CP-101A 2004

Cost Estimating Guidelines With ProfitProTM Software

SMTA Cost Estimating Guidelines

2004 SMTA Publishing 5200 Willson Road Suite 215 Edina, MN 55424 First Edition 952-920-7682 smta@smta.org www.smta.org

SMTA COST ESTIMATING GUIDELINES Table of Contents

FORWARD & INTRODUCTION The Elements of Cost .................................................................................... 2 ACTIVITY-BASED COSTING (ABC) .................................................................... 4 REAL-TIME COST ESTIMATING ProfitProTM - A Tour ........................................................................................ 6 REAL-TIME COST ESTIMATING EXAMPLES "What if" Scenarios (Time-Based) ............................................................... 10 Example 1: Does It Pay To Buy a $1 Million Chip Shooter If It Reduces Cycle Time from 28 Seconds to 26 Seconds? ........................................................... 10 Example 2: Solder Paste Reduces Setup Time But Costs More ........................ 11 Example 3: Shutting Down a Line ................................................................ 13 REAL-TIME COST ESTIMATING EXAMPLE Production Scenarios (Volume-of-Boards Based) ....................................... 15 APPENDIX I The Cost Calculations ................................................................................... 16 APPENDIX II Secondary Inputs and Their Definitions ..................................................... 17 APPENDIX III ProfitProTM Elements of Cost Definitions .................................................... 18 APPENDIX IV Cost Modeling a Facility .............................................................................. 20 APPENDIX V Workshops .................................................................................................... 25 ACKNOWLEDGMENTS ................................................................................... 25

The equations presented herein have been entered into the Excel-based computer program called ProfitProTM, which is included with this publication and that should be opened and operated in combination with the reading.
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FORWARD & INTRODUCTION The Elements of Cost

As in all industries, profit is the motive for the electronics assembly industry. Therefore, understanding assembly cost should be a prime concern. The stakes are indeed great, as approximately 10% to 15% of the $1 trillion electronics industry is assembly cost. Surprisingly, there does not appear to be a systematic approach to cost estimating in the industry. The enclosed Excel-based computer program called ProfitProTM, in combination with this reading, will aid in efforts to remedy this situation. Often people assume that there is some ethereal formula or algorithm that is used to determine total assembled cost. In truth, one needs only to add the elements of cost and adjust for yield loss. This operation is tedious perhaps, but not intellectually difficult. The 1) 2) 3) 4) 5) 6) 7) elements of cost are: The cost of the bill of material (BOM) The cost of labor The depreciation or lease cost of the assembly equipment Cost of utilities and floor space Cost of consumables Cost of money (i.e. interest on loans to buy goods or services used) The cost of inventory (i.e. inventory turns)

Let's use the elements of cost and a few simple calculations to perform a simple cost estimate. For simplicity, let's assume we are a small factory with one assembly line. We are to assemble 1,000 printed wiring boards (PWBs). We estimate that it will take our assembly line one week. Our total cost of labor (including benefits, Social Security, etc.) for one week is $15,000 (nine operators at $1,000 each, two engineers at $1,500 each, and the owner at $3,000). The bill of material is $100 for components and $20 for a PWB. Consumables, such as solder paste, adhesives, cleaning solutions, etc., are $0.75 per PWB. Our lease payment for our assembly equipment is $16,000 per month. Rent and utilities are $6,000 per month. We will assume we carry no inventory and borrow no money. We will assume that first pass yield is 95%, and each board costs $5.00 to rework. So to assemble these PWBs costs: Total BOM: 1,000 x ($100 + $20) = $120,000 Total Labor: $15,000 Total Lease Cost: $16,000 / 4.345 = $3,678 (4.345 weeks per month) Total Rent and Utilities: $6,000 / 4.345 = $1,381 Total Consumables: 1,000 x $0.75 = $750 Total Rework Cost: 50 x $5.00 = $250 Grand Total: $141,059 or $141.06 per finished PCB A pie chart of this cost analysis is shown in Figure 1.

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Figure 1: A pie chart of the assembled unit cost in our simple example.

This simple example is likely quite close to reality. However, it is seldom easy to estimate the amount of time a job will take, so the labor, lease, and rent/utilities estimates may be off. An error of 30% more time required for the job raises the assembled cost more than $6 (can the reader calculate this change?). An error of this type might put the assembler out of business if he can only command $148 per unit sales price.

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ACTIVITY-BASED COSTING (ABC)

Activity-based costing (ABC) was developed as an answer to the time estimating dilemma. It is a clever and simple to use system. ABC assumes there are two major components of cost: 1) 2) The cost of materials. The cost of the activities necessary to assemble the materials.

At first glance this approach doesn't seem to help us much. Determining the cost of materials is simple enough, but how does one cost the activities? Some have gone into great detail in defining the activities and ended up with precise costing techniques that no one will use because they are too cumbersome. Eventually it was suggested that the activities are really only one activity: assembling components. It then followed that one could determine the cost of assembling each component by summing the total non-material costs and dividing by the number of components assembled. With the cost to assemble each component determined, calculating the total assembled cost is easy - simply add the cost of the BOM to the product of the cost to assemble one component times the number of components. As a simple example consider the following. 1) A factory assembles twelve million components in one year. The total non-material costs (labor, rent, equipment lease, etc.) is $1 million. Hence the cost to assemble each component is $1 million / 12 million = $0.085/component. An order comes in from a customer to assemble a PWB. The BOM costs $120 and consists of 350 passives, 20 actives, and 20 ICs. The approximate total assembly cost is: $120 + (350 + 20 + 20) x $0.085 = $153.15 Note that as soon as the non-material assembly cost per component (NMACPC) is calculated, it is quite easy to estimate the total assembly cost. It became evident that the true cost of assembling a passive is less than a 208 I/O PQFP, so component families were developed each with different assembly costs. So in the above example, a passive may have a NMAC of $0.015, whereas the three leaded actives may be $0.03, and 208 I/O PQFP may have a NMAC of $1.365. The total cost is again $153.15: $120 + 350 x $0.015 + 20 x 0.03 + 20 x $1.365 = $153.15 As this concept matured, it was suggested that if one calculated the non-material assembly cost per lead (I/O terminal) (NMACPI/O), that the assembly costs relating to component families might be simplified. In the above example it might work like this. 1) By assembling 12 million components, the factory assembles 150 million I/O (on average each component has 150 million/12 million = 12.5 I/O). Hence, the non-material assembly cost per I/O is $1 million / 150 million = $0.00666/I/O. In our example above the total I/O is: 2 x 350 + 3 x 20 + 208 x 20 = 4920, the total assembled cost is then $120 + 4920 x 0.0066 = $152.80 or approximately the same.

2)

2)

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As of 2004, typical NMACPCs range from $0.04 to $0.15 per component assembled, and NMACPI/O range from $0.005 to $0.02 per I/O assembled. One might ask, "Why not stop here, doesn't this approach fill our needs?" No. ABC cannot tell us how much more profit we will make if we reduce our setup time by 10% or decrease cycle time from 40 to 38 seconds. It also is helpless to answer the question, "If I buy a $1 million chip shooter and it improves my line's productivity by 5%, does it pay for itself?" Only real-time cost estimating (RTCE) can answer these questions.

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