Estimated reading time: 6 minutes

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.