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• Business Case Questions for Occam

  August 28th, 2007

  

  

  

  

  

  Folks,

  In continuing to ask friendly questions about the Occam Process, see the fictitious vignette that follows. Please feel free to share your thoughts or learnings from the web, we (including me) are all here to learn. Here it goes:

  Could it be 25 years ago that I started Excel? Initially it was in my garage. It was a bold move, I was only 3 years out of the Thayer School of Engineering at Dartmouth and had a family with a new born and 2 year old. But I wanted to work for myself, so I struck out and started doing electronic assembly on my own. At first, it was just me, with a little help from Mrs. Wesley. Then I hired some part-time high school kids, then my first permanent employee 18 months later. Today Excel is the second largest ESM, topping $15B per year. I, Charles “Chuck” Wesley am proud of that, but I am most proud, that during all of this time, I was able to be a good dad too. My three young adult children easily rate as my and my wife’s greatest accomplishment. Two engineers and one in med school, not bad for a busy mom and dad.

  Business has admittedly been a challenge in the last few years. The EU’s WEEE and RoHS directives, and the RoHS copy cats throughout the world have been a real pain. Excel still struggles with some technical and logistics issues related to these directives. For the most part though, my team has been able to handle the issues and my relationship with my two biggest customers has never been more mutually beneficial. I have watched Phoenix Cellular go from and upstart to the world leader in cellular phone sales and Pinnacle Computer is number 2 in laptops. I worked with both companies since they were young. Isaac “Ike” Watts of Phoenix, Phillip “Phil” Bliss of Pinnacle and I have virtually grown up together; always treating each other like partners, OK admittedly with NDAs in place. Most recently the three of us started a joint venture in re-cycling, a business opportunity all of us think is not being addressed, hence is a great opportunity. Since Ike and Phil’s companies don’t compete, the three of us have had an annual “summit” to discuss trends in the business and how to compete effectively in the dog eat dog world out there. These summits are usually lively affairs with each company’s financial and technical executives present.

  This year’s summit is being held at Colonial Williamsburg. It has been organized by my VP of Technology, Frances “Fanny” Crosby. Fanny has been with me for 18 years right out of Thayer. She was so good, that I paid for her to get her PhD in Materials Science from Cornell. Fanny has been pushing for the main topic of discussion, at the “Summit,” to be Verdant’s Occam process. She argues that if this technology is as good as the “buzz” in the industry that we should get in on the ground floor. She has recruited Verdant’s VP of Tech and Business Planning to discuss this “evolutionary technology.” Occam took the electronic assembly world by storm when it was announce on August 1, 2007. The claims were breath taking: no soldering, the simplest assembly process, no RoHS concerns etc. Ike and Phil, as many, are intrigued but a little skeptical. Since cost is an obvious issue, Fanny assured that all involved signed NDAs so that cost can be discussed openly.
  When the day of the meeting arrived, it was a cool, crisp late October day in delightful Williamsburg. Fanny had planned a little historical touring and even a “lanthorn tour” in the evening to supplement the technical and business discussions. We had all agreed that the first day we would discuss the Occam business case, costs and market opportunity.

  The kick off presentation was given by Verdant’s VP of Business Planning John Newton. His presentation was a thing of unparalleled inspiration. He briefly described the process and in more detail the business opportunities. He waxed poetic numerous times and quoted JFK, Voltaire, Goethe, the Bible, Churchill, MacArthur and FDR. At the end he received a standing ovation. My first feelings were that everyone would want to adopt this ground breaking technology.
  Fanny had scheduled the first day so that we had a break at 10AM after Newton’s presentation and we were to gather again at 2PM and work until 6PM. It’s a great plan, as an October tour through Williamsburg is a delight. During this break Ike and Phil asked if they could walk with me and chat. Since they represent 60% of my business how could I refuse? So while we observed the gunsmith making a flintlock rifle and the silversmith a teapot, we talked. Ike and Phil were concerned. They agreed that Newton was a great and inspirational speaker, but the talk dealt too much in generalities. They both wanted to know how Occam would make their companies more money. Hmmm, not an unreasonable question. They both asked if they could present their current cost structure to start focusing on how Occam could save them money. The fact that we were both willing to share costs is probably a first in the industry.

  So at 2PM Ike asked to go first. I was stunned how open he was with his costs. Ike told us that the Phoenix Raptor, the latest phone, had these cost metrics:
  Sales Price: $130 – Gross Margin: $39 (Marketing, sales, admin, etc is $22, so operating profit is only $16) – Bill of Material: $80 (Components, display, camera, etc)
  Leaving $11 for PWB assembly, mechanical assembly of the phone, packing in a box and profit for my company, Excel (only $3!). Subtracting out the non PWB assembly costs, Ike gets each phone’s PWBs assembled for about $5-6. Currently he has reliability equal or better than before RoHS. Even if Occam could reduce his cost to $3-4 is it worth the risk he asks? Phil is asked to present Pinnacle’s costs, but he said they were close enough to Phoenix’s that they would add nothing new.
  Phil and Ike were united, they argued that Occam addressed only PWB assembly, which is less than 5% of their cost. Admittedly, it would save the cost of the PWB, but not for free, as the laminating material and copper plus processing would likely approach the PWB’s $5-6 cost.

  They went on that there currently exists a $100B infrastructure in electronic assembly equipment that is accomplishing this mission with success. No one argues that considering WEEE and RoHS, that there have been and will continue to be challenges. But what is the financial or other advantage that merits the $10 to $100Bs of capital and research effort that Occam would require? Phil and Ike argued that they had trouble seeing how this cost and risk would merit the possible small cost savings.

  They went on to note, that with WEEE and other initiatives, recycling is more important than ever. However, recycling is not simply grinding up old electronics products and extracting the materials, a significant part of the process is heating the PWB to melt the solder and “pulling” good components off the PCB to be used again in lower quality electronics. This process makes money and saves the environment by preventing the need to make additional components. With Occam’s process this simple “pulling” of components would appear to be hard indeed.

  So Phil and Ike await the Occam answers to their questions. Help Dr. Ron by seeing if you can find the answers in the many web postings or webinars.

  Next installment will address the technical questions

  Dr. Ron notes:
  1. Cost figures for a cell phone are from Prismark
  2. All of the characters in this story are named after real people. The first person to identify what these folks have in common will receive a small gift. Please include your land address.

  Cheers,

  Dr. Ron

  Posted August 28th, 2007 by Dr. Ron Lasky

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