It's no secret China and Mexico are lower cost labor regions. New technologies are automating manufacturing and reducing the direct labor content, making offshoring to China more expensive than building in the United States. The result is that right-shoring, aka building "in region for region", can be a cost reduction strategy.
The Burdened Labor Rate
We need to begin with understanding how labor rates are applied to costs. EMS companies calculate labor cost using the "burdened labor rate", which is the direct labor rate (hourly wage of workers) plus all other costs associated with manufacturing. In EMS companies that essentially means all costs except some selling and corporate overhead expenses. So, if all monthly costs (wages, benefits, equipment, facilities, etc.) for an operation come to $312,000, and the operation has 50 direct employees, the burdened labor rate is $39 (312,000 / [50 * 160 hours]).
Manufacturing Throughput
For an SMT line the main factors determining throughput are component placements per hour (CPH), and efficiency (the percent of a shift the line is operating). While acknowledging these numbers can vary widely, a fair baseline is 50,000 CPH and 40% efficiency.
Cost Per Placement
Armed with the burdened rate, CPH, and efficiency, we can calculate the cost per placement. Our example will produce 20,000 placements per hour (50,000 CPH * 40% efficiency) for $39, or $0.00195 per placement.
New Technology
Companies like ASM, Panasonic, Universal Instruments, Juki, and Fujitsu are introducing higher precision placement technology which allows for faster, more precise operation. The latest equipment is smaller and more modular allowing for optimal line configuration and efficient space utilization. Even the feeders are becoming smarter which makes change overs faster. And the supporting software is beginning to deploy AI techniques to discover the optimal equipment utilization set up.
Taken together these technology improvements allow modern SMT lines to run at 100,000 CPH and 60% efficiency, both very achievable. The throughput has gone way up, but the cost of the equipment has remained stable (much like our cell phones).
Adjusted Cost Per Placement
Accounting for improved equipment, what is the new cost per placement? It is $0.00065, or 66% less.
To make comparison easier we can express this 66% savings as a reduction the burdened labor rate, which now becomes the equivalent of $12.87 ($39 * 33%). Burdened rates in China and Mexico are around $9 per hour, or about 30% better than our automated example. For most PCBA's labor averages 5-7% of the total cost, so the 30% advantage in direct labor cost is just 1.5-2.1% of total cost.
Considering Total Cost of Ownership (TCO)
Total cost of ownership (TCO) calculates the cost of the product when all outsourcing costs are applied. TCO is the gold standard for understanding true total cost and comparing TCO for various outsourcing alternatives is the most accurate and complete method of evaluating outsourcing solutions. We recommend the TCO calculator developed by the Reshoring Initiative. This calculator has been endorsed by the US Department of Commerce. For most PCBA products fully accounting for TCO will add 5-9% to the cost of goods.
The net result is paying 1.5-2.1% more in labor costs will avoid 5-9% in offshoring costs, making reshoring a no brainer.
If you would like to see these models applied to your specific circumstances, visit our online cost model for instant price estimates.
