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March 2017 • SMT Magazine 55 A NEW ORGANIZATIONAL MODEL USING LOGIC, PART 4 tivity should not be ignored, especially when considering that material cost normally ac- counts for 70–90% of the total product cost pie. There should be near parity in material pric- ing as a function of where the material is pur- chased. There is not. The details of this factor are complex in nature and will be discussed in detail over the next several columns. The Controllable Parts: Factor 1 We have addressed this topic in previous SMT Magazine columns. To summarize: The need to apply expensive direct labor to "touch- up" and rework assemblies is a function of poor test yields. This result is a function of one of two conditions: A. A statistically incapable assembly process where naturally occurring process variation exceeds the upper or lower specification limits of the process, or B. A process acted on by an assignable cause that has led to the process going out of control. About 91% first pass in-circuit test yield may have been acceptable before the advent of in- expensive labor sources. However, to success- fully compete in today's competitive environ- ment, yields of 99.6% are typically needed. This assembly yield not only greatly reduces rework labor content, but also removes the need for 100% ICT 4 . The Controllable Parts: Factor 2 The subject of this and the previous three Jumping off the Bandwagon columns has been to establish an organizational model that signifi- cantly reduces all labor that cannot be catego- rized as "direct" (i.e., labor that is not attribut- able to the actual assembly of a product). There are several papers that address this topic as well 5 . Reducing labor cost by reducing labor con- tent through automation brings with it the abil- ity to absorb less non-direct labor costs. In any case, when a company's indirect la- bor costs begin to amount to one, two, or more times the direct labor cost, the labor sell rate be- comes non-competitive. These indirect costs are a result of the traditional hierarchical nature that has characterized the organizational struc- ture of most business models. Two Caveats Associated with Reducing Labor Cost Through Reducing Labor Content So, while reducing labor cost by reducing la- bor content by automating traditionally labor intensive processes instead of relentlessly seek- ing low labor rate assembly sources is a good competitive strategy, it come with two impor- tant caveats: 1. A highly skilled workforce that can de- velop and maintain the new automated pro- cesses is necessary. Unfortunately, this require- ment for a highly technical engineering work- force requires skills that our educational system currently cannot provide. The constant theme throughout these columns has been the abso- lute necessity of rethinking and overhauling the way we educate for our industry. 6 2. A new organizational model that mini- mizes all non-direct labor costs (controllable factor 2) is required. We have spent the past three months in this space drilling down into these costs. The conclusion: If we want to re- duce labor cost by reducing labor content in- stead of eternally searching the globe for the lowest labor rates, a reduction in direct labor hours must be accompanied by a reduction in Figure 1: The traditional hierarchical organization- al model is laden with non-direct labor costs.