Real-time Cost Estimates Measure


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Real-time cost estimating is a useful tool when comparing capital equipment expenditures.The electronics industry has recently become the largest industry in the world at $1 trillion. It is also the greatest "value add" industry. Starting with $3 billion worth of raw material (oil, water, sand, copper, tin, lead, etc.), $997 billion of value is added to produce the final product. This tremendous potential to add value and the electronics industry's unmatched growth (8 percent vs. the total GDP growth of 2 percent CAGR) has made electronics the industry of choice for emerging economies such as China, Mexico and Brazil. With the attraction of the high-growth electronics industry, it is surprising that electronics assembly is still in its infancy in regard to the industrial engineering aspects of optimizing productivity. Only recently have there been serious efforts to monitor and improve effective metrics to enhance productivity.1

Currently, many electronics manufacturing organizations use the cost of the equipment as the most important factor when selecting process equipment. Although the cost of equipment is important and should be one of the factors in the equipment selection process, several other factors are equally as important. To ensure the correct equipment is selected to support the long-term goals of the manufacturing organization, an evaluation of all factors must be completed using a cost-modeling tool. By using such a tool, the effects of a small improvement in process cycle time, reduction in downtime or improved accuracy can be evaluated for impact on overall costs. Various equipment performance improvements can provide a significant cost advantage over the useful life of the equipment and can provide significant payback over the cost of the equipment. A less expensive machine that continually breaks down or that does not achieve the quality or cycle time requirements is the most expensive piece of equipment on the production floor. Management will soon forget the "wonderful" bargain of a particular piece of equipment when it does not produce the revenue or yields necessary to meet the production plan.

Performing Cost EstimatesThe elements of cost. Cost estimating is quite straightforward. One merely adds the elements of cost and adjusts for yield losses and waste. However, there are numerous subtleties in costing. For example, a higher number of inventory turns can have a significant effect on profits, especially in a low-margin/high-return-on-assets business such as electronics assembly. One must also remember that while minimizing cost is important, this strategy does not always result in maximizing profits. To support this seemingly contradictory statement, consider the following example: Business is brisk and all of the units that are manufactured are sold. Currently, 200,000 units a year are produced and sold at $100 per unit. The total unit assembled cost is $95 each, so a gross profit of $1 million per year is made ($5 gross profit times 200,000 units). First-pass yield is 97 percent and any yield loss is reworkable. Senior management presses for improvement in first-pass yield and it is improved to 98.5 percent by adding lead coplanarity inspection for the multiple 200 I/O quad flat packs (QFP) included on each printed circuit board (PCB). With this improvement, unit cost is reduced to $94.85. The reason for this minimal cost reduction is that this process change slows the cycle time down by 15 percent. Therefore, the line now produces only 173,900 units while fixed labor, machine and facility costs increase because they are now amortized over fewer units. In this example, the effect on gross profit is disastrous. Gross profit is reduced from $1 million to $895,600 ($5.15 gross profit times 173,900) a reduction of more than 10 percent. Unit cost is important, but in a brisk market the number of units produced can be more important.

Real-time vs. activity-based cost estimating. Real-time cost estimating (RTCE) is performed by adding the material costs, indirect and direct labor, equipment amortization, rent and utilities, and adjusting for yield. As surprising as it may seem, software packages have only recently been developed to perform RTCE. The advent of easy-to-use spreadsheet programs such as Excel has facilitated these recent developments. RTCE has a tremendous advantage it enables one to perform "what if" scenarios relating to process changes to determine potential cost savings and profit calculations. Recently, two RTCE software programs have been developed. The first is an internal program developed by Cookson Electronics,2 and the second is a derivative of this program.3

Many people in the assembly industry use activity-based costing (ABC) for cost estimating. Using ABC, the nonmaterial costs to perform an activity are calculated. This activity is often the placement of components. Once this metric is defined, the total cost is simply the material cost plus the cost to place a component multiplied by the number of components. For example, consider a modem assembled by Acme, an electronics manufacturer. Last year, Acme assembled 500 million components and their annual nonmaterial costs (labor, equipment amortization, rent, utilities, etc.) were $50 million. Hence, the nonmaterial cost to place a component is $0.10 ($50 million divided by 500 million components). If the material cost for the modem is $90 and there are 140 components, the total assembled cost would be $104.00 ($90 for materials plus 140 components times $0.10 to place each component). In actual application, ABC will usually use activity costs that are graduated. Instead of all components being assessed at a $0.10 per placement cost, a simple component like a passive capacitor may be counted at $0.04, a low-lead-count small-outline integrated circuit (SOIC) at $0.10 and a more complex 200 I/O QFP at $0.20.

ABC is simple to use and can give a quick cost estimate, but it cannot easily answer the question: "If I buy a new chipshooter for $1 million and it reduces cycle time by 2 seconds, how quickly will it pay for itself?" This type of question is best handled by RTCE.

Low Cost vs. Fast and ReliableThe modem. This analysis will compare the profitability of two lines used to assemble an identical modem. The first equipment set, called the "low-cost line," will consist of quality equipment, but its lower cost will result in a slightly longer cycle time and marginally less "uptime." Using the RTCE software program to perform this analysis, it is assumed that a modem is being assembled for one year on an assembly line. Although this system could be used to analyze the effects of changeovers on this example, only one production line will be analyzed.

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The costing variables to assemble this modem on the low-cost line are entered into the RTCE program and are listed in Table 1. In this line, the stencil printer is $200,000, the pick-and-place equipment is $950,000 (a $350,000 flexible placer and a $600,000 turret-style chipshooter), the reflow oven is $100,000, the tester is $375,000 and there is $75,000 worth of board-handing equipment. A schematic of this line is shown in Figure 1.

69349-th_68217.jpgFigure 1. Low-cost line drawing.

Although this system can analyze much more detailed information, such as the number and cost of all passive discrete components, detailed price and repair information on capital equipment, or high levels of labor rate detail, a total product cost was included for simplicity. In this example, the sum of the material cost is $90 per unit. The software uses the data above to calculate the profitability of the low-cost line (Table 2).

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Note that approximately 98 percent of the cost is accumulated in the components, PCB and labor. The software also shows this cost breakdown in a pie chart (Figure 2). It is interesting to note that the amortized equipment costs of the entire SMT production line is only $0.80 per PCB.

69349-th_68222.gifFigure 2. Cost elements for the low-cost line.

To ensure that the cost parameters used were realistic, these results were compared to assembly metrics defined by the National Electronics Manufacturing Initiative (NEMI).4 The most important metric comparison is the nonmaterial assembly cost per I/O and is defined as: Nonmaterial Cost per I/O = Nonmaterial Cost per PCB / Total I/O per Finished PCB. This simulation produces a nonmaterial cost per I/O of $0.0146, which is consistent with NEMI's stated "world class value" of $0.015.

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The Faster, More Reliable LineNow, assume the purchase of faster, more reliable equipment. Table 3 lists the cost of the equipment for this line as compared to the low-cost line. A line schematic is shown in Figure 3.

69349-th_68252.jpgFigure 3. Faster, more reliable line drawing.

For an additional $325,000, the faster, more reliable line is able to achieve a cycle time of 23 seconds vs. a cycle time of 25 seconds for the low-cost line. In addition, the unscheduled downtime (USD) for this line is 6 percent vs. 8 percent for the low-cost line, while setup time (SUT) is 8 hours per week vs. 10 hours. Scheduled maintenance time (MT) is 11 hours per week vs. the low-cost line's 12.5 hours per week. Could it be possible that these small improvements could be worth $325,000? First use the RTCE software to analyze the effect of the cycle-time reduction. This change requires that two data points be changed the equipment cost to $2,025,000 and the cycle time to 23 seconds. The data is shown in Table 4.

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By decreasing the cycle time from 25 to 23 seconds, profits increased from $4.02 to $4.97 million an increase of more than 20 percent. Profits increased nearly $1 million despite the higher price of the faster, more reliable line. With the faster cycle time, the unit cost was reduced and more units were produced. Decreasing the USD from 8 to 6 percent results in an additional $375,000 of profit, the two hours per week reduction in SUT adds another $300,000 and decreasing the MT to 11 hours per week adds an additional $230,000 dollars.

ConclusionRTCE has been presented to show the advantages of performing cost analyses to aid in the purchase of capital equipment in the electronics assembly industry. It was shown that decreasing cycle time or increasing uptime has an exponential effect on gross profit. These process improvements result in lower unit cost and the production of more units to sell.

Although it is very easy to select process equipment based upon price alone, it is important to undertake a detailed evaluation of all of the factors needed to meet quality, cycle-time, technology and uptime requirements. If the buyer believes one equipment set has an advantage over another equipment set, these advantages can be proven using the cost-modeling tool and additional costs can be easily justified.

Think beyond the relative small difference in equipment cost and understand the value of the equipment over the years of ownership and the ability to produce revenue and profits for an organization. Using a RTCE software package can help with this evaluation.

REFERENCES1 R.C. Lasky, D. Baldwin and B. Lewis, Metrics: The Key to Productivity, presented at the Rhode Island SMTA Conference, October 1998.

2 Surface Mount Process Assembly Cost Estimator (SPACE), developed by R. C. Lasky, Cookson Electronics, Providence, R.I.

3 CostCoach, distributed by ITM, Durham, N.H.; THEITMTEAM@aol.com.

4 National Electronics Manufacturing Initiative, 2214 Rock Hill Road, Suite 110, Herdon, VA 22070-4005.

DANIEL BALDWIN, Ph.D., may be contacted at the Georgia Institute of Technology, 813 Ferst Drive NW, Atlanta, GA 30332-0405; (404) 894-4135; Fax: (404) 894-9342; E-mail: daniel.baldwin@me.gatech.edu. JOE BELMONTE may be contacted at Speedline Technologies Inc., 16 Forge Park, Franklin, MA 02038; (508) 541-6484; Fax: (508) 528-6999; E-mail: joe_belmonte@mpm.cookson.com. RONALD LASKY, Ph.D., PE, may be contacted at Cookson Electronics, 225 Foxborough Blvd., Suite 150, Foxborough, MA 02035; (508) 541-5800; Fax: (508) 541-5877; E-mail: Ron_Lasky@ced.cookson.com. KATHLEEN MURRAY may be contacted at Siemens Energy and Automation Inc., 2875 Northwoods Parkway, Norcross, GA 30071; (770) 797-3180; Fax: (770) 797-3094; E-mail: kathleen.murray@eae.siemens.com.

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