Analyzing Material Cost in Today’s Global Economy—Hit the “Pause” Button

This month’s column was planned to conclude a series that analyzed the cost of material in today’s global economy. The first three discussed the competitive importance of material cost considering it is generally 70–90% of the total electronic product cost.

It was recognized that differences in the cost of material that are based solely on the geographic location of where the product is being assembled frequently occur. Further, for a given purchase volume, any increased shipping and distributor overhead costs do not justify the magnitude of these differences.

The conclusion was that material price variation to these levels—in some cases from 20% to 50+%—could only be explained by one of two reasons:

1. Certain affluent markets are simply willing to pay more (i.e., what the market will bear).

2. For political reasons (i.e., manipulating material pricing to funnel the value-added product assembly activity and the associated jobs to regions that are common to the material manufacturers).

This is an audacious claim that needs to be confirmed with data. That was the original intent of this column. Toward that end, many U.S. agencies and NGOs (non-government organizations) were contacted for data… still waiting. Hopefully, we will be able to take our finger off the pause button and hit “play” next month.

Regardless, there are a few important points to be made while awaiting the data:

1. In a free global market economy, a company can sell their products at any price they choose. They can even choose to provide those products to some customers at preferred pricing, unless there is an international agreement to the contrary. It would be good to know this, wouldn’t it? I’m not speaking of a material price preference given because a customer offers a higher level of business activity to a material supplier (i.e., annual purchase volume, or any other traditional business reason). I’m referring to component manufacturers and/or distributors increasing prices to “non-local” companies for the reasons stated above, perhaps with their government’s encouragement, or worse, direction.

2. If this is the case, what is the remedy for electronic product assembly operations that are subject to the high side of this material cost disparity, for whatever reason? The remedy is to manufacture these components locally. We need to challenge the industry similarly to how we do to the re-shoring effort for assembling products. So, regardless of the offshore material pricing motivations, this level of national vertical integration would make the material price manipulation question moot.

3. Three questions require answers:

a. Does this mean manufacturing electronic components in the States— resistors, capacitors, coils, inductors, ICs, etc.?

b. Do we have an educational system to support this ground shaking shift in manufacturing thinking?

c. Can we do this competitively?

In order, the answers are: yes, no, and yes, if we can change the answer to the second question to “yes.”

All roads lead to education!

“If your plan is for one year, plant rice. If your plan is for ten years, plant trees. If your plan is for one hundred years, educate children.” —Confucius

Forget about a planning horizon of one year. In today’s Western, free-market business climate, one year is a long time. Unfortunately, in many cases, our totally near-term, profit-now culture obsesses almost exclusively on the results for the next quarter—stockholders demand it. In many cases, the investment community has become one of the traders—those who buy and sell with little regard for a company’s long-term prospects. This pressure on management leads to a series of decisions and actions that are not conducive to long-term success, just the near-term stock price. The mentality of, “We must ship,” even if it means issuing a work order to build 1,100 units to be assured of getting 1,000 that pass functional test, so be it. So, in addition to building products, we become proficient in building bone yards.

In our ardor to make the numbers, understanding the root cause of a consistent yield loss—whether it be client induced (design) or production induced (statistically incapable or out of control of the assembly processes)—often gets relegated to the bottom of our production priority list. At the top of the list, unfortunately, is the mindset to keep the machines running—at all costs!

However, with a properly educated workforce, the big data available on the production floor provides an opportunity not only to do root cause defect analysis, but also to do it in real time. In some cases, corrective action can occur without the need for human intervention through metaprocess control (sometimes called Factory 4.0).

It takes management virtue to resist the pressure imposed by this short-term thinking.

In a way, it is analogous to the difference between batch assembly—where product is pushed through the factory, and continuous flow manufacturing—where product is pulled through the factory. Virtue is required to transition one’s thinking to acceptance of having production operators on the line who are idle while waiting for upstream work, rather than building as many units as possible at each work station and batch moving the work in process from one work station to the next.

If you are a process engineer, the cost of the material for which you are developing an assembly process doesn’t concern you. Why should it? As an individual, you are evaluated on assembly throughput (the sister of machine utilization) and yield. This mindset is a consequence of an organizational structure that can be likened to a field of silos—each silo is a department. “Hey, it’s the procurement department’s job to purchase the material, not mine!”

This all changes if the organizational model is product team-based (SMT Magazine columns December 2016 to March 2017), rather than department- based.

However, as an engineering student I was not educated in material purchasing. There was no class called “Material Procurement 101.” How can I be concerned with something of which I have little knowledge? Looking back, wouldn’t it have been an advantage for me to been taught about real world material procurement as part of my traditional Economics 101 class?

Passing through the looking glass from the academic world to the real world, we are like children looking for manufacturing wisdom. I remember during the emergence of SMT in the early 1980s, the floodgates opened and everyone was racing for the SMT assembly Holy Grail.

People would approach me at conferences and ask, “What is the best pick-and-place machine to buy?” In other words, “Just tell me the answer. Save me the details.” Of course, the answer then, as it is now is that there is no single answer. The devil is in the details.

Toward that end, in our decision-making class we suggest one important criterion in the judgment process is to employ an objective way to develop a figure of merit for each of the choices that are in front of us. Specifically, to develop a weighted averaging matrix:

1. List all the variables that affect the decision.

2. Weight each one’s relative importance to your interests.

3. Rate each of the candidates with respect to one another.

4. Multiply the rating by the weighting factor in each category and sum the products to arrive at an option’s figure of merit.

Finally, our species has the distinct advantage of storing and sharing information. We didn’t have to develop the optimum time/temperature reflow profile for 63/37, tin/lead solder.

The manufacturers who wanted us to buy their solder paste and reflow ovens did this. They based recommendations on the empirical work they did in achieving a solder joint grain structure with the preferred intermetallic that led to the most robust component-to-circuit board attachment.

Even then, blind faith in the experts’ recommendations could be misleading and dangerous. As stencil apertures got smaller and the volume of paste we printed decreased significantly, we ran into process problems (paste sphere oxidation) created by recommended by too slow soak reflow profiles.

Judgment once again becomes the operative term—unfortunately, it is not a skill that is currently developed in our educational system. But, nonetheless, it is an essential attribute on the competitive field of the real world.

At least that’s what I think. What do YOU say? I’d like to hear your thoughts, reactions and opinions.

Next month, we hope to have the statistics needed to support the component pricing disparity claim.

Back

2017

Analyzing Material Cost in Today’s Global Economy—Hit the “Pause” Button

11-02-2017

It was recognized that differences in the cost of material that are based solely on the geographic location of where the product is being assembled frequently occur. Further, for a given purchase volume, any increased shipping and distributor overhead costs do not justify the magnitude of these differences. In this column, Tom Borkes looks at reasons that could drive material price variation to these levels.

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Analyzing the Cost of Material in Today’s Global Economy, Part 3

08-07-2017

Any increase in material cost based solely on an assembly operation's geographic location could, in itself, cause a condition that would not allow a turnkey electronic product assembler to successfully compete on the global landscape—notwithstanding the difference that exists in direct labor rates.

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Analyzing the Cost of Material in Today’s Global Economy, Part 2

07-07-2017

There is no question as to the importance of pure science, classroom technology, design engineering, and pure mathematics. One does not have to be a rocket scientist to understand the seminal role these technological tools play in the development of a firm foundation for the proper execution of applied high-tech electronic product production. However, teaching how to apply the theory in production can never be effectively taught in the ivory tower.

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Reading, Writing, Listening, Speaking and Analyzing Material Cost in the Global Economy, Part 1

06-06-2017

Complex automated systems in electronics assembly lines require a workforce with high engineering skill levels—a workforce that not only can write code, but also understands the science involved electronic product assembly process. It's not automation technology that is eliminating people's jobs. It's an educational system that is not responding to the needs of the new industries that the automation technology is creating.

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A New Organizational Model Using Logic, Cost-Effectiveness and Customer Service, Part 3

03-30-2017

Many of us look to the new U.S. federal administration with a high level of economic curiosity. How will the new president’s economic policies affect the high-tech electronic product assembly industry? Will the policies result in more jobs in our industry going to sources with low labor rates, or will they result in a renaissance of manufacturing and assembly activity here in the States and other high-labor-rate regions of the world?

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A New Organizational Model Using Logic, Cost-Effectiveness and Customer Service, Part 2

01-18-2017

In previous articles, Tom Borkes talked extensively about one of the controllable components of labor cost: the counterweight to competing against low labor rates—using automation to reduce labor content. Over the next few months he will drill down into the other controllable component of labor cost: indirect labor.

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Back

2016

A New Organizational Model Using Logic, Cost-Effectiveness and Customer Service, Part 1

12-22-2016

In the beginning, there was through-hole technology (pin-in-hole). Then, someone said, “let there be SMT,” and the earth and firmament creaked and groaned as Atlas shrugged.

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Leadership in Your Company: Something to Worry About?

11-30-2016

Leadership is an ingredient that most feel is important, even though many find it is hard to define. Some say that you will know good leadership when you see it. In this article, Tom Borkes of The Jefferson Project discusses the role of leadership, and how it can be taught in the academia.

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Do the High-Paid Managers in Your Organization Add Value?

10-25-2016

The widening gap between industry need and academic preparation has an adverse effect on the ability of a company to compete in the global manufacturing marketplace—and all competitive roads in any capitalist free market business ultimately lead to a cost versus contribution analysis. This article discuss another important cost driver—the cost of management and leadership, what a company gets for that money.

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Moving Beyond Paideia: Learning for Earning

08-11-2016

The complexities of our technological world and global marketplace now demand the development of specific, saleable skills as part of the student-customer's educational process--and that the template for teaching these skills must be based in the real world. Tom Borkes explains why in this article.

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The STEM Trap

08-03-2016

Post-secondary schools have not been responsive to the changing landscape of the modern electronic product assembly operation—they really can’t, considering the lack of real-world experience of most of the faculty. In this article, Tom Borkes explains why.

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The Production Engineering Student as Customer

06-17-2016

Production, industrial, process, manufacturing engineering, to name a few fields of engineering study, will never be successfully taught on-line. In his latest article, Tom Borkes explains why.

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The Henry Ford Division of Labor Production Model

05-31-2016

We are all aware of what the price of assembling a product is based upon: material cost, number of labor hours needed for the product assembly and test, and labor sell rate in dollars per hour. In this article, Tom Borkes writes why the disparity in labor sell rates is still daunting.

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The Importance of Being Earnest (Educated)

05-11-2016

This new column in SMT Magazine, titled "Jumping Off the Bandwagon," is dedicated to the continued development and improvement of the high-tech electronic product assembly industry, and the human component of that industry. For his first article, Tom Borkes talks about issues that, unless addressed, will continue to put product assembly at a disadvantage in high labor rate areas of the world.

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