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May 2016 • SMT Magazine 57 tHE HEnRY FoRd diviSion oF laboR PRoduction ModEl procurement, etc.; they pay you for products. They could care less that you have to do ICT (in-circuit test) on each circuit board you build to separate the ones assembled with manufac- turing defects from the ones that are defect-free. It is the quality of the final product that they care about. I left two critical competitive success factors out last month: 5. Material management—shop floor con- trol and a rational just-in-time material strategy. These reduce the inventory cost that is usually absorbed in the labor sell rate. If the customer won't allow a material mark-up cost, it has to be accounted for somewhere. People who have tried to embed these carrying costs, including scrap and attrition, in the material price they charge their customer are usually met with the customer saying, "I don't want to pay for your inability to manage material." (This is often up to 75–90% of the total product cost.) 6. Not knowing how much the things we assemble cost (whether the assembly opera- tion is part of an original product design [OPD] company, or an EMS company). In other words, having the ability to capture and analyze cost in real time. All the tools are available to do this. We used to call this measurement-to-stan- dard. And, although we didn't have bar-coding and software to look at cost in real time, it was looked at by cost accounting. Someone (usually an industrial engineer) would do a paper time and motion study. This became the basis for the labor cost part of the quote. If the job was won it became the standard that the actual la- bor hours expended when building the product on the floor were measured against. Today, this doesn't happen as much. Management, in their infinite wisdom to cut cost, just wait until the end of the month and hope. If the company's direct costs (direct labor and material)—costs that could be charged to a product (or, the cost of products sold)—were less than product sales (revenue), we had a positive gross profit. If the company's total cost including some indirect costs, overhead, general and administrative, and sales costs, were less than the revenue, we had a positive net profit (also called earnings). Whew! If there were no earnings and costs were more than sales…uh-oh. These last two are more local issues than global. Not having an infrastructure that ad- dresses 5 and 6 is a cause for increased product assembly cost and, hence, being less competi- tive. However, tools have been available for a long time to address these issues. Again, there are excuses to obfuscate. It is usually manage- ment… Item 4 leads us to this month's topic: The Henry Ford division of labor production model. We are all aware of what the price of assem- bling a product is based upon: • Material cost (assuming the assembler purchases the material); • Number of labor hours needed for the product assembly and test; and, • Labor sell rate in dollars per hour. The material cost, although seemingly un- controllable, is crucially important and will be the subject of an upcoming column in this space. However, at this time we want to drill down into the labor sell rate to see what pops up out of the ground. In the beginning, before product produc- tion for the masses, there were craftsmen. Prior to Henry Ford and his assembly line, depend- ing on complexity, products were produced by craftsmen. These craftsmen were highly skilled people who either applied those skills to one part of the product's creation or to the entire product. The important point here is that even if the craftsman was involved with only one aspect of the product's creation, he still had a thorough working knowledge of the product's entire production. There are two very basic economic laws that are in play for our discussion: • Supply and demand • Economies of scale The first refers to a combination of the de- sirability of the product (demand) and the amount of that product I am willing to produce at a certain price (supply). That's all. The price is established naturally. If there is an incredible