The economics of yield-driven processes

The economic performance of many modern production processes is substantial ly influenced by process yields. Their first effect is on product cost - in some cases, low-yields can cause costs to double or worse. Yet measuring o nly costs can substantially underestimate the importance of yield improveme nt. We show that yields are especially important in periods of constrained capacity, such as new product ramp-up. Our analysis is illustrated with num erical examples taken from hard disk drive manufacturing. A three percentag e point increase in yields can be worth about 6% of gross revenue and 17% o f contribution. In fact, an eight percentage point improvement in process y ields can outweigh a US$20/h increase in direct labor wages. Therefore, yie lds, in addition to or instead of labor costs, should be a focus of attenti on when making decisions such as new factory siting and type of automation. The paper also provides rules fbr when to rework, and shows that cost mini mization logic can again give wrong answers. (C) 1999 Elsevier Science B.V. All rights reserved.