Estimated reading time: 5 minutes

Maggie Benson’s Journey: A Solution to the Cost-Estimate Problem

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 story continues with Andy and Sue, who both worked at Ivy-Benson Electronics, but have been taking on other projects for Professor Patty Coleman at Ivy University.

At Hartman Electronics, Professor Patty asked owner Matt Harman to describe his new project to Andy and Sue. He had just explained how much he pays his operators and engineers but had concerns about whether this was the right amount.

Andy and Sue had been through a similar exercise at an auto mechanic’s shop, where Professor Patty recommended they learn the true cost of operating a business.

“We’ve been asked to perform final assembly of some units for the FAA,” Matt said. “It involves taking PCBs that we assembled on our SMT lines and connecting the PCBs together with wiring in a housing about the size of a small refrigerator. We estimate we will need 20 operators and five supporting engineers.” Matt then gave Patty, Sue, and Andy a tour of the facility and answered their many questions.

“I pay the operators about $20 per hour and the engineers $40 per hour,” he said. “I figure a 40% premium is fair. So, I plan to charge $28 per hour for the operators and $56 per hour for the engineers. Does that seem about right?”

Sue and Andy stared in disbelief at Patty, who then suggested that the two join her in a small conference room to analyze the situation. As she closed the conference room door, Sue said, “Is Matt kidding? Can’t he see right off the bat that he’ll lose his shirt if he charges so little?”

Andy shared the same sentiment, so Patty explained the situation. “Matt charges his PCB assembly customers per board assembled using a formula the previous owner used, so he is unfamiliar with current charges for this type of work. Let’s help him by suggesting what he should charge, and back it up with analysis. But I want you two to take the lead on this.” She then left the room to chat with Matt.

Andy repeated what Matt had said about 20 operators and five engineers being paid $20 per hour and $40 per hour, respectively.

Sue said, “I think it will make our calculations easier if we consider that he also has 20 operators and five engineers doing SMT assembly. Overhead costs will be split between the two operations. He has one person in marketing, one in sales, and two people in procuring and purchasing of PWBs, components, etc.”

“He also has two managers—one for SMT and one for the new project—and an administrative assistant. He also has an accountant,” Andy said. “He told us that he personally wants to make $250,000 annually.”

Sue suggested that they put all the data they were discussing in a spreadsheet. After about 90 minutes of work, Sue and Andy were quite confident they had a reasonable estimate of how much it would cost Matt to keep his operators and engineers employed. Just then, Patty returned, and they reviewed the final numbers together.

Patty thought their answers were spot on. “Okay, let’s discuss your analysis with Matt.”

Andy suggested that Sue kick off the meeting because she had developed the spreadsheet.” Once they convened in the conference room, Sue said, “Matt, it is true that you pay your operators $20 per hour and pay your engineers $40 per hour. However, with all overhead costs, we estimate that the operators actually cost about $44 per hour and the engineers $74 per hour. So, you need to charge at least this amount.”

Matt felt shaken and flustered, and his face grew red as he spoke directly to Patty, “You said these kids knew what they were doing. This is laughable. Why do I need to charge this much?”

Patty appeared angry and said firmly, “Matt, I told you not to over-react, and to listen to the analysis they performed. What you said was insulting.”

Clearly chastened, Matt replied, “Okay, you’re right. Proceed.” Still, he appeared very skeptical.

Sue resumed. “Your operators and engineers have a health care benefits package and a 401K. In addition, you have to pay Social Security, Medicare, and a few miscellaneous things. Your accountant confirms that this alone is a 45% adder.”

“Wow, that’s already beyond my 40% adder,” Matt said sheepishly. “I feel like a big dummy.”

“You have two purchasing agents, and these add $1.74 to each worker per hour, and a marketing and sales adder at 87 cents each,” Andy said.

After Sue explained that his managers and accountants add $2.90 and $1.02, respectively. Andy added with a chuckle, “Your three administrative assistants add $1.74 and the one personnel manager 87 cents.”

“Your requested salary costs $1.83 per hour per worker and we added 10% for a modest profit,” Sue said.

“Okay, you win,” Matt replied. “I’m embarrassed that I never really thought about the fact that the only people earning money for the company are those that make the product. Their efforts need to financially support the many people who are obviously important but don’t generate revenue.”

“You finally get it, Matt,” Patty said gently.

“Professor Patty, one of your cardinal rules is that doubling what an operator is paid approximates what they will cost,” Sue said triumphantly. “Twice $20 per hour equals $40 per hour, quite close to our estimate of the cost of $44 per hour.”

Patty felt warmly toward Sue for having called her Professor Patty.

Epilogue: Matt charged $48 per hour for the operators and $80 per hour for the engineers. He explained this to his customer using a cost analysis similar to the one that Patty, Sue, and Andy recommended. Both the customer and Matt’s company benefited from the relationship.

The Board of Advisors of the engineering school at Ivy U asked for an example of engineering students solving practical, engineering/business-related problems. The Dean asked Patty for help, and she suggested that Sue and Andy give a presentation on their project.

At the end of the presentation, even very senior members of the Board of Advisors referred to Professor Patricia Coleman, PhD, PE, as “Professor Patty.”

Note from Dr. Ron: I’m sure many readers will think that this post is just a work of fiction. After all, no one could be as clueless as Matt. As with all my posts, this one is based on a true story.

Would you like the Excel spreadsheet Sue used to make the calculations? Send me an email at rlasky@indium.com.

This column originally appeared in the June 2023 issue of SMT007 Magazine.