The Price-Profitability Paradox

Let’s see how Patty and Pete are making out on their latest adventure….

“Here is the ProfitPro output,” Dave Ferris said as he pointed to a PowerPoint slide on the screen.

Just then, the site general manager, Sally Wilson, and the head of purchasing, Blaine Ellis, arrived.

“Long time no see,” Pete said to Ellis.

Ellis acknowledged Pete, but appeared to be in a foul mood. Everyone settled down and the meeting came to order. Patty was again surprised: Pete always seemed to know everybody.

After introductions, Sally kicked off the meeting.

“As you know, we have a new corporate award program for saving money. Dave is a candidate to win the first award.  But Blaine won’t sign off on it, because his solder paste expenses have, in his word, ‘skyrocketed,’ ” Sally started.

Ellis exclaimed, “My solder paste costs are through the roof. Last year we used 3,000 kilograms and this year we are using 3,100 kilograms and each kilogram costs $10 more. That’s more than $40,000 more. How is this saving money?”

“How has the overall site profitability changed?” Patty asked.

“It’s pretty consistent with what Dave’s PowerPoint slide shows,” Sally answered. “His result is for one of our six lines. We are using the new solder paste on all of the lines now and profitability is up about 8%, or more than $6 million for a year.”

“A lot of the added profit is from cost savings that purchasing has implemented,” Blaine shot in.

“You don’t realize the pressure I am under to reduce the cost of purchased goods. Components, PWBs, connectors, solder paste, flux, packaging, etc., is over 80% of all of our total cost. Corporate has been all over me because of the increase in solder paste cost,” Ellis went on in frustration.

“Part of the increased cost of solder paste is because we ship more product, we actually use less paste per board with the new paste,” Dave responded.

“How so?” asked Sally.

“The old paste had poor response to pause. If we stopped the line for a few minutes, the first one or two prints afterward would be poor because the paste stiffened up. We would have to wipe the paste off those boards and reprint them. This would happen a couple of times per day. The ProfitPro output shows the increased productivity and profitability for the line for which I am responsible. Note that the profits are up $841K!” Dave Ferris went on.

“But my purchasing expenses have gone through the roof!” Blaine Ellis blurted as he stormed out of the room.

Patty, Pete, Dave, and Sally, sat there dumbfounded, looking at each other.

Pete finally spoke up, “Let me go talk to Blaine,” he said as he left the room.

“One of the issues is that Mr. Ellis should not be criticized if a consumable costs more money if it increases profitability. That doesn’t make sense,” Patty said.

“I agree” said Sally. “But much of the pressure comes from ‘Corporate.’”

As Sally was speaking, it occurred to Patty, that, in her new role, she may be able to impact this ineffective corporate policy. As she was mulling over this thought, Pete and Blaine Ellis returned to the room.

Ellis spoke first.

“After discussing the situation with Pete, it occurs to me that young Ferris’ profitability argument may have merit,” Ellis started.

“But Dr. Coleman, I need your help,” Ellis implored.

At this Patty’s ears perked up. She was not used to being called by her last name nor was she aware that she had a Ph.D.!

“I think I know what you need,” Patty responded. “We need to change the corporate criteria for evaluating the effectiveness of purchasing, to include situations like this. I’m quite sure I can do it,” Patty finished cheerfully.

The meeting concluded with all agreeing that Dave Ferris should be given the corporate award and Patty reaffirming her commitment to change the corporate policy.

In several hours, Patty and Pete were on an airplane heading home.

“OK, out with it,” Patty teased Pete.

“What?” was Pete’s sheepish reply.

“How did you know Blaine?” Patty asked.

“Remember, when I told you that I tried out for Olympic volleyball years ago?” Pete responded.

“Yes, ” Patty replied.

“So did Blaine. I’m not sure which one of us was more humbled by the experience,” Pete chuckled.


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.