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96 SMT Magazine • February 2015 The financial team figured that the loss repre- sented more than $3 million worth of materials at cost pricing. That's a lot of chips. The Scale of the Problem OEM manufacturing operations are bud- geted to break even against an agreed budget, using fabricated "transfer pricing" as a tool to calculate operational per- formance. On the other hand, EMS companies need to make real profits, often from very small margins. A sudden im- pact on the business in either case can be devastating. Shutdown of the factory over a long weekend had al- ready meant the loss of 1% of annual productivity. For a factory making products with a total value of $150 million per year, the stock check cost $1.5 million of lost opportu- nity, even before consider- ing the labor and other costs. The end-result value of the write-off of "lost" materials was estimated at more than $3 million on top. This would represent a major embarrass- ment for any OEM CEO and a fi- nancial disaster for an EMS, whose margin just evaporated. It was time to get out of the meeting and into action, to uncover the facts about the conspiracy behind these SMT materials shortages. The Scene of the Crime—the Warehouse An anxious warehouse and logistics man- ager approached us. He was quick to explain that, although the materials shortages had re- ported been directly related to his team, all of the losses actually could not have taken place in the warehouse. He was confident in his materi- als operators. He thought that the materials had gone missing because of the inherent nature of SMT materials, which, while mostly based on reels, have a minimum delivery quantity. He ex- plained that for work orders that require 1,500 pieces of a certain material, the minimum he can send to production is a single reel of 5,000. Even if he had a reel with 1,500 pieces of ma- terials, a little extra would have been needed to compensate for the SMT machine and related spoilage, so more materials would have had to be included. This issue applied to each of the hundreds of materials on every work order, mul- tiplied then by the number of produc- tion lines. Not only that, but be- cause of the history of not being able to find materials for work orders when needed, each line can have several such "kits" of materials prepared in advance, meaning that if there was a material shortage at the ware- house, there should be time to do something about it before it affected production. This was the agreement that pro- duction made with the ware- house. I thought that we had just found a clue to our con- spiracy. The warehouse was huge and well-stocked with materials. It must have taken ages to count. The bloated in- ventory was simply due to the requirement to oversupply the lines and the historical issues of unexpected material shortages. The increase in the frequency of these shortages was what led to the need for the stock check. The warehouse manager shrugged his shoul- ders and said he knows what happens during the day; it is what happens at night that he is afraid of. I asked whether the excess materials sent out to production are ever seen back in the warehouse again. The reply was that they were not—at least not all. The ERP system had dif- ficulty tracking part-used materials, so manual management was necessary within production. We looked across the shop floor at the banks of feeder trolleys and racks of feeders, all setup with part-used materials. With each feeder cost- ing up to $1,000, that was a serious investment in itself. What was causing the disappearance of those materials? It was time to move on and talk with the production manager. the essential pioneer's survival Guide i thought that we had just found a clue to our conspiracy. the warehouse was huge and well-stocked with materials. it must have taken ages to count. the bloated inventory was simply due to the requirement to oversupply the lines and the historical issues of unexpected material shortages. " " STOP THe SMT CONSPIraCy, ParT 2: abduCTION continues