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August 2017 • SMT Magazine 27 2 with volume requirements that permit direct purchases from the material manufacturers. Marking-up the Material When generating a quote for a turnkey elec- tronic product assembly, the raw "M" is typical- ly marked-up by the assembler to: 1. Absorb the cost of money for the inven- tory they carry. This is an estimate of what the funds tied up in inventory could have earned if invested, or the interest that needs to be paid on the money borrowed to purchase the material. 2. Pay for the handling the material (in- specting, prepping, kitting). 3. Account for an estimation of material at- trition and scrap. Both of these cause the assem- bler to have to purchase more material than they should have in order to build the required num- ber of assemblies for the customer. Scrap and at- trition are the result of material fallout during production. The material losses can be caused by poor product design and component solderabili- ty and packaging issues. Also, poor performance of the automated equipment used in the prod- uct's assembly, assembly processes that are inca- pable and/or uncontrollable, along with other non-conformances increase these losses. Different companies account for these costs in different ways. Regardless, they must be ac- counted for. The inability of assembly operations to properly manage material losses by accurately estimating these losses during the quoting pro- cess, and minimizing the losses during the pro- duction process, has resulted in many assem- bly companies effectively wrapping a $5 bill around each assembly they ship—then it's, "the more we ship to our customer, the more mon- ey we lose!" However, in a business that has razor thin, "supermarket" level margins to begin with, the above issues concerning material performance will not last long (i.e., last person to leave please turn out the lights because the party's over). But, this is not what I wanted to discuss in this column. Our immediate interest concerns the cost of the raw "M" to the assembler as a function of the geographic location of the as- sembly operation. What contributes to the material cost of an electronic product? Last month, we listed the cost elements af- fecting the price the assembler pays the materi- al distributor. 3 These are: 1. The cost that the component manufactur- ers charge the distributors for the material they manufacture. 2. The distributor's overhead cost that must be loaded and absorbed in the component price. 3. The quantity of material the assembler or- ders from the distributor. 4. The currency that will be used to pay for the material (e.g., U.S. dollar (USD), yuan, etc.). 5. Any applicable import and export tariffs. 6. And, yes, the location where the material is shipped (although not publicized). These costs are uncontrollable by the assem- bler and add up to the ultimate price that the product assembler pays for material. Of course, we are speaking of turnkey product assembly, or at least the turnkey portion of the assembly, as opposed to assembly with consigned material that is provided by the customer. We went on to focus on uncontrollable ma- terial cost variable number 4: how monetary ex- change rates affect the price paid for material. We arrived at the surprising conclusion that a weak yuan, or what politically is the subject of derision in many circles because of alleged unjustified manipulation to keep the currency undervalued, actually should be an advantage to assembly companies paying in USD for elec- tronic product material. While a disadvantage for assembly labor in high U.S. dollar labor rate markets, a weak yuan should be an advantage in a strong cur- rency environment because the material should be less expensive to purchase (i.e., a strong dol- lar buys more yuans, or buys material at a re- duced price). What is it then? If it's not exchange rates (cost variable num- ber 4), it's got to be the distributors running two ANALYZING THE COST OF MATERIAL IN TODAY'S GLOBAL ECONOMY, PART 3