Analyzing manufacturing test costs

Abstract

We can think of the rapidly growing electronics manufacturing services (EMS) industry as an electronics manufacturing supermarket. Like their food store counterparts, EMS providers are usually geographically convenient to their major customers, original equipment manufacturers (OEMs). They provide a smorgasbord of goods and services ranging from circuit design through final product assembly and shipping of printed circuit boards-all on a fast-turnaround basis. And, like supermarkets, EMS companies are highly competitive and differentiate themselves primarily on intangibles such as quality of service, turnaround time, and the like. The economic model of the EMS provider is also strikingly similar to the supermarket's: profitability depends on high volumes shipped at relatively low gross margins. Historically, EMS profit has hovered in the neighborhood of 5% to 10%. Operating this close to zero or even negative profitability allows an EMS sales department little room for error in pricing and quoting jobs for customers. Most of the EMS job-pricing formula depends on tangible costs such as parts, labor, and overhead consisting of the amortized operating cost of the surface mount technology (SMT) assembly line. In circuit-board manufacturing, however, ill-defined quality criteria and an imprecise understanding of test costs often result in a gap between the job cost estimate and the actual production cost.