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Conversion Cost Update
When conversion cost is measured on a per lead basis, the evidence clearly indicates that the cost of transformation is declining.
Of all the benchmarks measuring performance in electronics assembly, conversion cost is the most popular because it encapsulates all aspects of shop floor activity and defines the level of competitiveness. After close to two decades of monitoring the market, the conclusion is inescapable: The cost of transformation for printed circuit assemblies (PCA) is consistently and continuously declining over time. The trend is most visible when conversion cost is measured on a per lead basis.
Conversion cost (e.g., cost of transformation, value added or cost per placement in various studies) is the difference between the transfer or selling price and the cost of material as shown on the pur- chase order. Conversion cost includes everything from acquisition of material to a fully populated and tested "good" PCA. The transfer price is for captive shops, while the selling price is for contract manufacturers (CM) and includes profit.
The conversion cost per component is a common metric in the industry; the cost of transformation is often still measured in dollars per PCA, which is not useful information. The conversion cost per lead or solder joint is the most reliable measure of performance because it in-corporates the impact of high-lead-count components into the cost measure. Cost per lead has been CEERIS` primary reference for more than 15 years (since the introduction of high-pin-count SMT packages). In the early 1990s, CEERIS started computing cost per opportunities for defects (OFD), which encompasses both the cost per component and per solder joint, and compensates for the differences between PCA designs with high or low numbers of leads per component. Also, cost per OFD factors the yield loss risk that rises with the number of opportunities for defect per PCA into the equation.
The 94 PCA part numbers that make up the sample for the 1999 conversion cost database1 were selected as the most representative of their activity by the 17 assembly factories participating in the study. This ensures the sample represents components that cross the entire spectrum of use. Also, the 14 companies that participated in the study include some of the most renowned CMs and well-respected OEMs. These OEMs are constantly subjected to competition from outsourcing - maintaining a high level of cost performance is a major concern.
The total sample represents the yearly assembly of 8.7 million boards worth $972 million, of which $176 million is the transformation cost. The CMs in the sample account for 74 percent of all the components assembled yearly and 80 percent of the total cost of transformation.
Table 1 and Figure 1 summarize the distribution of the sample by board type with mixed through-hole/SMT designs representing the overwhelming majority (82 percent of the PCA part numbers and 95 percent of the total number of components assembled yearly).
Also, the vast majority of the sample is for PCAs assembled in high volume and large lots, the two most important cost drivers in an assembly environment.
The transfer or selling price of a PCA is equal to the sum of material valued at purchase order (PO) price plus the conversion cost. For the whole 1999 sample, the average per PCA is:
- Material PO price: $0.361 per component and $0.057 per lead
- Conversion cost: $0.080 per component and $0.013 per lead.
The transfer/selling price of a PCA averages $0.441 per component and $0.070 per lead or solder joint for the entire sample (Table 2). The conversion cost averages 18 percent of the transfer/selling price. In fact, substantial differences exist in the cost structure of the various groups that comprise the whole sample (e.g., different volumes and lot sizes; various regions such as the United States, Mexico, Europe and Asia; or business sectors such as computers, telecommunications, consumer products, instruments and automotive electronics). These differences within a category be-tween costs expressed per component and per lead reflect the importance of high-lead-count packages in board design. For example, the transfer/selling price of PCAs assembled in Mexico is quite low on a per component basis, but relatively high on a per lead basis because these boards are low-functionality items with few high-pin-count integrated circuits (IC).
The importance of lead count as a reference for measuring conversion cost is exemplified in the cost trends presented in Table 3. In a 1996 sample for a conversion cost benchmarking study, the average value added per component for the leading mixed-board technology was $0.082 per component; in the 1999 sample, it is $0.081. While the change on a component basis is almost invisible, the drop in average conversion cost per lead is impressive: $0.017 per lead in 1996 and $0.012 per lead in 1999, a 30 percent reduction.
The shrinking cost of transformation per lead is driven by board designs that are becoming ever more compact. Higher levels of functionality are measured by the trends in the average number of leads per package, which increased from 4.7 in 1996 to 6.6 in 1999. While functionality increased by 40 percent, the conversion cost per component remained almost unchanged. The real gain in productivity is measured at the cost per lead level.
With the average conversion cost per component remaining constant over the last three years, it is legitimate to consider that procurement and assembly systems have reached some sort of plateau. It is only the world-class performers who can continue to reduce expenses by improving their supply-line management and redesigning production tools with new and more efficient line configurations.
1 CEERIS Report, "Cost of Conversion Benchmarking Study."
CHARLES-HENRI MANGIN is president of CEERIS International Inc., P.O. Box 939, Old Lyme, CT 06371-0939; (860) 434-8740; Fax: (860) 434-8742; E-mail: CEERIS@aol.com; Web site: www.CEERIS.com.
Figure 1. 1999 sample distribution by board technology.