-
- News
- Books
Featured Books
- smt007 Magazine
Latest Issues
Current IssueComing to Terms With AI
In this issue, we examine the profound effect artificial intelligence and machine learning are having on manufacturing and business processes. We follow technology, innovation, and money as automation becomes the new key indicator of growth in our industry.
Box Build
One trend is to add box build and final assembly to your product offering. In this issue, we explore the opportunities and risks of adding system assembly to your service portfolio.
IPC APEX EXPO 2024 Pre-show
This month’s issue devotes its pages to a comprehensive preview of the IPC APEX EXPO 2024 event. Whether your role is technical or business, if you're new-to-the-industry or seasoned veteran, you'll find value throughout this program.
- Articles
- Columns
Search Console
- Links
- Events
||| MENU - smt007 Magazine
Examining Cost of Ownership Challenges
December 31, 1969 |Estimated reading time: 7 minutes
The most important consideration when purchasing equipment is to examine the challenges the electronics industry faces this year to understand how it affects cost of ownership (COO) decisions. Requirements for new capital can be broken down into three categories. The first is the need for additional capacity within a site, or for a new project. The second is the need to replace old equipment. The third is the requirement for specialty equipment. A global engineering consultant at an EMS firm could spend a lot of time on equipment evaluations - examining equipment capability and COO. Although it’s very important, the lowest COO is not always the main criteria when selecting equipment. There are a number of situations in which other criteria can take precedence.
During the EMS industry’s period of significant growth in the late-1990s and early 2000, delivery lead time was the most pressing concern when buying equipment as manufacturers worked diligently to meet increasing customer demands. Now, equipment lead times can still be a problem, particularly for larger orders or with little notice from customers.
On such occasions, equipment is needed sooner than suppliers can deliver, leaving manufacturers to look to several suppliers to meet tight schedules. In such instances, even if there is a preferred machine in mind with a low COO, the delivery schedule may not meet timing requirements.
As the EMS industry must react very quickly to customers’ changing requirements, this situation becomes commonplace. Therefore, when selecting equipment and performing a COO analysis, it may be wise for EMS providers to select two or three companies to work with to have flexibility in the area of delivery and other commercial issues that may arise. At a minimum, it’s important to have a dual-source strategy.
Another situation is an increase in the number of incidents in which customers mandate the use of a particular brand and model of equipment. As big deals are made, this can often factor into part of the agreement. The downside of this is that there may be additional costs associated with adding a different brand of equipment into your factory. It requires training, spare parts, programming, etc. EMS companies may also need to install customer-required equipment that is not well supported in a particular geography. In this case, it could take a long time to get the necessary on-site support, and may increase downtime if there are problems.
Operationally, factories with a purer installation of equipment (i.e. fewer brands), generally run more effectively. As more brands of equipment are added, the complexity of running a factory increases, and operational effectiveness may decrease as more unique equipment is added. This is a factor that might be overlooked as part of the COO.
Along the same lines, how many companies still run SMT lines with mixed vendors for SMT placement? Historically, many companies placed a best-in-class fine-pitch machine next to a best-in-class high-speed machine. While, on its own, each machine had the lowest cost of ownership, when the two machines were combined, they no longer offered the lowest COO solution. This is because each machine had its own requirements, including programming software, unique feeders, and spare parts. Balancing programs was difficult, feeder inventory was larger, and the learning curve for each machine often was longer as operators weren’t always proficient on both machines. The need for mixed-vendor placement lines is now a thing of the past as new technology combines high speed and fine pitch into the same platform. The conclusion is that it is important to look at the big picture to determine how equipment will affect the overall operation.
When it comes to new capital - replacing old capital - the curve Figure 1 shows the typical age of equipment distribution for a company. Many EMS companies have a large amount of inventory of equipment purchased around 1999 or 2000, when the industry was at peak production. This equipment is now seven or eight years old; some companies may have older equipment, which has the luxury of being fully depreciated, and, as such, is often considered “free.”
Figure 1. Typical EMS age distribution of assets.
The question often arises: when should your company consider replacing old equipment? Should you wait until it becomes a maintenance problem? Do you wait until you get a new technology that can’t be handled by the old equipment? Do you determine whether new equipment would have a lower total COO?
It is believed that it is far better to be proactive in this situation, instead of waiting until the bitter end of the system’s life cycle. Even if the line is still running, this does not mean it is the most cost-effective solution.
Figure 2. Market analysis.
A “free” asset still has direct and indirect labor supporting it. It also takes up floor space, has facility requirements, and so on. A new placement machine also may be twice as fast as the older incumbent equipment. One EMS provider* has installed new SMT lines that do the equivalent work of two older lines. Beyond the productivity improvement, the machines are more accurate and provide better quality. The software in new equipment is also easier to use and, therefore, leaves less room for error. If we had not examined the total cost of ownership (TCO) we would have missed the opportunity for greater cost savings.
As new capacity has been added to factories, many newer lines are being used for high-volume consumer products. However, this is an extremely cost-aggressive market segment that encourages a manufacturer to examine all costs and potential opportunities carefully. One opportunity for companies manufacturing consumer electronics is to determine ways to reduce capital costs. Most equipment prices have seen a steady decline over the past six or seven years, or at least an increase in performance for the same price. Many suppliers have moved some of production capability into China or Taiwan. In addition, there are a growing number of Chinese-made machines that compete globally against European-, American-, and Japanese-based equipment. This is evident when walking trade-show floors; market share reports indicate that most wave soldering machines are now sold by Chinese companies (Figure 2).3
How do the offerings of these companies fit into future equipment purchases? Clearly, they have a price advantage; however, other industry considerations include reliability, quality, support (inside and outside of China), customer service, and potential for patent-related issues. Today, China-based companies make soldering equipment and screen printers, but in the future will they also start making placement machines?
While Chinese equipment can represent a lower cost-of-capital solution, there has not been enough data established to determine whether they will provide the lowest COO solution. Capital cost is important, but manufacturers must stay focused on all aspects of COO.
When buying specialty equipment (equipment not commonly used across different customer products, manufacturers should consider the lifespan of both the project and the equipment. It’s important not to assume that the equipment will last its full depreciation cycle. When that project is complete, how easy will it be to use the equipment for other work? For example, a selective soldering machine is customized for a unique project in a particular geography. Once that project comes to an end, will those machines end up as surplus with little residual value due to low demand on the used equipment market? Keep in mind, a $210,000 asset with seven-year depreciation, will cost $30,000 depreciation per year. You may have to assume that, at the end of three years, the equipment’s residual value may be $30,000. Therefore, yearly costs are closer to $60,000 per year. While these are very rough calculations, you can see how one change can cause capital costs per year to double.
Figure 3. Custom SMT line monitoring.
Finally, do you collect data from the factory to determine equipment performance and COO? To do this, good data is required from lines, and should include detailed quality information and operational performance such as downtime reports, maintenance reports, and throughput numbers. Unfortunately, there is no simple way to collect all of this information. You can collect it manually, but you must ensure data integrity and be aware that detailed data collection can be quite tedious. On a positive note, new equipment software is better than ever, and it is becoming more common for equipment messaging to be CAMX-compliant.
Assembly, test, and inspection equipment using the CAMX standard will speak the same language so that their messages can be collected by a broker and stored in a database for analysis. While this is a move in the right direction, the industry has been slow to adopt the standard, and most equipment providers currently have their own unique solution, which does not communicate with other brands of equipment. Custom software can also be written (Figure 3) to collect and display the data that you specifically want.
Conclusion
In addition to normal COO considerations, it is important to understand the changes and challenges that the industry faces, and the effects that it will have on capital equipment purchasing decisions. *Celestica, Toronto, Ontario, Canada.
REFERENCES1. Padnos, Gerry, “Cost of Ownership Considerations,” SMT, May 2006.2. Gibbs, Glen; Lewis, Al, “Cost of Ownership for Dispensing Equipment,” SMT, June 2006.3. “Worldwide Wave Soldering Market Study,” ITM Marketing.
Mike Berry, global engineering consultant, Celestica, may be contacted at mberry@celestica.com.