(PDF Version)
Roger E. Bohn, UCSD
Christian Terswiesch, Wharton School
Report 97-04
October 2, 1997
Abstract
The economic performance of many modern production processes is substantially 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 only costs can substantially underestimate the importance of yield improvement. We show that yields are especially important in periods of constrained capacity, such as new product ramp-up. Our analysis is illustrated with numerical examples taken from hard disk-drive manufacturing. A one percentage point increase in yields can be worth about 6 percent of gross revenue and 17 percent of contribution. In fact, an eight percentage point improvement in process yields can outweigh a $20 per hour increase in direct labor wages. Therefore yields, in addition to or instead of labor costs, should be a focus of attention when making decisions such as new factory siting and type of automation. The paper also provides rules for when to rework, and shows that cost minimization logic can again give wrong answers.
Keywords: Yield, Cost of quality, international operations, plant location, rework
Corresponding author: Roger E. Bohn
A version of this paper is published in Journal of Operations Management (18) 1999 pp 41–59
|
| |
| Return to Top |
| |
