ABCs of price vs. value: what first-graders can't tell you about cost of ownership

Circuits Assembly, August, 2008 by Chrys Shea

Which values are smaller: 3% or 2%? Eighty hours or 180 hours? $95,000 or $120,000? If you selected 2%, 80 hours and $95,000, congratulations: You understand the "greater than" and "less than" principles, and are at least as smart as a seven-year-old child.

But if those values represented typical yield fallout, mean time between interrupts, and the cost of a new piece of assembly equipment, which values are actually more advantageous for the assembler? That's where it gets tricky. If we look at the total cost of ownership of a machine, the $120,000 piece of gear that produces 98% yields and runs an average of 180 hours before requiring attention may be a better deal than the $95,000 piece of gear that produces 97% yields and runs an average of 80 hours. The better value depends heavily on the production operation, the assembly line's utilization rate and the owner's tolerance for WIP, rework and downtime.

Joe Belmonte, a longtime friend, inspired this exercise. He maintains that, to know which piece of equipment has a lower price, he can show a first-grader two numbers and ask them to identify the lesser of the two. But if he wants to know the better value, well, that's where engineering skill comes in.

The price versus value equation is often difficult to write, never mind solve, primarily because value can be difficult to quantify. We frequently talk about the total cost of ownership, but rarely do we calculate it. Why? Sometimes we don't know which inputs to identify in the cost equation; other times we prefer to remain ignorant. More than once, I've begun calculating total cost of a defect, only to be instructed by management to stop and find an alternate way to justify a capital expenditure. It's extremely unpleasant to own up to the full impact of mistakes on an organization's financial position. Not too many plant managers want to advertise the true cost of their bone pile to their boss. Even if the proposed solution might cut the value of scrap from $1 million a month to half that, that initial number is an incredibly painful--and possibly career-limiting-admission.

As engineers, we need to find more palatable, career-friendly methods of financially justifying process upgrades. I'm of the opinion that nearly every capital improvement can be cost-justified; sometimes we have to work just a bit harder to make the business case. The best person in your organization to help you make that case is the cost accountant. Every operation has one, as they provide vital, decision-making information to management, but they are often unsung heroes. Find your operation's cost accountant and buy him or her a cup of coffee. This person is the key to justifying your upgrade, so treat them with respect. Whatever you do, don't refer to them as "bean counters." My husband started his career in cost accounting and resented the term, despite working for a coffee purveyor.

Most process upgrades, be they changes in processing materials or acquisitions of new equipment, are justified by either shorter tact times or defect reductions, or both. If shorter process times are the key to justification, don't limit your considerations to labor costs. The cost accountant also can provide adders to the labor costs for fringe benefits. If the process improvement eliminates process steps or frees up floor space, the overhead allocation or burden rates for the production area might even be more substantial than the labor savings. The same goes for maintenance-heavy processes, like wave soldering. If downtime can be reduced in a 24/7 operation, the greatest savings may be realized by the gain of productivity in a high-overhead area. And please, if the numbers show that headcount can be reduced, show a little sensitivity. I prefer to use the term "reallocation" than reduction to clearly indicate that no good workers will be rendered jobless if my upgrade plan meets with approval.

If defects are expected to drop, faster visual inspection times and lower average repair times factor into the savings calculation. Beyond that, defects that escape the inspection/touchup area and discovered at test are a huge source of justification because test equipment is so expensive. Every defect not caught at inspection requires repair and re-test. Overhead rates for test are typically much higher than for inspection/repair, so every minute saved at this stage of the game is worth much more than similar time savings in the visual inspection or hand soldering. And since Pb-free process windows are tighter, it is not unreasonable to take SnPb defect rates and add a few percentage points to estimate the projected fallout for Pb-free, especially if you don't have a history with it.

Then there's always a certain portion of rework that gets botched: a pad lifted or a trace torn. When that happens, the board has to go to a more highly skilled individual for extraordinary repair, or to a Material Review Board for disposition. Some percentage of those boards will get scrapped. Typically, if a board is scrapped during assembly of the primary side, its scrap cost is recorded at the bare board level. If it is scrapped after the secondary side is started, its cost is recorded as a fully populated assembly. This can make equipment additions to secondary side lines somewhat easier to justify. And, the entire time those boards are sitting in queues waiting for extraordinary repair or MRB review, they are costing the company money by tying up capital. Cash flow is king. Estimating the amount of boards sitting in WIP for extraordinary repair or disposition, average value and estimated carrying costs can also help in the justification process. The cost accountant is the best source for these numbers, which are likely not a stretch for them to provide, as they calculate such things as part of their regular duties.