Secondary Source Bring up Cost Metrics and Net Present Value Calculation
Secondary source bring-up generates positive Net Present Value when unit cost savings and risk offsets exceed fixed tooling and qualification expenses.
Scrap Allowance
Meaning
An inventory planning margin compensates for the expected loss of raw materials and electronic components during the automated assembly process. This pre-calculated buffer, referred to as a scrap allowance, ensures that the contract manufacturer purchases enough components to complete the ordered volume of finished goods.
Loss Calculation
Planners analyze the historical yield of the SMT lines to determine the required buffer percentage for each part type. Smaller components, like resistors and capacitors, receive a higher scrap allowance because they are easily lost during high-speed pick-and-place setup. Expensive microprocessors or complex radio modules have a very low allowance to prevent costly excess inventory.
This tier-based calculation protects the financial margin of the assembly contract.
Financial Liability
Sourcing too few parts leads to production halts when the SMT feeders run dry before the order is finished. This shortage requires the manufacturer to run a secondary setup cycle, which increases the total cost of the assembly run. Conversely, excessive scrap allowance leaves the buyer with unused component inventory that must be written off.
Contract agreements define who absorbs the cost of these remaining materials at the end of the run, protecting both the supplier and the customer from unexpected bills.
Process Improvement
Production managers monitor the actual waste of components during each batch to refine the replenishment buffers for future builds. When the actual loss is lower than the allowance, the unused parts are stored for subsequent production runs. This continuous review helps reduce material waste and lowers the unit cost over time.
It gives the logistics team accurate data to negotiate material requirements with component suppliers.