Estimated reading time: 3 minutes

Maggie Benson's Journey: A Buying Strategy Primer

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. The January column concluded with these questions: Will BE buy Ivy Electronics? What will the price be? What is in the action plan? What is 5S and the 8 Mudas?

Maggie asked Frank and Chuck to spend an extra day investigating Ivy Electronics. Afterward, the team (Maggie, John, Frank, and Chuck) discussed whether they should buy the company.

“Well, team, what’s the scoop?” John asked.

“So, Ivy Electronics has a lot of room for improvement and growth, which may be good news,” Chuck said. “Their rework stations are a mess, but I worked with Phil Consol to apply 5S¹ methods and we straightened one up within only an hour or so (Figure 1). I think Phil became a 5S convert. We also identified Muda² issues (Figure 2). I’ll let Frank comment on inventory issues in a moment. Regarding the Muda issues I observed, ‘motion’ was a big problem. A PCB is required to travel to a second building to have rework performed. Then, in anticipation of future orders, we found ‘overproduction.’ Some of their future orders never materialized and became scrap. In addition to this, their first pass yield is only 90%, so there is also a ‘defects’ issue.”

“What do you think? Are these issues solvable?” Maggie asked.

“Definitely,” Chuck said, confidently.

“Tell us about inventory, Frank,” Maggie requested.

“Ivy has about 10 weeks of inventory,” he began. “Some of it is dated, so potentially unusable. A rule of thumb is that each week of inventory costs 1% of a year’s inventory in tax. When you consider they purchase about $10 million in inventory per year, that’s a $1 million tax.”

“Can we improve on that?” John asked.

“I’ve estimated that we will be able to cut it in less than four weeks,” Frank replied.

“Don’t forget uptime is only 12%, so there is opportunity there as well,” John chimed in.

“It’s interesting that a cheapskate like Price missed so many ways he was losing money,” Maggie commented. Murmurs of agreement followed.

“So, what is the bottom line? Should we buy it for the $1.5 million that Price is asking?” John asked.

“Well, sales are $15 million, and profit is $250,000 after Price gives himself a $500,000 salary. He is asking $1.5 million, but this comes with no assets as they rent the building and the equipment is worthless. We would be essentially buying ‘goodwill.’ However, in electronics assembly, a price-to-earnings ratio is typically 10 to 20 (Note: 10 X $250K = $2.5M), so the $1.5 million doesn’t seem too high at all,” Frank said.

There was a lull in the discussion as the team members thought over the information.

Frank added, “I’m extremely optimistic that we can make this work for us, as Price granted me permission to speak with their main customers. These customers have difficulty finding assemblers, as they have small lot sizes. I spoke with them, and they will stay with us. All seemed quite happy that we might take it over.”

“Let’s offer $1.25 million, as we will need to invest quite a bit of time and money to bring it up to reasonable standards,” Maggie said.

“Chuck, if this deal goes through, you will become the general manager at the business we plan to call Ivy Benson Electronics,” John said. “What do you think about using Phil Consol and Tanya Brooks as your two lead engineers?”

Chuck was not the type of chap who easily became embarrassed or emotional, but his face grew a little pink and, if you looked closely, a slight tear could be noticed in the corner of each eye.

Epilogue: One week later, Ned Price accepted a negotiated offer of $1.4 million. He insisted that the team needed his help running the business for the first six months, for a $250,000 salary, but the team turned him down.

How will the workers receive the new management? How will the team handle the takeover of Ivy Electronics? Will they clean up the bathrooms?

Stay tuned to find out.

References

1. 5S, Wikipedia.com.
2. Muda, Wikipedia.com

This column originally appeared in the February 2022 issue of SMT007 Magazine.

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