Indium Blog

Conclusion to: Profits are Down. Could a Cheaper Solder Paste Have Caused it?

  • Solder Paste

  • Folks,

    Let's see how Ivy University graduate student Maria Gonzales is handling her assignment to find the lost profits a Liberty Elecronics...

    Maria had never been so nervous. She was going to give a presentation to the owner of Liberty Electronics, Chuck Babcock. That would be scary enough, but she was going to have to tell him that the new, cheaper solder paste that they switched to a short time ago was causing them to lose money. Little did she know, Chuck would not be the problem.

    As Professor Patty Coleman and Maria Gonzales traveled together in Patty’s car, going 30 miles south on Route 91 from Ivy University to Liberty Electronics, Maria finally confessed her nervousness.

    “Professor Patty, I’m really nervous,” Maria said.

    “You shouldn’t be! You did a very thorough analysis. Just stick to your analysis and data and you will do fine,” replied Patty.

    However, Patty thought of the many times years ago she was in Maria's shoes and she was nervous too.

    The remainder of the ride was filled with small talk. Patty was pleased to see that Maria was an artist as well as an engineering student. Ivy U was one of the few institutions where an engineering student could minor in a field like art.

    In no time at all, they were at Liberty Electronics.

    As they parked the car, Maria showed Patty a photo of her latest painting.

    “Maria, that is stunning. You have to tell me the details on the way back to Ivy U,” Patty said.

    Figure 1. Maria's Latest Painting. 

    Aftrer they left Patty's car, they went into Liberty’s main building and were met by Jose.

    “Professor Coleman, este es Jose de quien le he hablado mucho,” Maria said.

    “José, María me ha hablado mucho de ti. Gracias por ayudarla tanto en la auditoria,” Patty responded.

    Jose was so stunned to be addressed by Professor Coleman in his native tongue--and with only a very slight American accent--that he turned red in the face. After exchaning pleasantries, Jose took Patty and Maria to the conference room.

    Attending the meeting in the small conference room were Patty, Maria, Chuck Babcock, Jose Castellanos, Liberty’s new procurement manager, Mitch Miser, and to Patty’s surprise, ACME CEO Mike Madigan.

    “Mike, fancy meeting you here,” Patty said cheerfully as she shook her former boss’s hand.

    “I always learn something important when I am around my favorite professor,” Mike responded.

    Patty had to chuckle that the new procurement manager’s last name was Miser!

    When Miser was introduced by Chuck Babcock, Miser responded, “That’s right, the last name is Miser, I’m here to cut costs and I surely have,” he said gruffly.

    Patty was immediately put off by him. Maria looked terrified.

    “Thank you for coming,” Babcock said to the group. “Profits are down a bit and I discussed this with my golfing buddy Mike and he suggested Professor Coleman might be able to help us understand why,” he continued.

    “You’re also losing money to me every time we golf,” Madigan teased. Then, he quickly added, "Actually, Chuck beats me every time.”

    There was polite laughter.

    “So Professor Coleman, please tell us what your findings were,” Chuck asked.

    “Before you begin, I just want to point out that I am the only one here with any finance background. I think it’s a waste of time to have these Ivory Tower academics come in here and muck things up,” Miser said, almost shaking with rage.

    “Well, let’s see what they have to say,” Babcock shot back, clearly annoyed.

    “Dammit, we buy 4,000 kgs of solder paste a year. I found a new vendor, and these guys charge $0.02 less per gram. That’s $80,000 per year of savings,” Miser responded with a red face.

    Patty was a little surprised by Miser's intimidating attitude.

    Patty looked at Maria’s ashen face and whispered in her ear, “It’s OK. Just share what you did, and I will support you if needed.”

    Patty proceeded to introduce Maria. “Maria Gonzalez is one of my grad students. Mapping the assembly process at Liberty and developing a cost model is part of her research for her PhD. Maria, please share with us your findings."

    Maria stood up and was visibly shaking. She used Powerpoint slides to describe the work that she and Jose performed to map the assembly process and develop a cost model for it. As she spoke, she continued to relax. Her confidence in her work and the support from Patty helped.

    About 15 minutes later, Maria concluded, “The only significant change in the period of time that profitably dropped was the solder paste. In addition, profitability is down 15% in this period, not the 10% that has been stated,” Maria pointed out.

    “But the solder paste is cheaper, why are profits down?” Chuck asked.

    “That’s right,” Miser shouted, barely containing his rage. "We are saving $80K per year. The profitability being down is a random fluctuation.”

    “That’s correct: the solder paste does cost $80K per year less. But the solder paste has poor response to pause, and as a result, production is down 5%,” Maria explained.

    Miser was ready to blow. Chuck whispered in his ear to calm down or else.

    “I’m confused, what is 'response to pause' and why does it make profitability go down if it's poor?” Chuck asked.

    Maria was now feeling confident. “Typically, a few times each shift, the line will be paused for some reason, say... adding components to the placement machine. During this pause time, some solder pastes will stiffen up and the first print after the pause will have to be discarded. Wiping the print off of this first board and reprinting it results in 5% lost production per shift,” Maria said.

    Miser was beside himself. “There is no way that such a small amount of solder paste affects profitability that much!” he shouted.

    “It isn’t the solder paste cost, it is the lost production time,” Maria shot back. “In each shift, about 5% of the time the line is down. All of the workers are still paid during that time, as is equipment amortization, rent etc. None of those costs stop during the downtime.”

    “You said profits are down how much?” Chuck asked.

    “About 15%,” Maria replied.

    “That’s ridiculous! How can profits be down 15% if production is down only 5%? You engineers should stick to engineering and leave finance to us numbers-guys,” Miser shouted.

    Maria was temporarily stunned by Miser's aggression.

    “Well, what is your answer, Maria?” Chuck asked.

    “I think it is easier to understand it going the other way. Say you increase production by 5%. You have 5% more product to sell, but each unit costs less to make, because you have amortized your fixed costs over the larger numbers of units produced. So, you make more profit on each unit and have more units to sell. I used ProfitPro software to make the calculations. Professor Patty calls this profit improvement as a function of productivity, ‘The Exponential Law of Profit’.” (See Figure 2.)

    Figure 2. The ProfitPro calculations that show that the new solder paste causes a loss of 15% in profitabilty, even though it costs $0.02 per gram less.

    "If we go back to the old solder paste, we will regain the 15% higher profits, even though the old solder paste costs $0.02 gram more?"

    Maria responded, "That's correct."

    As Patty was watching all of this, a smile crossed her face.



    Liberty Electronics went back to using the old solder paste and, true to Maria’s predictions, production and profits went back up to where they were.

    Mitch Miser left Liberty shortly after the meeting. No one knew the details of why he left.

    Mike Madigan finally beat Chuck Babcock in golf. Rumors abounded that it was payment for helping to get the profits back to Liberty.

    Maria Gonzales was offered a summer internship at Liberty, which was convenient, as she had a new gentleman friend at the company. 


    Dr. Ron

    Acknowledgment: The paintng in figure 1 was created by Dr. Ron's granddaughter, Sophie Morvan. Sophie is a sophomore at Bryn Mawr.  Bryn Mawr is one of the Seven Sisters colleges. 

    Note: All academic, corporate, and peoples names are ficticioius.