1.The New Millennium saw a dramatic shift in PCB procurement from North America to Asia (primarily to China). Consequently, domestic PCB fabrication revenue declined 66% [1] which, in turn, closed more than half of North American fabricators. Now, with the U.S. economy hobbled and arguably in a recession for the past decade (I don’t care what Wall Street says), two wars under our belt, and politicians (Democrats and Republicans alike) in the public’s crosshairs, onshoring has been making the news.
No More Flag-Waving: Here are the Brass Tacks…
As a domestic PCB fabricator, my first reaction is to welcome this kind of talk. However, when you start processing the numbers, you realize that this is just that--talk. Even if, as folks in the industry say, “It all comes back,” we couldn’t handle the volumes due to a permanent reduction in capacity.
What this movement should spur PCB buyers to do is consider a streamlining of their supply chain and purchasing habits to maximize profits through reduced total procurement costs. So often purchasing habits are focused almost exclusively on price--risk is often dismissed along with other components of total cost of ownership (TCO). I know this is a message that is talked about often, but it is seldom backed by hard facts and methods with which a buyer can analyze their situation.
What many will find is that by applying a true TCO approach to procurement on a part number by part number basis, the perceived benefits of procuring overseas do not always exist. This is because the TCO approach takes into account cost inputs that a traditional price-variance buyer does not consider. This is especially so for low- to medium-volume production spanning a wide range of technology levels. The key is to build a TCO calculator that truly suits your organization. I’m going to attempt to guide this process through the following discussion.
What is TCO?
TCO involves determining the total cost of purchasing something--in our case, a PCB. In addition to purchase price, to calculate the total cost of a good you need to take into account additional hard and soft costs.
Hard costs include, but are not limited to:
1.Freight;
2.Duties; and
3.Inventory holding costs.
The list of soft costs continues to grow the more you think about them. The most universal of these include:
1.Impact of extended lead times;
2.Difficulties in communication;
3.Increased MOQs;
4.Increased time to market;
5.Lost incentives;
6.Potential intellectual property loss.
Why TCO?
The reason behind this initiative is to force additional thought into the procurement process beyond comparing the piece price on two different quotes. Too often do we come across purchasing personnel who have very little knowledge about the commodity for which they are responsible. This almost always pushes those folks into a price-only analysis for procurement. Impressing upon them a TCO model forces the organization as a whole to learn more about what it is they buy and what it is they do every day.
The net result should be a possibly increased purchase price, but decreased total cost of procurement and a much more streamlined supply chain.
How to Calculate TCO
While the ideal situation is to create your own model that fits your company’s business practices, there are models available through third-party consultants, as well as established organizations. One of the most comprehensive models I have seen for manufactured goods comes from the Reshoring Initiative. Their web-based calculator can be found here.
I plugged in the values for a part number that we sell to a customer that insists on purchasing everything, no matter what the annual volume, from overseas. One of the main reasons they insist on this is because, as a larger corporation, their accounting is set up to favor overseas procurement by allocating freight to a separate charge account that does not get counted against the piece price. Further, inventory turns are not included as a performance metric for purchasing.
n going through the model I left many of the inputs at zero to be as conservative as possible (plus, I didn’t really know what many of them meant). Below are the results.
Cost of Goods Sold
Included in this initial calculation are other costs associated with bringing in a shipment from overseas.
As you can see, a PCB procured at a piece price of about half of what it would cost to be produced stateside ends up costing 18.5% more on a TCO basis. For those forward-looking buyers/organizations, the five-year outlook for the cost differential results in the overseas-procured PCB being approximately 60% higher in cost than the domestic-procured PCB based on forecasted wage inflation in both countries.
One of the drawbacks I saw with the model is that while it is very worthwhile to perform this sort of detailed analysis for larger programs, it may be too time-consuming to complete for the multitude of lower- to medium-volume projects we see going overseas on a daily basis.
Unfortunately, I believe this is the space in which TCO could add the most value to a buyer and benefit North American PCB manufacturers as a result.
For this, I would propose buyers to create models that are easy to use, but comprehensive enough to capture their true costs associated with overseas versus domestic procurement. Let’s try to build one in this discussion.
Hard Costs
As is human nature, let’s start with the low-hanging fruit. These would include, in addition to the bare board price, freight and duties.
Inventory Management: One that comes to mind is not being able to take advantage of dock-to-production line deliveries. Domestic vendors are more likely to allow buyers to take monthly releases of these programs, while overseas vendors are most likely to require the entire EAU be purchased and shipped at one time. This requires the purchasing organization to store the EAU and pick from inventory each time that part number is scheduled to be run.
Inventory Holding Costs: Further, storing product has associated inventory holding costs. In today’s age of zero-percent interest rates one might think this could be a negligible sum. However, there are other opportunity costs associated with cash tied up in inventory than just lost interest in a savings account. The least risky investment for free cash flow in a manufacturing concern is taking advantage of early payment discounts. At a 2% discount rate, you can easily assume an 18% APR, depending upon the timing of invoices and payments. Others that have more variable returns could include investment in software or equipment that produces efficiency savings over a longer period of time. Since the savings associated with internal investment varies organization to organization, we will use the early payment discount opportunity for our calculation. The costs calculation is even more favorable towards local sourcing when considering that payments terms for domestic suppliers are often extended beyond those allowable with overseas suppliers.
Lost Opportunities of Time: Another hard cost is time. If your organization is anything like ours, we are all wearing multiple hats due to “streamlining” of overhead. This is just fancy talk for our bosses are making us do more work for the same pay. With overseas procurement, more time is spent for each order on a variety of activities:
1.Pre-engineering: Due to difficulties in communication and time zone differences, resolutions for engineering inquiries may take longer.
2.Status Checks: Due to longer lead times and often strict production schedules, buyers may be placing more inquiries to maintain production status and/or request expedited completion.
3.FAI/PPAP Reporting Issues: We have often seen mistakes in FAI and PPAP reports that require resolution between incoming QA and overseas engineering.Aside from this strict monetary valuation of time, opportunity costs are associated with what could have been done with the time freed up. These include looking for cost-cutting opportunities, inventory streamlining, sourcing/corporate initiatives, and maybe even getting off of work early once in a while to see the kids or have a cold beer (in my case both--I’m good at multitasking).
Inventory Obsolescence: As with most good companies out there, yours is most likely following a path of continuous improvement in both its internal operations as well as its product line. Unfortunately, this can result in revision changes that render current inventory/open orders obsolete. Unfortunately, until Apple invents an iCrystalBall, it’s tough to predict if/when revision changes will affect your inventory value. The only alternative is to have a policy not to enact revision changes until current inventory is exhausted, but this risks losing the time-to-market advantage.
Inventory Spoilage: Normally we do not consider spoilage when it comes to PCBs. However, with the advent of lead-free requirements, we are now using materials that have high moisture-absorption rates coupled with final finishes that do not stand the test of time, such as immersion tin and OSP. In the event of slowing demand, buyers may find themselves holding on to inventory in excess of one year. Not only could there be solderability issues, but also depending upon storage conditions, moisture can cross-link into the PCB resin system, preventing effective bake-out.
Factoring these hard costs into a more simplified model for the part number we analyzed in the more complicated model yields a revised total cost savings of only 15%, versus the piece price savings initially calculated at 45%. One common mistake is to stop here at the percentage. It’s often beneficial to monetize this into total dollars so we have a hard number to weigh against, in this case $765.
Soft Costs
Now for the more difficult part of the calculation--soft costs. For purposes of this discussion, I’ll define soft costs as those not easily monetized. Some of these are just re-hashes of past discussions most of us have heard, but hopefully not all.
Supply Chain Protection/Contingency Partner: By having a domestic supplier as an active part of your supply chain, you have an exercised partner in case there is a need to enact a contingency plan. Contingency planning was often overlooked in the past and only resurfaced as a priority after the Japanese tsunami and recent material shortages.
Demand Reaction/Customer Service: We receive requests on a daily basis for pull-ins and push-outs and often gain customer service gold stars by meeting those requests. I would like to believe that there is a trickle-up effect to this in that my customers receive the same when they can comply, in turn, to their customers’ requests in the same fashion. This flexibility is almost completely lost when sourcing overseas, where vendor production schedules are not often flexible enough to make a great impact after considering transit time, etc.
Reduced Time to Market: Theoretically, there is a first-mover advantage to getting your new product out to market before the competition, but this is hard to quantify. It might even be something you don’t want to try to quantify because that also requires you to factor in the overseas knock-offs that are sure to hit market five minutes after your product is introduced.
How to Get the Most Out of Domestic Procurement Let’s say that after weighing the soft costs in addition to the hard net savings (costs) your TCO calculator leads you to procure domestically. Do the savings end here? Only if you want them to.
You can actually build upon a domestic relationship to further streamline your procurement activities. Two methods come to mind, but I’m sure there are many more.
4.Kanban/Stocking Agreements: Now that you have reduced your piece quantity exposure and lead time, you can start to make incremental improvements.
Engaging into a Kanban stocking agreement with your supplier can help further reduce your lead time down to just transit time. Essentially you are authorizing your supplier to hold a min/max quantity of finished goods on their shelf (i.e., they bear inventory holding costs) and they ship within 24 hours of your release.
Build to Forecast: Another way to reduce lead time to transit time and take advantage of the cost savings associated with larger production runs is to allow the supplier to build to a forecast window. An agreement could include authorization to have up to two weeks in finished goods and four weeks in WIP. Just like in the Kanban model, lead time can be reduced to transit time so long as the forecasts do not include significant pull-ins.
Conclusion
The key to success in utilizing TCO is not to view it as a populist reshoring agenda. Most of what’s gone overseas (to China and Taiwan in particular) isn’t going to come back. As I mentioned earlier, even if it did come back, we couldn’t possibly hope to build it all anyway.
Success will only be had by taking a true cost approach towards applying TCO to your basket of goods. Hopefully, after using and refining your models, the end result isn’t just in cost savings for your company, but also making yourself a more educated, and therefore dangerous, PCB buyer.
Reference:
1. Joel S. Yudken, Ph.D., “Manufacturing Insecurity: America’s Manufacturing Crisis and the Erosion of the U.S. Defense Industrial Base,” High Road Strategies, LLC, April 14, 2010, 8.
Yash Sutariya is vice president of Corporate Strategy at Saturn Electronics Corporation (SEC) and owner/president of Saturn Flex Systems, Inc. Since joining the team, SEC has successfully navigated from a low-mix, high-volume automotive supplier to a high-mix, medium- to high-volume persified supplier. As a result of the company’s transformation, manufacturing capabilities now range from quick-turn prototypes to scheduled volume production while attending a broad cross-section of industries to include industrial controls, telecommunications, aerospace and power supply industries.
