Value is swimming upstream
12/01/2004
Squeezed margins, rising and shifting R&D costs, supply base consolidation, a slowing of technology innovation, and other signs have some prognosticators saying that the best days of the semiconductor industry are behind us. What is overlooked in these discussions, however, is that other manufacturing industries have faced these exact challenges and managed to survive quite well. What’s needed is an in-depth look at exactly where value now lies in the semiconductor supply chain and a new approach to supply management that extracts and maximizes this supply value.
Direct suppliers and other players that are positioned “upstream” in the semiconductor supply chain now create more value than ever before. Intense and continuous pressure on profit margins and costs drives this upstream migration of value. The focus on costs naturally leads companies to focus on what they do best and outsource other activities to outside experts who can do this work faster, better, and at lower cost.
Like it or not, the global semiconductor industry is maturing. While the details differ, the essentials of this maturation basically are the same as those experienced by other large manufacturing industries. Many years ago, automotive and aerospace manufacturers realized that they could no longer perform all or most product research and development on their own. R&D costs had become prohibitive for a single company to absorb, and product lifecycles had shrunk to the point where technology development had to be done simultaneously and not sequentially. Manufacturers had to rely much more on suppliers and business partners for R&D and for cost reduction/control. Suppliers, in turn, were forced to reduce costs wherever they could, while simultaneously developing new technologies and more overall strategic value for customers. Sound familiar?
Initial outsourcing efforts by chipmakers and their suppliers were focused on work that is far removed from the core value produced by manufacturers. But once these initial outsourcing efforts start, they tend to increase rapidly.
For example, what began as an initiative by Lam Research in 2002 to outsource noncore activities has grown into CapOneSource Alliance LLC, a group that aims to reduce its outsourcing costs by combining buying power and concentrating that power with a few, select service providers. CapOneSource offerings include long distance services, facilities management, warehousing and logistics, and other work that clearly is not considered a core competency of any company in the semiconductor industry.
Outsourcing has expanded to include wafer processing. For example, Total Fab Solutions is a company that provides CMP outsourcing services, including process development and process integration. Total Fab Solutions started (about six years ago) as a company that distributed surplus and refurbished equipment. A couple of years ago the company expanded its business by providing CMP outsourcing services. Over the past year, Total Fab Solutions has grown by about a factor of three, according to company officials.
Decision makers in our industry must determine exactly where various activities are done best in the semiconductor supply chain. These are strategic decisions that may require a level of supply management experience that is more readily available in industries other than semiconductor manufacturing. One major player in our industry appears to have come to this conclusion.
Applied Materials president and CEO Mike Splinter went outside the industry and hired an acknowledged leader in supply management from a company widely considered an innovator in supply management practices. The leader was Garry Berryman, now VP of Applied’s Global Materials Organization, and the company was motorcycle producer Harley-Davidson, which executed such innovations as the formation of supplier councils - at which key suppliers exchanged all types of information, including basic manufacturing costs in some cases - and intimate joint product-development efforts with supplier engineers. In essence, Harley-Davidson and other leading companies changed how they interacted with suppliers, for the good of all companies involved. Semiconductor companies can achieve this goal, too, but it may require acquiring experienced talent outside the industry.
 |
Kevin Fitzgerald
Editor-in-Chief