5 people normally run the line, you have just one stay back during lunch. That way each person only misses the regular lunch break once a week.”

John thought optimistically, “There is such a thing as a free lunch.”

“Now, let’s talk about what we can do to double the uptime from the 15% we will get by running the lines over lunch,” said the Professor.

Patty listened to all of this in amazement. The Professor was helping ACME more than she thought possible.

Next steps? Yes, John will keep his job. But, what is The Professor’s plan to get uptime to 30% or more? And, we still haven’t learned where Patty will go to dinner.  Stay tuned for the latest.


Dr. Ron

Dr. Ron note:  As surprising as this may seem, this story is based on real events. The uptime numbers and improvements are from real examples. Any company that can achieve 35% or more uptime can compete with anyone in the world, even in low labor rate countries. Sadly, few companies know their uptime or have an urgency to improve it.

Best Wishes,

The Weakest Link: Musings from SMTAI

Due to an illness, I jumped in to co-chair a session at SMTAI yesterday. In doing so, I had the pleasure of spending a little time with a longtime industry machine designer. Afterward, he asked an interesting question:

Talking to all these (industry veterans), I’ve seen a common thread. Almost all are unhappy and hoping to make it to retirement while continuously looking over their shoulder and waiting for the shoe to drop. Perhaps it’s a function of have been through too many downturns. Almost all say they are working harder than ever for less money than ever. Staff reductions of years ago have never been replenished.

Griping aside, they are all keenly aware that there is no one to step in to fill their shoes, be it process engineers, quality managers, field service, you name it. They all state they’re on their own with no replacements in sight. What’s your take on this and if they’re correct, will the industry grind to a halt?

Great question! I agree with the sentiment expressed — small/no raises, more work, no bench from which to develop new engineers. These have been problems for the past 10 years.

That said, I see some underlying trends that make me more bullish than some. For starters, there’s never been more entrepreneurs at the college level. I have been spending time researching tech incubators and have come away stunned at the level of talent and energy. The so-called hobbyist market is booming: 140,000 attendees at the Maker Faire event in San Mateo this year, and they all come to see innovation in action. In researching open source pick-and-place software earlier this year, I learned that there are some 2,000 desktop placement machines out there, and an engineer is behind every one.

There is an abundance of talent designing and building electronics hardware and related tools these days. They just aren’t doing it at the usual places like IBM or HP. It’s more under the radar, but it’s there. Google, for instance, has 5,000 workers doing box build and test in Mountain View. There is a lot of hiring going on at growth companies; it’s just no one talks about it.

During the SMTAI Keynote this week (a really interesting, if a bit inflated, talk on the F-35 warfighter by retired US Navy General Bob DuLaney), I asked whether he saw a way we could better leverage such state-of-the-art technology in order to get more engineers interested in the industry. His response was that he couldn’t see how any engineer wouldn’t be excited to work on such a project. Point, DuLaney, but if I had it over, I would have asked the question this way: How could a company like Lockheed Martin ensure product builds come in on time and on budget when the supply chain it depends on for materials, bare boards, assemblies and so on is struggling mightily to recruit and retain top engineering talent?

For my bigger concern is really the lack of interest by new engineers in the smaller companies that supply the big ones. The Lockheed Martins and Raytheons will always attract talent. But they buy much of their bare boards and assemblies from companies that are considerably smaller, local and less well known. Those firms are the ones having trouble recruiting and keeping talent. For those who do it well, it’s become a strategic advantage. And as long as the Tier 1s have to outsource, their ability will always be limited by the weakest links of their supply chain.

Slow Train a Comin’

Where are the next generation of good engineers going to come from?

If I had a nickel for every time I’ve been asked this …. well, you can do the math.

A good friend asked me this just today. He has noticed many of the 25 to 45 year old engineers have left the SMT industry, and questioned where the new ones would come from.

My response: The same place they always have — they will be poached from other companies, or trained in house.

Twenty years ago, we had the same problems we face today regarding the availability of qualified process engineers. But we looked at it differently. Then, with the industry in its relative infancy and growing 15 to 30% per year, we accepted that hiring novice engineers and training them was simply part of the cost of doing business. Somewhere along the line (get it?) the mindset changed. We started to expect that experienced yet affordable engineers would always be available, and when they weren’t — especially after the tech meltdown, when many left for greener, less cyclical pastures — we as an industry went into a collective mode of “woe is us.”

What we forgot, however, is that the electronics industry has traditionally been self-reliant. We don’t need universities to send us mechanical and industrial engineers ready minted and prepared for action. We need to get back to recognizing that every industry has its learning curve, and we need look no further than ourselves for the solution.

It’s time to stop worrying about the next-generation of engineers and get back in the business of recruiting, mentoring and shaping the orbs as they exit college, engineering degrees in hand, into insightful and careful process engineers.

Companies that do well in this regard will have a competitive advantage over those that don’t.

And if we are lucky, we may just learn something along the way.