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Assembly Conversion Cost Revisited
December 31, 1969 |Estimated reading time: 6 minutes
While the average cost per lead has decreased by roughly 10 percent since the mid-1990s, there are challenges associated with the declining prices.
By Charles-Henri Mangin
Conversion cost, or the cost of transformation (or value added) of basic materials to printed circuit board assemblies (PCBA), is the difference between the transfer, or selling, price and the cost of materials as shown on the purchase order. Additionally, conversion cost traditionally is the most favored metric for measuring PCBA management performance. Although the trend toward outsourcing manufacturing has increased price transparency, the compilation of global cost data remains a necessary tool for the industry. In the current downturn environment, for example, knowledge of pricing conditions and trends is seen as more necessary than ever as factories are confronted with shrinking margins. Though detailed in the 2001 update of the 1999 cost-of-conversion database1, highlights of the challenges associated with declining prices are presented here.
DefinitionsConversion cost includes everything from materials acquisition to the production of a fully populated and in-circuit tested (ICT) functioning PCBA. The transfer price is for captive shops (OEM), while the selling price is for contract manufacturers (CM), which includes profit. The conversion cost per component is a common metric in the industry and is a better reference than the cost measured in dollars per assembly, which is not useful information. Still, a conversion cost per lead or solder joint is the more reliable and preferred measure of performance because it incorporates the impact of high-lead-count components into the cost.
Cost per lead has been the primary choice of researchers since the introduction of high-pin-count surface mount packages in the second half of the 1980s. In the early 1990s, researchers began computing cost per opportunity for defects (CPOFD), which encompasses both the cost per component and that per solder joint and compensates for the differences between assembly designs with high or low numbers of leads per component. Also, CPOFD factors the yield-loss risk that rises into the equation with the number of opportunities for defects per assembly.
SampleThe 98 assembly part numbers that make up the sample for the 2001 conversion cost database were selected as the most representative of their activity by the 16 CM assembly factories and 10 OEM plants participating in the study.1 This ensures that the sample represents components across the entire spectrum of use. Also, the 26 assembly facilities that participated in the research include some of the more prominent CMs and OEMs on a global basis. The latter are subjected constantly to competition from outsourcing; thus, maintaining a high level of cost performance is a major concern.
The total sample represents the annual assembly of almost 15 million boards worth more than $1.5 billion, of which $220 million is the transformation cost. The yearly volume for the 98 assemblies reaches more than eight billion components, with the average assembly holding 540 parts. The 2001 sample is component-intensive compared to the previous database (1999).2 Fortunately, on a lead-count basis the samples for the 1999 and 2001 studies are quite comparable, thus confirming once more that lead count should be the reference of choice for comparing costs of different assembly designs, as well as over time and in different geographical locations.
Figure 1. Sample distribution (2001) of board technology based on (a) number of PCB part numbers, and (b) annual component assembly is shown.
Both Table 1 and Figure 1 summarize the sample distribution by board type with mixed- (through-hole/SMT) technology designs representing the overwhelming majority: 78 percent of the part numbers and 85 percent of the total number of components assembled yearly by the sample. In comparison to 1999, the contribution of through-hole only designs became marginal in 2001 while the share of SMT-only boards in the sample increased dramatically.
The 2001 sample includes very-high-volume PCBAs, a category that did not exist in previous benchmarking programs. Very-high-volume part numbers capture the majority of the assembly volume in the sample, which has an important impact on the average cost because volume is the most important cost factor.
Cost StructureThe transfer or selling price of an assembly is equal to the sum of materials valued at purchase-order price plus the fully loaded expenses from procurement to assembly, including ICT and profit when applicable. For the entire 2001 sample, the average per assembly works out as follows: materials PO price, $0.045/lead vs. conversion cost: $0.008/lead.
The transfer/selling price of an assembly in 2001 averaged $0.053 per lead (or solder joint) for the entire sample (Table 2). Of course, substantial variations exist for different types of technology. The low-cost layout is for mixed (through-hole/SMT) technology with both materials ($0.039/lead on average) and conversion cost (averaging $0.007/lead) being below the sample averages. All SMT boards should, on theory, be cheaper to assemble than mixed-technology designs. In reality, however, they correspond to complex designs with expensive high-lead-count components. Thus, it is not surprising that material averages $0.072/lead and transformation cost $0.008/lead for fully surface mount assembled boards. The really expensive boards are all through-hole types with materials averaging $0.134/lead and conversion $0.036/lead.
The cost data based on the number of components are not comparable to those of the 1999 study. This is because the very high-volume boards in the 2001 sample are large and densely populated boards with a low average number of leads/part. This induces much lower assembly cost per component in 2001 vs. that for 1999, while the cost of conversion based on the number of leads remains coherent.
The 2001 conversion cost averages 15 percent of the transfer/selling price vs. 18.6 percent in 1999. Not only has the price of materials decreased from 1999 through 2001, but also the relative share of conversion cost has shrunk by 3.6 percentage points. Margins are squeezed. These averages for the whole sample hide substantial differences by regions (the share of conversion cost is lower in Asia than in the United States) as well as by volume, in which case the margins are much higher for low-volume boards.
Cost TrendsThe importance of lead count as a reference for measuring conversion cost is exemplified in the cost trends presented in Table 3 for mixed-technology assemblies. In the 1996 sample, the average conversion cost for such boards was $0.017/lead; in the 1999 sample it shrank by 30 percent to $0.012/lead; and in the 2001 sample a further erosion of 40 percent brought the average cost of conversion down to $0.007/lead.
The shrinking cost of transformation per lead mainly is driven by board designs; however, improved management of the complete supply chain and the ever-growing shift toward higher volumes with the associated economies of scale also plays a role. In the 2001 research, it is the very high-volume boards that are driving down the average cost of conversion for the entire sample. For low-, medium- and high-volume assemblies, the cost of conversion either remained unchanged or was slightly higher in 2001 vs. those of the corresponding 1999 categories.
ConclusionThe average cost of conversion per lead has decreased by 10 percent (typical) per year since the mid-1990s. The detailed analysis in the 2001 study shows that productivity gains as well as continuously increasing assembly volumes have been the key contributors to that remarkable trend remarkable until profit margins become negative.
REFERENCES1 CEERIS Report CC-2001, "Cost-of-Conversion Benchmarking Study."
2 Charles-Henri Mangin, "Conversion-Cost Update," SMT Magazine, January 2000, p. 88-90.
Charles-Henri Mangin, president of CEERIS International Inc., may be contacted at P.O. Box 939, Old Lyme, CT 06371; (860) 434-8740; Fax (860) 434-8742; E-mail: ceeris@aol.com; Web site: www.ceeris.com.