Electronic Testing Operations (ETO), a division of Seligram, Inc., provided centralized testing for electronic components such as integrated circuits. ETO was created as a result of a decision in 1979 to consolidate electronic testing from 11 different divisions of Seligram. ETO commenced services to these divisions in 1983. It was estimated that centralization would save Seligram in excess of $20 million in testing equipment investment over the next five years.
ETO operated as a cost center and transferred products to other divisions at full cost (direct costs plus allocated burden). Although ETO was a captive division, other divisions within Seligram were allowed to use outside testing services if ETO could not meet their cost or service requirements.
ETO was permitted to devote up to 10% of its testing capacity to outside customers but chose to …show more content…
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Seligram, Inc.: Electronic Testing Operations
caught early in the manufacturing cycle, the cost of repair could exceed the manufacturing cost of the product itself. Studies indicated that a defective resistor caught before use in the manufacturing process cost two cents. If the resistor was not caught until the end product was in the field, however, the cost of repair could run into the thousands of dollars. Second, a large proportion of Seligram’s work was defense related. Military specifications frequently required extensive testing of components utilized in aerospace and naval products. By 1988, ETO had the ability to test 6,500 different components.
Typically, however, the division would test about 500 different components each month and between
3,000 and 3,500 per year. Components were received from customers in lots; in 1988, ETO would receive approximately 12,000 lots of components.
ETO performed both electrical and mechanical testing (see Exhibit 2). Electrical testing involved measuring the electrical characteristics of the components and comparing these …show more content…
Burden was calculated for each lot by multiplying the actual direct labor dollars associated with the lot by the 145% of burden rate. The resulting burden was then added to the actual direct labor costs to determine the lot’s total cost. In 1988, the facilitywide burden rate was 145% of each direct labor dollar, of which more than 40% was attributable to equipment depreciation (see Exhibit 3).
Several trends pointed to the obsolescence of the labor-based burden allocation process. Since the founding of the division in 1983, direct labor hours per lot tested had been steadily declining (see
Exhibit 4). This trend was aggravated by an increased dependence on vendor certification. Vendor certification was a key component of Just-in-Time (JIT) delivery. With vendor certification, Seligram’s suppliers did the primary testing of components. ETO then utilized statistical sampling to verify that the supplier’s production process was still in control. Thus, whereas JIT led to an increased number of smaller lots being received by ETO, vendor certification reduced the number of tests performed. Early indications were that JIT deliveries would account for 30% of Seligram’s shipments within the next five