The economics of yield‐driven processes

TLDR

Process yields heavily influence the economic performance of modern production lines, affecting product cost and often being underestimated when only costs are considered. The study demonstrates that yields are critical during capacity‑constrained periods such as new product ramp‑up and offers rework rules that challenge conventional cost‑minimization logic. The authors use numerical examples from hard disk drive manufacturing and develop rework decision rules that illustrate how cost‑minimization logic can fail. Yield improvements of three to eight percentage points can boost gross revenue by up to 6% and contribution by 17%, surpassing the benefit of a US$20/h wage increase, indicating that yields should guide decisions on factory siting and automation.

Abstract

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 three percentage point increase in yields can be worth about 6% of gross revenue and 17% of contribution. In fact, an eight percentage point improvement in process yields can outweigh a US$20/h 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.