I do not like procurement organizations.
It is like saying you don’t like lawyers. I don’t know all procurement engineers or managers, so understand my statement is a grand generalization. It’s not the people I don’t like, it’s a common behavior that I’ve witnessed countless times that I do not like.
Procurement organizations tend to look for ways to reduce cost by purchasing less expensive components or materials. This is often done with little regard to the impact on product reliability.
Why is this? And what can we do as reliability professionals to change this behavior?
Isolated Costs
One of the problems of the procurement organization is that they are focused on one of the largest identified costs of a product- the cost of the components included within the product. The cost of the components is a viable target.
Substituting a similar component for a higher cost one shows direct cost reduction and improved profit.
What is often missed is the impact on yield during manufacturing and field reliability in the hands of customers. I’ll leave the adverse impact on manufacturing yield to the interested reader to pursue elsewhere. The impact on reliability is delayed and may even be difficult to measure.
The focus on what is immediately available to measure is short-sighted and may lead to erosion of profit and market share due to poor product reliability.
Less expensive components may not be the same
Vendors are working to reduce costs to meet the demand of their customers.
They automate processes, reduce waste, streamline processes, and simplify designs. They reduce performance margins, increase internal heating, increase process variation, and reduce the robustness of their products.
Less expensive components may perform as well or better than more expensive parts, yet that is rarely the case in my experience.
Less expensive components generally have a higher field failure rate, and it doesn’t take much of a change in failure rate to erase any cost savings created.
FET cost reduction example
Let’s say we have a product with a circuit board that contains a field effect transistor (FET). The FET costs \$0.10 (completely hypothetical example using simple numbers to illustrate the point).
We plan on manufacturing and selling 1,000 units each with a one year warranty from date of purchase. Customers use the unit about 1,000 hours each year.
Our dutiful procurement engineer notices that the same vendor offers a very similar FET that costs half as much, \$0.05 and suggests the we switch the the lower cost component.
The proposed change would save \$0.05 x 1,000 = \$50. Not a big amount, yet in the right direction according to the metrics used by the procurement organization.
Reliability impact of proposal
We need a couple pieces of information in order to determine change in field reliability and impact on warranty.
First we need the expected component failure rates. For this example, let’s use the following (FIT is failures in time, here failures per 109 hours of use):
$0.10 FET has a FIT of 13,333
0.05 FET has a FIT of 20,000
You can use the exponential distribution reliability function to determine the probability of a FET surviving one year (in this example, 1,000 hours).
$$ \large\displaystyle R(t)={{e}^{-\lambda t}}$$
Where t (time) in this example is 1,000 hours
And, lambda is the failure rate, in the ten cent FET case 13,333 x 10-9
Resulting in:
0.10 FET has a one year reliability of 0.987
0.05 FET has a one year reliability of 0.98
At this point the procurement engineer will say something like “Great, that isn’t a big change, let’s do it.”
Let’s continue the calculations to estimate the number of failures we will expect to incur across the 1,000 units. This is the probability of failure or one minus the reliability times the number of units. Resulting in the expected number of failed units in a year:
FET has 13.25 expected failures
0.05 FET has 20 expected failures
Raising the cost of failure
That is an 6.75 expected increase in unit failures. Which brings up the cost of failure. We do not replace just the FET when it fails, we replace the entire circuit board and often replace the entire box or system involved.
In this example lets say the average cost of a field failure under warranty is 250 (a relatively low value in most cases when including the cost of the replacement unit, call center costs, shipping/handling, failure analysis, engineering time, loss of future sales, brand erosion, etc.)
Therefore, the savings of \$50 buy using the lower cost component will result in an increase of warranty costs of 6.75 x $250 or 1,698.50 (roughly).
Summary
If making this clear to the procurement team is not sufficient to stop the component cost reduction nonsense, then find someone that cares about the bottom line and customer satisfaction.
What is often missing in an organization is the cost per failure. Along with a simple estimate of the change in failure rate we can estimate the total cost when ’saving’ money with lower priced components.
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