How the road to Singapore accelerated manufacturing in China
01/01/2006
Oded Lendner, Alan Schindler, Kulicke & Soffa Industries Inc., Willow Grove, Pennsylvania
With China offering the semiconductor industry new levels of manufacturing cost efficiencies and strong domestic market growth opportunities, many integrated device manufacturers (IDM), material suppliers, and chip-packaging equipment companies are moving operations to the Chinese mainland at unprecedented rates. The move by IDMs such as Intel, AMD, Hitachi, and Fairchild into China also has prompted a mutual move by semiconductor equipment manufacturers and material suppliers such as Kulicke & Soffa Industries, Universal Semiconductor Inc., and Flextronics Corp., into the country to better serve its customers.
In 2003, mainland China represented 7% of the total worldwide revenues for the semiconductor assembly and test services (SATS) segment. That share is expected to more than double by the year 2007, according to projections from Prismark Partners LLC (see figure).
In pursuit of these opportunities, Kulicke & Soffa (K&S) has set up its own manufacturing operations in China during the past few years. In addition, the company is establishing a growing local supply chain to support its new production operations. With a production and supply chain both located in China, K&S can increase its support of IDMs and contract packaging/assembly companies, which are expanding operations in the mainland area.
Transitioning to outsourcing
Over the last decade, K&S has transitioned its overall manufacturing strategy from a fixed-cost orientation to a variable cost approach for many of its high-technology machine components. Prior to the outsourcing, K&S produced much of the tight-tolerance subsystems, machine parts and assemblies for its interconnect products, creating the need for intensive capital investment and factory space requirements. A large infrastructure, with fixed overhead and labor costs, was required to support these in-house manufacturing activities.
Now, much of the high technology for IC ball bonders and other labor-intensive products are outsourced from established suppliers throughout Asia such as Singapore, Malaysia, and China. The company’s outsourcing model allows it to reduce fixed costs, with inventory available from suppliers when needed to meet customer demand. By lowering costs, outsourcing creates a lower break-even point of operation and enables the company to be more competitive in the marketplace during a time of major price erosion. For example, between 2000 and 2004, the average price of an IC ball bonder dropped 30%.
The outsourcing model also helps improve in-house inventory levels, and allows a quick ramp-up or ramp-down to meet industry needs in the cyclical semiconductor market. Since implementation, ramp time has improved by 40%, while inventory turns are 4× better, increasing from 6 to 8 to 32 turns a year.
Creating the overseas supply chain
Development of a supply chain in Asia began in the early 1990s when K&S first realized it needed to outsource to be more competitive in the industry. Initially, a US-based supplier pool was used to support the manufacturing operation of IC ball bonders, which was then based at the company’s US headquarters in Willow Grove, PA. To be more competitive, however, K&S found it needed to acquire components overseas. In addition to offering lower parts costs, an overseas supply chain would allow K&S to be closer to its competitors and international customer base, most of which were located in the Far East.
In 1997, the company established an international procurement office in Singapore, which was managed by local Singaporeans who interfaced with US manufacturing engineers to acquire machined parts for installation in larger subsystems and ultimate use in assemblies made in Willow Grove. At that time, Singapore was chosen as the ideal location for the procurement office and K&S’s first step into Asia because it was cost-effective, close to the company’s customer base, and business-friendly, with a large population of English-speaking business professionals and engineers.
When repeated attempts at buying lower-level parts did not met the company’s expectations, K&S contracted with turnkey suppliers such as Kinergy Pte. Ltd. and Flextronics in Singapore to not only build subsystems, but also to manage the complete procurement supply chain.
The transition of outsourcing product to a third-party supplier included a methodical process that began with a review of the competitive landscape by an internal cross-functional team. An in-depth audit also was conducted on all business systems to ensure that the infrastructure was sufficient to support ongoing requirements. Engineering change control processes were closely monitored to ensure that suppliers could match the same high-technology subsystems that were manufactured in K&S plants.
Training was provided so suppliers could exactly simulate the company’s manufacturing methodology and quality standards. General communications and daily coordination took time to develop and mature. While significant, implementation costs were contained through the utilization of a ten-person US team, which focused solely on the task of establishing the third-party supply network.
 Workers in K&S’ factory near Shanghai assemble wire and capillaries for wire bonding equipment. |
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Supply chain management
Supply chain management proved the most critical aspect of forming a successful relationship with new turnkey suppliers. While the learning curve was steep for all suppliers in this area, as it previously was for US-based suppliers, the company’s on-site support staff bridged many gaps between the supplier and K&S’s advanced manufacturing engineering organization. While K&S’s on-site staff facilitated daily problem solving, the company’s engineering team visited the suppliers’ sites to exchange knowledge critical to accurately duplicate K&S’s exact manufacturing methodology. Suppliers’ engineering staffs also visited K&S headquarters in the US to better understand engineering processes and procedures. In addition, Singaporean suppliers were invited to work alongside former US suppliers at their sites, while they transitioned their manufacturing operations overseas. While declining to relocate operations overseas to continue producing major subsystems, these US suppliers agreed to participate in the transfer of information between their own operations and new suppliers in Singapore.
In an attempt to be even more competitive, K&S ultimately decided to move manufacturing abroad. With the experience and success of building a supply chain in Singapore - and understanding the business culture of the country - establishing a factory in Singapore was an easy next step. In 2000, a 73,700 sq. ft IC ball bonding facility was opened in Singapore, just three years after the supply chain network was established in the country.
Operating on a “24/7” schedule, the facility is now at full capacity - thanks in part to the supply chain established in the country. Along with IC ball bonding operations, a 53,500 sq. ft facility in Singapore is used for gold and aluminum bonding-wire production.
Moving into China
After opening its Singapore plants, K&S began moving material- and labor-intensive products into mainland China to take advantage of the cost efficiencies and new market opportunities in the country. The company also began to transition portions of its supply chain from Singapore to China to better support the new operation as it ramped into production.
To quickly respond to the changing chip industry, primary Singapore suppliers were urged to establish operations in China so that the company’s new plant could come up to speed more quickly. Many Singaporean vendors and multinational companies saw the huge business opportunities in China. A “copy exact” approach played a significant factor in accelerating the company’s supply chain transition into China. K&S’s initial foray into Asia (Singapore) required the complete creation of a supply chain from scratch, taking about three years. In China, the supply chain was operational in a matter of months.
Under the leadership of K.H. Lee, director of Asia/Pacific materials, the company supported the transition of many Singaporean suppliers to China. While 45% of the components purchased from Singapore-based suppliers have moved to China, that number is expected to increase to 65% within the next year.
Collaborating with its suppliers, K&S has built a strong supply chain in China for both its deliverables and principle products. The company’s experience in Singapore helped it establish the new supply chain in China, leveraging the same business processes as it did when establishing the initial Asian supply chain. In both cases, a development program was required to bring local suppliers up to expectations. However, the learning curve in China proved to be much shorter due to learning experiences in Singapore and other factors.
China’s own challenges
While establishing a supply chain in China went quickly, K&S did face great challenges within the country. Management teams’ and workers’ skill levels varied greatly from those in Singapore. Business operations in China were mostly geared toward a high-volume and low product mix that was based on lower levels of technology. There are also very few suppliers with the experience or desire to handle high technology and lower-volume products. Skill sets required for manufacturing tight-tolerance machining parts and the knowledge of supply chain management also lagged in China, compared to Singapore. However, this gap is beginning to close quickly as more multinational companies move into China and apply “copy exact” targets for technology provided by local suppliers.
China’s entry in the World Trade Organization also is expected to change the business landscape in the country, as more pressure is placed on the government to adapt to WTO standards. The central Chinese government also is trying to slow down rapid growth in specific sectors to stabilize its economy and minimize high turnover rates seen in some domestic workforces.
‘Megacenter’ is goal in China
In 2002, K&S opened its 13,500m2 manufacturing facility in the Suzhou Industrial Park, near Shanghai. The facility is dedicated to the manufacture of bonding tools and cantilever probe cards. In September 2003, the Suzhou facility reached a milestone with the shipment of its one millionth capillary. And now the facility has manufactured more than 4 million capillaries and currently accounts for more than 60% of K&S’s total capillary production.
In 2004, probe card production was moved to the Suzhou facility, and product shipments started in March. To date, thousands of probe cards have been shipped domestically and abroad. K&S is continuing to ramp up production to make its Suzhou facility a high-volume manufacturing center for its cantilever probe cards. China’s domestic supply chain is now playing a critical role in the company’s production ramp and the ability to reduce cantilever probe card costs at the Suzhou plant. Eventually, K&S hopes to establish a “megacenter” in China that manufactures multiple product lines, while optimizing production in other areas.
Outsourcing benefits
In addition to improving operating efficiencies, supply chain management strategy has enabled the company to better deal with the cyclical nature of the semiconductor industry’s sharp downturns while responding more quickly to upturns as well. Through outsourcing, product delivery cycles have shrunk and 40% more IC ball bonder units can be shipped within the company’s standard lead times.
Many of K&S’ products utilize a variety of different and often custom-made high-technology parts and hardware. Consequently, outsourcing has dramatically reduced the company’s inventory levels. K&S has increased its operational inventory turns on IC ball bonders from an annual rate of 8 to 32 times/year between 1997 and the fiscal quarter, ended March 2004.
Rather than investing in infrastructure to manufacture low-level, noncore subsystems, outsourcing has enabled K&S to better focus on its core value-added activities, including the development of new semiconductor technologies, final integration and test, and customization. By letting turnkey manufacturers worry about tactical matters, in-house resources are free to focus more on customers and core competencies.
Conclusion
Looking ahead, K&S will implement advanced supply chain software to tie its manufacturing operations in Singapore to suppliers in China. Having implemented advanced enterprise resource planning (ERP) systems in its North American and Singapore facilities, K&S will do the same in its China operations. Currently, two to three different planning systems are implemented in China. Once installed, the ERP system will integrate all departments and functions within the facility into a single computer system that can serve different department needs.
By providing improved visibility into factory operations, the ERP system will help K&S manage inventory better for just-in-time (JIT) product delivery to plans. When networked among the various international facilities, K&S hopes to create an intercontinental JIT materials management system that factors in transportation times and ongoing changes in demand.
Contact Oded Lendner at Kulicke & Soffa Industries Inc., 2101 Blair Mill Rd., Willow Grove, PA 19090; ph 215/784-6000, fax 215/784-6002, e-mail [email protected].