SMT007 Magazine

SMT-Mar2017

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54 SMT Magazine • March 2017 (IP), reliable deliveries and high product quali- ty that was envisioned as the company's Mona Lisa masterpiece has turned out to be more like a painting of dogs playing poker 1 . The Labor Cost Pie The two principal ingredients that are baked into the product assembly cost pie are labor and material. All costs that a company incurs can be placed in one of these two ingredient contain- ers. Historically, in most cases, the labor cost slice is only 10–30% of the entire pie. Considering high labor-rate regions of the world should be MORE competitive in high vol- ume production, it's fair to challenge the long- held premise about high direct labor rates being the root cause of needing to assemble volume production off shore. In addition, remember di- rect labor is only a percentage of the total labor cost, which itself is only 10–30% of the total prod- uct cost! Let's continue to drill down and examine more closely what has really been going on. The Direct Labor Rate Disparity Defense Labor rate disparity has been a convenient excuse for moving production out of high la- bor-rate areas, but there are other factors that have had more of an impact on the competitive landscape and, perhaps, come closer to the root cause (choose as many factors as applicable in your environment). 1. High assembly yield loss causing labor costs in high labor-rate operations to balloon due to expensive rework. (Not an issue in low labor rate regions where rework labor costs can diminish the effect of poor process develop- ment and control.) 2. High indirect and general and adminis- trative labor costs that must be absorbed and greatly inflate the labor sell rate. 3. Material cost differences—a potentially big issue. This is especially true for tier 3, 4 and 5 operations that don't have facilities in low la- bor-rate locations with a central procurement activity to leverage volume production and lo- cal favorable material pricing 2 . 4. Government policy such as corporate tax, tariffs and regulation that affects the cost of do- ing business. Some of these factors are controllable (e.g., Factors 1 and 2), and some are not (e.g., Factors 3 and 4). Who Says You Can Never Go Home Again? A re-shoring initiative is underway in some high labor-rate regions. There are several rea- sons. One reason is that for about 10 years the true cost of offshoring electronic product assem- bly has been slowly but relentlessly hitting the original product developer (OPD) and electronic manufacturing service (EMS) providers' books. The accountants have said, "Maybe we should look at this offshoring stuff a little more closely." But in many cases the die has been cast; the money to create the additional organi- zation needed to manage and deal with opera- tions halfway around the world has been spent. Too many in management have their repu- tations and egos to worry about. Remember, there is a good reason for moving production offshore: the desire to sell products into a huge "local" market. Unfortunately, the underlying, unspoken motivation to move production was often some combination of the four factors list- ed above, and not driven by the desire to ex- pand product exposure into new markets. The labor-rate disparity provided cover. The Uncontrollable Parts: Factor 4 In the United States, we now have a new ad- ministration that is seasoned in the art of the deal. The good news is that we now have lead- ership that at least understands business. The bad news is that they are still subjected to the politics that can trump logic and shape an eco- nomic policy that is not in the best interest of the country 3 . The way out of this mess is to have leader- ship at the national level that focuses on mak- ing the economic opportunity pie bigger, and not one that is consumed with making the size of the slices equal. The promise of this country has never been equal results, but the freedom to pursue individual happiness—in whatever way happiness is defined by the individual. The Uncontrollable Parts: Factor 3 Material cost differences between high and low labor rate regions of product assembly ac- A NEW ORGANIZATIONAL MODEL USING LOGIC, PART 4

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