Are Your CAM Dollars Going Up in Smoke?
THE FRONT END'S BOTTOM LINE

Fabricators spend up to $250,000 annually on CAM. How does it add up?

by Alex Coppersmith

How much is front-end engineering costing you? If the answer eludes you, you are not alone: Over 90 percent of the respondents in the PCB industry we spoke with lacked comprehensive data. Though fixed costs (including payroll, workstations, software, networking equipment, utility expenses, etc.) were known, most general managers were unable to easily summarize the total cost of operating their front-end engineering divisions. We conclude that, without a clear understanding of these costs, the respondents are most likely A) accepting of the financial and economic risks associated with running a predominantly fixed-cost-based division, or B) generating such dramatic sequential-revenue growth that front-end engineering is simply ignored due to the excessive cash flow produced by the firm. Or, even more probable, GMs are limited by resources from performing financial analyses of their front-end operations. That is, they don't have the time.

While surveying fabricators, we were surprised by one GM's naïveté that front-end engineering costs "...all come out in the wash," adding "After consolidating each business unit and allocating corporate expenses across divisions, the front-end/CAM operations get buried." But what if the costs weren't buried beneath the corporate veil? What if the true costs, both direct and indirect, could be accounted for? Armed with that information, GMs could accurately measure productivity while identifying bottlenecks and improving resource allocations. A company could observe the tradeoffs of quality versus speed in order to manage its operating margins more effectively. Gaining a deeper understanding of a business process can only provide more opportunities to improve upon it and, more importantly, to profit from those improvements.

This article provides the tools to assess the true cost of running a front-end engineering division. The survey took into consideration the fact that every PCB manufacturing facility in the world is run differently and at varied expense structures. The resources available at one company may be completely different and perhaps unnecessary at another. Therefore, please note that while most items will apply to your organization, some may not.

The expenses related to front-end engineering are separated into four main groups (fixed direct, variable direct, fixed indirect, and variable indirect expenses). Fixed direct expenses clearly represent the majority of front-end expenses, as segmented in Figure 1.

FIXED DIRECT EXPENSES, including salaries, equipment, insurance, and associated costs, are the easiest to measure because GMs know what they are and they seldom change. When they do change, the adjustment for the GM is simple. Figure 2 provides a look at the breakdown of the total cost of fixed direct expenses. Companies should examine several factors when quantifying fixed direct expenses:

Salary: Labor has and will continue to be one of the greatest costs associated with front-end engineering. The premium attributed to CAM operators is due to the fact that they must not only be educated, but also technically adept and detail-oriented. The ability to run a CAM station efficiently and communicate effectively with designers and manufacturing personnel is vital to rapid turnover and yield improvements. Based on recent data, CAM operators in Europe and North America command the highest salaries, in the range of $35,000 to $80,000, while CAM operators' salaries in China, Mexico, and Taiwan range from $15,000 to $35,000, including benefits.

Personnel insurance and taxes: Based on the salaries mentioned above, taxes can amount to $5,000 to $11,000, or possibly more, based on location. Insurance clearly varies by country and by state. In portions of Europe and North America, for instance, it is not uncommon for companies to pay for medical, dental, and life insurance, as well as any workers' compensation expenses. Moreover, because of the risks associated with working in a manufacturing environment, some companies may even pay for additional liability insurance under an umbrella policy. These types of add-on insurance policies can add upwards of $2,000 to $6,000 annually per employee onto fixed direct expenses.

CAM workstation: A CAM workstation requires lots of memory and processor capability to handle the large data files. A powerful and economical workstation with a brand name like Hewlett-Packard or IBM will run between $4,000 and $15,000. The range is great because of choices in memory capacity, processor speed, and peripheral add-ons. Some firms even provide their operators with a second basic computer to manage e-mail and other administrative functions. However, the incremental cost of such a basic system will add a mere $600 to $1,500 to the total cost.

Software: CAM software has become extremely sophisticated, and the vendor market is competitive. High-end products with all the bells and whistles command prices in excess of $250,000, while others sell for $30,000 to $50,000. Since CAM software is the engine behind the operator's performance, PCB shops generally spend more on this expense than others. This is not to say that an inexpensive product costing below $20,000 cannot be used, but that it is simply the fact that the time required to analyze, edit, tool, and panelize the data using less expensive (limited) software generally increases the processing time. And with delivery times shrinking and board complexity increasing, especially in quickturn and prototype facilities, the more robust a software package is, the more likely the CAM operator will meet deadlines. Without the proper tools overall yields will undoubtedly suffer.

Maintenance fees: All software providers and some hardware manufacturers generally require firms to purchase an annual maintenance program. The costs of these programs cover routine servicing as well as upgrades and access to call center support. Generally, maintenance fees range from 10 to 20 percent of the overall fixed software or hardware costs.

Furniture and fixtures: The basic configuration of a workspace includes the following items: chair, desk, filing cabinet, and bookshelves in a cubicle or office. A few additional amenities may be added at a nominal cost. The one-time charges associated with these fixed assets can run from as low as $1,500 to as high as $9,500.

ISP/network connection: Depending on the level of sophistication of the PCB facility, individual workstations may be connected directly to the Internet via DSL or cable modem directly or through a T1 or T3 line shared by a series of workstations. The fixed cost associated with DSL or cable connections can cost between $960 and $3,000 annually per connection, while a shared T1 connection can cost as much as $15,000 to $40,000 per year based on service provider and country of origin.

Other costs (housing, transportation, meals): Some operations with campus environments, typically in Asia or Mexico, offer employee housing, associated cafeteria services, and transportation to and from the facility. The costs associated with these services may vary dramatically and are thus considered too difficult to estimate based on the information available. However, if this information can be gathered, it should be included in the total cost analysis.

VARIABLE DIRECT EXPENSES, those that are relatively easy to track but change frequently, include everything from supplies to training. The factors and their average costs cosist of:

Supplies: We all know what general office supplies include, and the cost of these supplies is nominal. Expect to spend about $400 to $2,000 per year per employee on supplies.

Telephone: This category includes only personal telephone usage, pager, and cell phone reimbursement, if applicable. Rates may vary drastically if the CAM operator is located in a different country from the production facility and according to the respective country's telephone rates (taxes, surcharges, etc.). Assuming average usage with minimal international calls, telephone costs can range from $1,100 to $4,250 per year per employee.

Training, education, and compliance: CAM operators require time-consuming training to become proficient on their firms' CAM software programs as well as to gain knowledge about the procedures necessary to complete their assignments. Some software companies provide their customers with offsite as well as onsite training for an additional fee. And with the size of the layout on each board shrinking, raw materials changing, and better tools coming onto the market, CAM operators must also take training courses to stay proficient. In the U.S, employees are often required to participate in information sessions covering proper behavior in the work environment, which undoubtedly cost the company more money. In aggregate, total educational activities can cost between $3,000 and $12,000 per CAM operator.

Maintenance (networking, HR, facilities, etc.): Problems occur at every PCB facility in the world. Whether a computer networking issue, a disgruntled employee, or physical damage to a workspace, companies must either employ an internal maintenance person or bring in a consultant to resolve the issue. Due to the time-sensitive nature of front-end engineering, all issues that can potentially affect productivity are dealt with using brute force and as a result frequently increase expenses. Worse, having a CAM machine down for two days means that the whole process has to stop, and that can make the difference between meeting a deadline and losing a client. Maintenance costs average between $2,000 and $5,600 per year.

Travel: Typically reserved for more senior CAM operators, travel can be a necessary part of working with a new OEM or EMS firm in order to gain a better understanding of its operating environment. Such travel is not considered in the normal course of business, but when it is, the cost can be as high as $4,000 or more, depending on frequency and destinations.

FIXED INDIRECT EXPENSES are those that seldom change but that come with the territory:

Networking equipment and service: At the heart of all CAM operations are the shared hardware components that facilitate processing data files. From the general server or servers storing the data to routers, switches, and other networking equipment, the complex nature of maintaining a fail-safe system can cost a company a one-time fee of between $50,000 and $500,000, along with annual maintenance charges of approximately 10 percent of that amount. The purchase of additional components may be necessary based on the number of CAM operators as well as the amount of data stored. Generally, a consultant is contracted to install the entire system and provide support if problems occur. The consultant's fee covers the integration of the hardware and software and may be included in the initial invoice or possibly on a cost-plus basis. For some larger organizations, an internal IT team may be used to install the network environment as well as perform routine maintenance. This will reduce the high fees typically charged by consultants but still represents a monetary value based on resource allocation.

Rent and insurance: Most CAM operators occupy a small space of approximately 64 to 100 sq. ft. Based on this assumption as well as corresponding liability coverage, companies can expect to allocate anywhere from $950 to $4,500 a year per operator, depending on where the operator is located in the world.

Utilities: Electricity, gas, water, and disposal service expenses incurred by the front-end engineering department are combined with their respective portion of the common area utilities for an annual cost of $500 to $3,200. These costs can vary dramatically based on the country or state in which the facility resides.

Divisional corporate administration: The managers who directly oversee the activities of front-end engineering represent only a portion of the personnel at the company who dedicate at least some of their time to front-end operations. From senior management to the accounts payable clerk, the cost of managing, accounting for, and supporting the front-end operation generally ranges between $4,100 and $14,500 per operator.

VARIABLE INDIRECT EXPENSES, as the name suggests, are those expenses that vary based on usage and that come with the territory of front-end engineering:

General corporate overhead and operation: General corporate expenses include all the other expenses incurred by the company that in some way or another affect the operations of the front-end department, except salaries, which are included in fixed direct expenses. These include items such as leasehold improvements, employee incentive programs, restructuring, and technology spending. It is difficult to put a price on this category due to its inexact nature. While one company may incur less than a $2,000 expense in this area, a larger company may take a big charge and subsequently allocate $10,000 or more to front-end engineering. It all depends on the company.

Capital fees and interest: Front-end engineering requires funding of its activities, which ties up free cash to cover overhead costs and fixed assets. As such, there is a corresponding cost-of-capital associated with running a front-end engineering operation. Based on the size of the operation, the cost-of-capital can be as little as $2,000 and as high as $9,000 per operator based on the capital structure of a mid-sized company in the current market environment.

One area that tends to be forgotten during most quantitative analyses of the front-end operation is the intangible costs of running the operation. Intangible costs include the time expended to work through employee issues such as hiring, firing, performance reviews, and motivational talks. They include unexpected delays due to power failures, design flaws, software viruses, and facility accidents, not to mention the enormous risks associated with relying on a single individual to perform flawlessly on a machine that must operate assiduously. Intangible costs appear to correlate with the overall level of morale among a company's employees and clarity of the company's strategic focus. Without positive morale and a razor-sharp focus, intangible costs will eventually affect the entire organization and stifle its ability to operate effectively. Given the annual recurring expenses noted above and the corresponding depreciation expenses of related fixed assets, the average annual cost of operating a front-end department can range from as little as $103,000 to well beyond $250,000 per operator per year. But is it worth it? Should a company spend the time and money to upgrade, or is it more cost-effective to outsource front-end operations to a third party? A similar question regarding manufacturing was raised in the early 1990s by a number of large OEMs, including Cisco, AT&T, and Hewlett-Packard. The answer to that question resulted in the formation of the electronics manufacturing services industry. EMS has proven that individual pieces within a process can be selectively removed and performed independently at even higher levels of quality, profitability, and speed. How did they get there? Stated simply, by knowing their operating costs cold! PCB fabricators can take a page from their lesson book: Optimize front-end engineering costs or be prepared to outsource this process to an organization that can.

Copyright 2008, ATOMIC29. All rights reserved.