Estimated reading time: 5 minutes

Maggie Benson's Journey: The Law of Exponential Profits

Editor’s note: Indium Corporation’s Ron Lasky continues this series of columns about Maggie Benson, a fictional character, to demonstrate continuous improvement and education in SMT assembly.

Chuck “The Tower” Tower had never been so nervous. No, it wasn’t the upcoming meeting with Benson Electronics owners, Maggie Benson and her fiancé John, to discuss process improvements; it was his plan to pop the question to Tanya Brooks. He had the ring but was looking for a place to ask for her hand. He thought he would ask John. After all, John had just proposed to Maggie with success.

Chuck saw John walking through the assembly area and approached him.

“John, I have a personal question to ask you,” Chuck said.

“Sure! Let’s go to my office,” John replied.

As they walked to the office, John was curious as to what the topic could be, as Chuck looked extremely nervous, which caused John some concern.

As John shut the office door, he asked, “What’s up?”

“I need to ask your advice,” Chuck replied. Chuck’s unease was evident.

“Glad to help,” John responded.

As Chuck started to talk and explain his situation, his nervousness vanished.

“So, you want some advice on where to propose to Tanya?” John asked. “How about The Prince and the Pauper restaurant in Woodstock, Vermont? I know the owners, and I think they would be willing to set up something special for you,” John went on.

For a few more minutes, they discussed this topic. Chuck left John’s office grateful and relieved.

Three hours later…

The team of John, Maggie, Frank Emory, and Chuck sat in Ivy University Professor Patty Coleman’s office. The topic was how to keep Benson Electronics’ lines up over the lunch hour.

After introductions and a few minutes of small talk, Maggie began: “Professor…, erm, Patty. Chuck has led a continuous improvement effort and we have increased our lines’ uptime from about 19% to over 30%.”

Maggie and the others still had trouble calling the professor “Patty.”

“Over 30% is not too bad,” Patty responded.

“But we still shut the lines down for lunch and lose about an hour of uptime,” Maggie continued. “Even though the lunch break is only 30 minutes, the line is actually down much longer. Frank ran a model and concluded that we could pay the workers $2 more per hour if they could figure out a way to keep the lines running. What are your thoughts?”

“Maggie, John, you may remember that we discussed a similar case in one of our classes,” Patty started.

Maggie and John both looked a little embarrassed as, at the same time, they remembered this lecture.

Patty said, “It was the first project I ever worked on with The Professor¹, when I was at ACME Electronics². I suspect it’s the same issue: the workers don’t want to keep the line running as it would require some of them to miss lunch with their group of friends.”

“Exactly,” Maggie, John, Frank, and Chuck groaned in unison.

“Well,” Patty elaborated, “we did some brainstorming with the line operators and agreed that if they could keep the line running during lunch, we would raise everyone’s salary by 10%. It ended up being a financial windfall for the company.”

“Can you explain how it worked and why it was so beneficial?” Frank asked.

“There were about eight people running each line, but a number of those people were doing future setups, getting components, solder paste, etc. So, to keep the line running for 30 minutes, the teams of operators for the two lines felt that just two people were needed to keep things going. The two teams worked together so that during the 30 minutes, two people could keep it running. Sometimes they need three people; sometimes only one,” Patty continued.

“How did it work out?’ John asked.

“Actually, profoundly better than expected,” Patty replied.

“Why?” Maggie asked.

“Well, you could argue that keeping the line running for an extra hour at 30% uptime should result in 0.3 hours of extra uptime. It ended up being more like 0.7 or 0.8 hours,” Patty explained.

“Why?” John asked.

“We think it is because so much focused effort was spent keeping the line up that it typically ran for the entire hour,” Patty elaborated.

While they were chatting, Frank was using his cost-modeling program to calculate the change in profits.

“Wow! The increase in profits is too much to believe,” he said. “I ran a model—based on our most common product, which sells for $115.50—and the results were amazing. Gross profits would go from $2.79M to $5.29M on one line. It doesn’t seem possible.”

 
“It’s likely correct,” Patty commented. “Who can tell me why?”

Chuck seemed hesitant, but Patty gave him an encouraging look.

“Go on Chuck,” Patty said.

“Well, we are producing more product and all of the product is at a reduced price,” Chuck explained.

“Precisely,” Patty said.

Everyone in the room was impressed that Chuck grasped the concept first.

“For those of us that are dummies, could one of you explain this?” John implored.

“Let me try, with a simple example,” said Patty.

“Let’s assume we make 1,000 units at a cost of $95 and a sell price of $100. We make 1,000 x $5 = $5,000. Now we increase productivity so that we produce 33% more so we have 1,333 units to sell. However, our fixed costs such as labor, rent, and machine amortization have not changed. We might have a little more cost in electricity, consumables, and machine repair, but these are second order effects. Our unit cost might go to down to $92. Profits are now 1,333 x $7 = $9,331,” Patty explained.

“So, we have more units to sell, and all of them are cheaper to make,” Maggie concluded.

“Precisely,” Patty replied.

“Of course, we have to have the demand to buy the extra product,” Frank warned.

“Not to worry, folks; we have been turning away orders,” John said, excitedly.

“This situation is what The Professor calls ‘The Law of Exponential Profits.’ With increased productivity, each unit produced is cheaper to make and you have more of them, so profits increase exponentially,” Patty explained.

Frank was excited. “Comparing the details of the models of each case supports what Patty explained,” he said. “The labor cost alone went down almost $3 per PCB.”

 
Patty mentioned that Frank’s calculations were just a model and they should proceed with caution, but the team was already excited.

Epilogue: Maggie and John plan to work with the BE team to implement having the lines run over the lunch break. Stay tuned to see how it works out.

Oh, and Tanya said yes!

References

1. The Professor is a mythical figure at Ivy University. Few know his name. He is an expert in process optimization. He is a polyglot, speaking more than 10 languages. He was and is Professor Patty Coleman’s main mentor.
2. ACME is the company that Patty worked at before becoming a professor at Ivy University. There is a book written about her adventures called The Adventures of Patty and the Professor. Contact Dr. Lasky at rlasky@indium.com for a free soft copy.

This column originally appeared in the October 2021 issue of SMT007 Magazine.