Another Perspective on Outsourcing

By John Pittman

Recent columns published in Advanced Packaging reported on the moves of IC makers to outsource assembly and test operations based on the argument that if a capability is not something that you put in your sales literature, then maybe that capability should be outsourced. Then again, maybe it's not. Outsourcing is neither a fad nor a fundamental shift in the electronics industry, but rather a little of both. Over the past few years, much has been written about outsourcing strategies as a way to achieve lower costs, gain technical expertise that doesn't reside internal to the company, reduce assets, create a more flexible financial model or to reduce business risk. At Agere Systems, we've taken a different view of the situation and derived some different outsourcing strategies by considering outsourcing (or not outsourcing) as a way to provide the best total customer experience.

Agere has chosen to source its front-end IC manufacturing from major foundries, because we feel they are now providing reliable, cost-competitive core CMOS technologies that free us from the financial burden of a very high fixed cost. Unlike other IC makers alluded to in earlier columns, we have chosen to retain and invest in our back-end wafer probe, assembly and test capabilities.

Today's market realities dictate that semiconductor suppliers provide responsive, flexible and predictable service to customers whose demand is becoming increasingly uncertain at shorter intervals. While many companies choose to outsource portions of their assembly and test operations, advantages are afforded to companies that retain operations closest to the demand source while building a culture of speed and flexibility around these operations. The ability to have a super-fast back-end provides key differentiation in the IC world. Today, we have optimized our internal assembly and test facilities and created a culture focused on providing 48-hour turnaround.

Creating this culture, however, is not an overnight process. The journey to create a fast, responsive supply chain is one that takes years. Where cycle time was once measured in months and weeks, it is now measured in hours and minutes. The journey, while long, is one that cannot be avoided for companies that are going to survive in an increasingly competitive marketplace.

In today's supplier-customer relationships, orders are often placed in the anticipation that customers will sell their product — not on an actual sale of their product. In response, best-in-class suppliers need to implement lean supply chain practices that incorporate a joint full-stream buffer policy that leverages a cross-supply chain buffer strategy based on statistical analysis of supply and demand volatility. The key to implementing this lean supply chain model is having a thorough understanding of your customers' demand cycle. Modeling customer demand provides the supplier with a statistical model of the customers' real end demand.

To make this model work, however, you need a super-fast and flexible back-end capability that can react to the actual market demand before it changes. Statistical demand modeling and 24-hour-a-day factory planning allow semi-finished product to be staged at the back-end of the semiconductor supply chain, where it's strategically held until an actual market event triggers final assembly and test. As back-end cycle time is reduced, companies can get to the point where the final assembly and test is driven by actual market events rather than the anticipation of market events.

The relationship between outsourcing and high technology can also be counter-intuitive. While the common thought is to invest in technology and outsource tasks that are low tech, at Agere we have found that the reverse is also a viable strategy. When processes or technologies become mature, less challenging, more mainstream and ultimately higher volume, the benefits of bringing those technologies or processes in-house can be significant. In-sourced processes can be controlled closely, focusing on quality and schedule needs, while higher volumes make it less risky to invest in equipment and fixed costs.

With this set of outsourcing and investment strategies, Agere now does 80 percent of its assembly in-house and outsources only 20 percent. More than 95 percent of probe and test is done in-house. The result is that assembly and test is to the 95th percentile completed within 48 hours from start of wafer. This is several times faster than we see from subcontractor operations. The resultant time savings from Agere's expertise in fast, flexible assembly and test is a service differentiator that leads directly to reduced work-in-process, lower planning costs, less risk and, ultimately, better customer service.

Outsourcing indeed has its place in the supply chain or the value-added chain. The key is to understand how a company's outsourcing strategy fits into its overall business plan, how it delivers by complementing the company's distinctive competence and helps the enterprise deliver value to its customers.

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JOHN PITTMAN, vice president of Assembly and Test Operations, may be contacted at Agere Systems, 1110 American Parkway NE, Allentown, PA 18109; phone: (800) 372-2447; e-mail: [email protected].


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