Cutting Manufacturing Costs
What Will It Take?
Faced with rising costs, photonic component manufacturers must consider all available
options, their benefits and trade-offs.
With increasing market pressure to make
significant reductions in the cost of manufacturing photonic components, engineers
are turning more and more to new design approaches, higher levels of device integration
and the extensive use of automation for their next-generation device designs. But
no single solution can relieve the ongoing price pressures. A look at some approaches
to reducing cost could prove beneficial.
First, it is important to understand the base
costs and cost drivers in any reduction effort (Figure 1). This example of a cost
breakdown for a photonic component is divided into material, labor and equipment-related
content. Note that both the material and labor portions include constituent costs
related to scrap and rework — the principal penalties one pays for poor yield.
To simplify this analysis, “overhead” other than equipment cost may
be considered within the labor and material portions. Another way to express this
is a simple formula: assembly cost = material + labor + scrap material + rework
labor + equipment depreciation.
Figure 1. In this example, material and labor are direct variable costs. Scrap cost is
material lost because of poor yield, and rework labor is cost to repair/refurbish
or to salvage a bad component. Equipment cost is the fixed price of equipment, divided
by the number of components made overits useful life.
Although this profile can be considered
typical for several applications, preciseness is not critical. Rather, it is more
important to understand the relative magnitude of the constituents to determine
the greatest opportunity for cost cutting.
It is also important to correlate each of the
following five cost-reduction efforts with the category that will be affected, so
that the potential benefits and chances for success can be determined.
Figure 2. Semiautomated
assembly workstations improve efficiency and process consistency, delivering increased
• Automation: The introduction
of automation into any process typically improves efficiency and yield. Efficiency
is a measure of the “assembly cost” in terms of nonmaterial expenses.
These include labor, floor space, equipment and utilities on a per-part basis. Yield,
however, is a measure of the “scrap and rework cost” of having an inconsistent
or uncontrolled process, and it represents the cost of damaged material and additional
labor and/or material needed to remanufacture or repair the part. Automation can
achieve substantial improvement on both counts.
A look at the improved efficiency gained
through introducing a semiautomated workstation on a typical butterfly fiber pigtailing
process makes the benefits of automation obvious (Table 1). In this comparison of
a manual vs. a semiautomated assembly process, note that, although capital equipment
cost is higher, the per-part equipment cost remains unchanged, and throughput triples.
This payback calculation is conservative, because it does not include potential
scrap savings realized through improved yield. The cycle time and consistency improvements
result in a lower per-part cost and a fast payback for the initial equipment cost,
based on efficiency improvements alone.
One of the bigger benefits of automation,
however, is the potential improvement in yield. The gains in consistency and process
control that automation brings can deliver powerful material and labor savings on
scrap. In a typical 980-nm pump pigtailing process, the cost of scrap and rework
for each assembly can be as much as $150 in material and $50 in labor, which would
generate more than $900,000 in annual savings, assuming a 15 percent yield improvement
over 31,500 parts. The effect of yield improvement on the assembly cost per part,
given various equipment costs, brings us to the conclusion that the assembly cost
is most affected by yield (Figure 3). It is nearly insensitive to equipment-acquisition
cost when running at high volume.
Figure 3. Assembly cost per part as a function of machine cost and
yield shows yield — not equipment costs — as the driving factor.
Another important consideration for
automation is volume (Figure 4). Here we can see the mix of machine vs. labor cost
as a function of volume. Note that the labor component eventually dominates the
cost equation because, at high volumes, the equipment contribution diminishes, but
shift premiums add to the labor cost of running 24/7 operations.
Figure 4. A sensitivity analysis of cost vs. volume illustrates that machine costs per
part decrease significantly with volume, whereas burdened labor rises as a result
of shift premiums that must be paid to run a 24-hour operation. This example assumes
a fully burdened labor cost of $50, including benefits and factory labor overhead.
Automation can result in significant
savings. In most cases, we have demonstrated from 50 to 80 percent reduction in
nonmaterial assembly costs. However, as we illustrated in Figure 1, automation
can help reduce costs for only the labor, scrap and rework. It cannot inherently
address the base material cost of the product, which represents the majority of
the expense. Thus, other methods for driving down costs must be taken into consideration
• Integration and design for
manufacturability and automation: For this discussion, these two activities
are combined because the first is really just one component of the other; i.e.,
it reduces part count. “Design for manufacturability and automation”
techniques also encompass design rules and use of components that are inherently
easy to see and to manipulate with machines; reduction in the number and variety
of fasteners or assembly technologies; design for continuous-flow manufacturing;
and self-registering components.
Examples of integration in the photonics
world include combining multiple optical elements (or functions) onto one chip or
substrate, monolithic integration of electronic components with the optical components
in the wafer and multichip-module assembly.
Integration and design for manufacturability
attack base costs in material by eliminating components and corresponding labor
costs. They also can positively affect yield. Although the degree of cost reduction
depends on the level of execution, this activity inherently offers high leverage,
given that it can concurrently address costs in several areas.
• Standardization: Standardization
of packaging components and processes could provide substantial cost relief, both
in development as well as in material and processing. Aggregating large volumes
of standard packages vs. having many custom packages in the market could reduce
the cost of some components by as much as 50 percent. Furthermore, the reduction
of design effort by using standardized components will save in development costs
and time to market, as well as mitigate performance risks in the product.
• Offshore manufacture:
The huge supply of cheap labor in Asia and Eastern Europe offers an attractive alternative
to domestic manufacture. Looking at our cost profile, if you considered your labor
as essentially “free,” you could possibly eliminate up to 25 or 30 percent
of the production costs. But again, this brings with it the problems of training
workers and supporting products in remote locations. Therefore, moving manufacturing
offshore is not advisable for products that are new or for processes that are not
well-characterized or -understood.
• Supply-chain management:
An aggressive push on the material supply chain can yield a reduction of as much
as 10 to 20 percent in a typical year. This is achievable by increasing volumes,
leveraging more standardized designs, maturation of the manufacturing process and
yield improvement — often via automation — in the vendor base.
This activity has tremendous leverage
because it operates on the biggest cost element. This is one reason that subcontract
manufacturers — i.e., manufacturing service providers — will likely
become a solution of choice in more mature applications. They can aggregate larger
volumes over multiple products and can leverage the supply chain in a more substantial
The pricing curve
Achieving sufficient cost reduction to keep up
with market pricing pressures will require simultaneous attacks on several fronts.
Automation can address labor savings plus yield-related cost recovery; offshore
manufacturing can reduce labor costs (but is appropriate only for more mature products
and processes); and supply-chain management can steadily work the material costs
However, even successful combined efforts
like these are unlikely to preserve sufficient profit margins. In forecasting cost-reduction
efforts against an ongoing 25 percent sales price reduction over a four-year period
(Figure 5), the following reasonable, yet fairly aggressive, cost-reduction actions
Figure 5. Projected cost
savings vs. price reductions shows eroding margins, even with aggressive cost cuts.
Fundamental design changes, integration and standardization will be required to
achieve next-generation targets.
• 10 percent per annum material
savings through supply-chain management.
• 75 percent assembly labor savings
over the forecast period through aggressive automation and continuous process improvements.
• 75 percent scrap and rework
labor reduction over the projected period through automation and process yield improvements.
• 80 percent reduction in equipment
cost per part due to increasing volumes and higher levels of automation.
The result is that, over the forecast
period, costs decline by more than 50 percent, but margins still erode from nearly
40 to less than 10 percent.
A recent example of commercial success
that supports this cost-reduction scenario is the Lucent Technologies (now Agere
Systems) Laser 2000 program. First implemented in the late 1990s, this program entailed
the radical redesign of a family of active components using design for manufacturability
and automation, aggressive implementation of automation, flow manufacturing and
supply-chain management. Although this program was implemented in the US (along
with the commensurate higher labor rates), the company has reported a total manufacturing
cost reduction of 50 to 75 percent over a three- to four-year span.
It is clear, however, that with continued
market pricing pressure, fundamental product design changes also will be required
to stay ahead of the game. Development and incorporation of substantial advancements
in integration, extensive use of design for manufacturability and automation, and
standardization of packaging components and manufacturing tools will be required
to make photonic components economically viable for future-generation systems.
Fortunately, concerted efforts in each
of these areas are already under way. And, in the meantime, the established techniques
of automation, process improvement, offshore manufacture and supply-chain management
will help keep component providers competitive.
Meet the author
Randy Heyler is vice president of business development
for fiber optics at Newport Corp.’s Photonics Div. in Irvine, Calif.
MORE FROM PHOTONICS MEDIA