Building High-volume Electronics in High-labor-cost Regions, For Less


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By Gary A. Tanel

Automation is the key to unlock the door to domestic high-volume manufacturing. For many years, we have all accepted the premise that high-volume manufacturing is built in low-labor-cost regions of the world and low-volume assembly is performed close to the design center and end user (in the high-labor-cost areas). In a way, this seems rather ironic in that low-volume assembly has higher labor hours per unit than automated high-volume. The difference is in logistics. Timing and flexibility are the primary drivers in low-volume services, much like fast food orders that must be custom, immediate, and taste right. All competition is local; you want it your way and you want it now.

To reduce labor cost you have two options: reduce the labor rate or reduce labor content. Scaling the workforce upwards to align with production volumes is practical where labor rates are small and the labor pool is huge. It is easier to bring in lots of inexpensive people than it is to invest in design and fully automated equipment. High-volume production that is labor intensive will always go to the cheapest labor rate countries, with a cost of doing business of greater logistics expenses and less flexible response time.

High-volume Assembly Close to the End Market?Start by selecting products that are designed and ready for full automation. This means no test, inspection, rework, or manual assembly. Determine the logistics costs of shipping products from overseas to the end customer. When the labor cost to build the product is less than the logistics cost of shipping from overseas, an opportunity exists for local production. "If we automate and 'just let the line run,' doesn't the offshore low-cost-labor advantage asymptotically drop to zero?"1 Next it is time to restructure how you approach burdened labor rates.

Traditionally, the cost of capital and overhead is loaded into the shop labor rate. In this approach, as labor content approaches zero, the burden rate goes through the roof. Start by eliminating the link between burden and labor. Cost of goods sold is material + direct labor only.

Eliminate Functions in Automated High-volume ProductionThink about a "lights-out" factory approach where labor approaches zero. Going with a few highly skilled individuals rather than lots of lower-skill workers is the key to productivity and success. Monitoring the high-yielding process parameters is far more valuable than inspecting and handling products. Reducing the number of operators reduces variation and error. All the touch labor and human inconsistency that is typically injected into products through manual add-parts, visual inspection, testing, and rework must be eliminated. All supervisors and middle managers are eliminated, resulting in a very flat organization. The second level of the organization is engineering, purchasing, shipping, receiving, and accounting. That's it.

Generally speaking, equipment and material costs are the same regardless of where you are building around the world. This is dependant on where the equipment and material is made along with the capital tax structure of the country. These variations are minimal and overshadowed by logistics and labor considerations.

Engineering and prototyping units need to be as close as possible to the product design center to facilitate a rapid design cycle. The production locations are dependant on labor content and logistics costs. If automation is less expensive than labor and shipping, then build it next to the consumers.

"We need a corporate model that focuses on assembly of the customer's products and not on the technical disciplines or departments within the organization. We have evolved into an industry of indirect labor specialists. We have a corporate structure that puts each of us into our own silos"2 and departments that constantly struggle to justify their existence.

We live in a world of instant electronic communications and data sharing, so it is easy to design a product and build it anywhere in the world for consumption in that region. Physically moving parts around the world takes more work and costs more money. There are costs of doing business on the other side of the world, like shipping, training the workforce, accommodating multiple languages, time spent in customs, and executive downtime while traveling.

Clearly, not every product is fully automatable, but commercial products exist with high enough yields to eliminate the need for testing and inspection along with the indirect support infrastructure. Labor that simply "adds value" may not be optimized to eliminate labor.

Join Tom Borkes and Gary A. Tanel for a webcast on this topic, Wednesday, March 18th at 12:00 noon EST.

Inspiration for this article came from two articles by Tom Borkes of the Jefferson Project:1."PAPER OR PLASTIC? Choosing to Move Offshore," SMT Magazine, April 2006.2. "HOLDING THE WOLF BY THE EARS, The key to regain electronic production market share" (SMTA-International 2008).

Gary A. Tanel is an SMT Editorial Advisory Board member, SMTA Dallas Chapter President, and Senior Vice President of the Associate Equity Group. He is the chairman of the Dallas M&A FORUM. Gary can be reached at (972) 751-0700 x203 or gtanel@associateequity.com.

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