In the electronics and semiconductor capital equipment industry, manufacturers typically produce and sell products that often have multiple configurations and require a very substantial amount of testing for customer acceptance. Given the current economic downturn, many SEMICAP manufacturers are in a cost-cutting mode; one of the trends has been to reduce the amount of testing that suppliers do or even bring outsourced processes back in house. This reduces Bill of Material cost. On paper, the result is a lower cost product. The reality is, however, that the increased complexity of the testing required has negated any savings that a company may have gained. There is, however, a much better way to achieve product cost reduction without sacrificing value.

Here is a hypothetical example. ABC Company has shown a loss in Q1; its shareholders and Board of Directors are putting pressure on management to reduce costs. Materials managers begin to pressure ABC’s suppliers. Suppliers suggest reducing the amount of testing that is done or relaxing requirements (or simply agreeing to lower price while reduce testing or relax requirements without informing ABC). Parts and assemblies that arrive are of lower quality, but ABC Company doesn’t know it because they don’t do receiving inspection or testing: they have certified suppliers that do this for them. Problems are often detected much later in the process, after hundreds of thousands of dollars are invested in the product. When a problem is detected at this stage, the cost is multiplied many times. Let us consider some of the costs:

· Inventory Holding Cost. For example, a product costing $500K is in inventory an average of 2 weeks longer as a result. There are 160 of these products produced per year. Given the industry standard holding cost of 30% annually, for each product this results in an annual cost of about $5800. This gives us an annual cost (or reduction in profits) of $923,000.

• Test Technician Time. Let’s say a test technician costs the company an average (including benefits) of $40/hour. We will assume that over the two week troubleshooting period, the tech spends 40 hours troubleshooting the product. This costs the company $1600 per unit; the result is a reduction in profits of $256,000.
• Time for Others to process the defective part(s) from each unit. We will assume that an average of 20 hours per unit will be spent processing the part. This includes documentation, transportation through the plant, and shipping. I believe this is a conservative estimate. Using the same $40/hour rate, this costs the company $800 per unit or $128,000 per year.

Based on the above, any savings derived are offset by an annual reduction in profits of $1,307,000! The other more important factor is the increased possibility that one of the defects will not be detected by internal testing resulting in a defective product being sent to the customer. Anyone who has sold equipment to semiconductor manufacturers knows that they expect and need their equipment to be running with very minimal down-time. Sending defective products to a customer could cost ABC Company millions more in future profits.

What is the solution for companies in similar situations to the one described above? When they are in an economic “up cycle,” the top priority of companies like ABC is responsiveness to demand without much regard for cost. In downturns, the focus becomes cost. Companies like ABC should focus on value engineering or design-for-manufacturability. This involves changing the design of the product to significantly impact cost while maintaining or increasing value to their customers. This can be done using several design-for-manufacturability methods.

One effective method is a DFM workshop. DFM workshops involve design engineers, manufacturing engineers, buyers, quality engineers, and other interested parties meeting for several days and following a process for reducing the complexity of a design. An experienced consultant usually conducts such a workshop. Typical results based on my experience are 20% – 30% reduction in complexity. This typically translates to a corresponding reduction in product cost. In the case of ABC, a 20% product cost reduction would translate to $200,000 per unit or $32M per year, a number much more significant than any small savings (or significant loss) that might be achieved through bargaining with suppliers.

DFM Workshops involve six major steps:

• A brief training session in which participants learn the objectives and methods of the workshop.
• Analysis of the current design to include all of the operations required to manufacture the product.
• Brainstorming Sessions in which participants suggest changes to the design that decrease complexity.
• Development of new design concepts based on the brainstorming
• Analysis of the new design concepts to measure improvement
• Concept Selection and Action plan.

After the workshop, the team should meet periodically to status the action plan and drive the implementation phase to completion. In 3 – 6 months, the product cost savings should begin to be realized.

In an economic downturn, organizations can use DFM to achieve their goal of lower cost without sacrificing value to their customers. This underutilized tool can be applied across all industries and typically results in 20% to 30% reductions in cost. Instead of going with their initial inclinations to squeeze suppliers and reduce value to decrease cost, management teams should champion DFM efforts in their organizations to reduce cost and add significantly to the bottom line.