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The Professor, Patty and Pete Find the Lost Profit


Our trio continue on their adventure:

As Patty, The Professor, and Pete maneuvered around the partially completed product, Patty noticed signs everywhere that proclaimed: “Being Responsive to Our Customer is Our Biggest Asset.” 

Pete commented, “This place is so crowded with partially built product that not another tube of solder paste or even a solder perform could fit out here.”

Our trio then approached a technician who was working on a product changeover. Patty introduced herself in Spanish and asked what he was doing.

Pedro’s face beamed when he heard Patty addressing him in his native tongue. He responded to her in Spanish (translated here.)

“I’m doing a product changeover,” Pedro replied, “We are really good at them, because we do so many. This is actually the second changeover I’ve done on this line today,” he continued.

“Your first job, must have been a very small lot size,” Pete commented.

“Oh, no,” Pedro chuckled. “We never ran the first job.” He went on, “Another more important job than the fist came along and we were told by our supervisor to changeover for that one,” he added.

“You mean you never ran any boards for the first job?", The Professor queried.

“That’s right,” said Pedro. “This only happens a couple of times a month,” Pedro confirmed.

“I really like working here,” Pedro shared. “I feel proud that I have learned to be so good at change-overs and all of us have been able to work a lot of overtime since the ‘Being Responsive’ campaign started. We feel like we are really making a difference and getting great pay,” he beamed. “Just look at all of the product on the floor,” We are really producing a lot of stuff,” Pedro boasted.

Our team strolled away from Pedro and his co-workers and ran into a very hyper man, Phil Marcos, production manager. Phil was one of those types that made you nervous just being near him.

“Great job! Great job!, These folks are really supporting my responsiveness campaign,” Phil projected at 250 words a minute in a strong Long Island accent. “I don’t have much time to chat, I have to stop production on line 4 for a 'Being Responsive' job that just came in. I need to have Pedro and the ‘changeover guys’ change that line over for this new job,” he finished as he trotted away. “He looked back and said, “I’m so excited that next quarter we will have 15% more production and that sales are up 10% this year.”

As Phil left, The Professor commented, “It’s a good thing Phil doesn’t speak Spanish, I’m not sure my ancient brain could process 250 Spanish words a minute.” 

They all burst out in laughter.

“I wonder where they will put all of the WIP when production increases 15%?” asked Pete.

Our team spent the better part of two days reviewing production and inventory figures. They learned that the site had 8 SMT/Through-hole mixed assembly lines. Before Phil Marcos arrival, normally six of the lines were dedicated to jobs with very large lot sizes. Some of the jobs ran for months without a changeover. Since Phil’s arrival, more high mix, low volume jobs have been sought after by sales. The two lines, devoted to such jobs in the past, were not enough to handle the new high mix jobs. The customers demanded fast turn around for these jobs as they paid a 5% premium. Since profit margins at this site were about 10%, these jobs seemed like a great deal financially. The meet this new demand most lines were regularly disrupted. There seemed to be little logic in how a line was selected, but all agreed that the facility looked “responsive.”

Pete found a room for Patty, The Professor, and himself to review the data. Pete had been watching The Professor and it was clear that he was holding back to let Pete and Patty learn by searching for the answer without too much help from him.

“The loss in profit clearly relates to the changeovers,” Patty said. “Professor, why don’t you let Pete and I figure this one out and see if we get it right?” she added.

The Professor beamed at his two protégés.

After numerous calculations, Patty and Pete presented their conclusions to The Professor. After a few minor suggestions, The Professor agreed with their conclusions. They went off to review their findings with Harry Hopkins, Jane (the new corporate CFO), and hyper Phil Marcos.

Patty started the meeting with a preamble.  “We developed a spreadsheet of costs, sales and profit. We are sure it is not the type of format finance uses, but it helps us to understand the problem,” she began. 

She projected the spreadsheet onto the screen and continued, “As you can see, sales are indeed up by 10% for this year, but that extra income was more than lost because inventory costs are up 66% and labor costs up 22%.” Patty went on, “The labor cost is understandable, you are doing many changeovers, often on second shift. Not only do you have to pay overtime premiums, but the many changeovers cause some disruption to all workers…..your breakrooms have never been so crowded!”

“Inventory carrying costs are a little harder to understand,” Patty continued. “Your increase in inventory is mostly product on the shop floor or WIP. Last year there was almost no WIP, now there is about $4 million in partially finished product on the floor at anytime. This decreases your inventory turns from 17 to about 10. We were able to make these inventory turn estimates, because holding each week of inventory costs about 1% of the yearly cost of all of the inventory. The bottom line is that the WIP is killing profitability, the 5% cost adder for the responsiveness jobs doesn’t come close to making up for this loss.”

Hyper Phil moaned, and then rapidly said, “You’re saying that my being responsive to the customer campaign is a failure.”

“Not really Phil,” intoned The Professor. "Just be more careful in your implementation."

“Can you give an example?” moaned Phil.

“May I tackle this one?" asked Pete. “We did quite a thorough analysis and are convinced that you can implement 90% of your ‘responsiveness’ jobs and not negatively affect production,” Pete went on. "As an example, 4 ‘responsiveness’ jobs last week where started at 1PM and finished at 6PM, too late for the day’s shipments. They didn’t ship until 10AM the next day. They could have been assembled on the next shift, with no disruptive changeovers and no extra WIP hanging around.”

Patty added, “We believe that you should leave 5 of your 8 lines undisturbed to handle jobs with very large lot sizes and have three  lines for some large lot sizes and the ‘responsiveness’ jobs." 

“We can work with you to develop a plan to minimize changeovers and WIP while continuing to be responsive. Your shop flow should be organized more like a ballet than a hockey game, quoting Phil Crosby. You can be responsive and minimize disruption on the shop floor… a balance is needed,” she summed up.

“One thing to remember, is ‘Emerson’s Rule,’” The Professor interjected.

“What is that? everyone asked. Spreadsheet

“It is from my dear friend, Professor Bob Emerson of Binghamton University, ‘Never release a job to the floor unless you are committed to finishing it uninterrupted.’ Bob is an expert on inventory management, he knows the crippling cost of inventory if not well managed, especially WIP, which includes much added value,” The Professor finished.

The meeting broke up and Phil, Harry, and Jane gratefully thanking the trio. Patty and Pete agreed to stay for a few days to help Phil set up a modified production control system.

“Boy, I was surprised how well that was accepted,“ Patty confessed. 

Pete, who usually has insider info, responded, “Phil was told to work with us or else…. I guess he listened.”

On that note, Patty’s cellphone buzzed. It was her mother, with the latest wedding details.


Dr. Ron