Testing new business models
08/01/2004
Solid State Technology asked suppliers to discuss manufacturing process strategies in the current industry climate.
Market upturn will test new approaches to manufacturing
 Kevin Brewer |
Kevin Brewer, VP, worldwide operations, Axcelis Technologies Inc., Beverly, Massachusetts
Those of us in the semiconductor industry sometimes forget our unique situation. Very few markets of any size experience the volatility in demand that we do on a regular basis. If the last few years are any indication, this volatility is not going to change anytime soon.
Many of us used the downturn to refine our operational strategies and prepare for the next upturn, which at long last appears to have arrived. Long-lead times, quality issues, and either too much or too little inventory were hallmarks of the last peak and trough of the cycle for many companies. We learned our share of these lessons at Axcelis, and proceeded to refine several aspects of our business model with three goals in mind:
- improve gross margins,
- reduce cycle time, and
- increase responsiveness to our customers.
This included forging strategic alliances throughout our supply chain, improving the visibility of our forecasting system, and, in some cases, sharing more inventory risk. This was coupled with specific lean manufacturing initiatives to reduce cycle time and achieve aggressive cost-out goals. With the arrival of the upturn, we're seeing this model tested.
The first step we took was to revamp our supply chain in a way that would allow us to create strategic partnerships with fewer but more diversified suppliers. By doing this, we were able to focus on material lead-time reduction — in most cases by as much as 50%. As a result, inventory liability significantly improved for both Axcelis and our suppliers. By enhancing our e-supply tools with supplier-direct updates, we were able to improve material planning accuracy — this action helped yield a 60% improvement in our material availability. The final changes to our supply chain involved shifting to a pull-based replenishment strategy from a push system, and implementing a more robust sales, inventory, and operating plan (SIOP) process to rationalize our demands.
The next natural step was to define "lean" as our guiding principle for operational excellence. Operating in a lean environment involves many principles, and chief among them was deploying high-intensity Kaizen workshops (Kaizen is a continuous improvement technique used in various manufacturing industries), in which all manufacturing employees were required to take part. Being lean also placed tremendous importance on right-sizing the business with a skilled workforce that is agile and responsive to steep demand fluctuation. We eliminated waste and improved cycle time by 60% on our key product lines, while improving manufacturing processes to realize year-over-year productivity gains of 10%–20%.
Outsourcing is a delicate subject these days, especially when so many reductions in force come into effect during a downturn. But by outsourcing our noncore work and freeing up factory capacity, we were able to reduce our required infrastructure by 20%. Finally and most important, we approached the lean way of manufacturing not as a stopgap or temporary fix, but as a way of life. It has become part of our culture, and we will continue to embrace its principles for a long time to come.
We also began a "critical to quality" initiative by which we analyzed the critical parameters in our products that affect reliability and robustness. Unlike traditional total quality management practices that focus on defect elimination regardless of importance, our process uses trained Six Sigma black belts (who are Axcelis employees) to analyze and stabilize critical characteristics in our design-and-build processes. By doing this, tool-to-tool variation is significantly reduced.
During any upturn, one can expect to see typical stress cracks at this point. Some of the most frequent include significant material stock-outs and lead-time push outs. Other issues affecting the manufacturing process include part quality and production capacity constraints as suppliers ramp up, inventory bubbles as the buying process goes into full swing, and inevitably stretched manpower resources. Those companies that are prepared to weather these storms will ultimately be the most successful during the ramp.
Based on the actions Axcelis has taken, how are we doing in the early stages of an industry recovery? Manufacturing cycle times and supplier lead-times continue to shorten, which is improving our asset velocity. On-time delivery of our products is at all-time high. Product reliability and tool-to-tool variation are showing measurable improvement. Improving our days-on-hand (DOH) inventory has kept inventory levels relatively flat despite significant buying. And, finally, we are seeing favorable margin improvement and plenty of capacity for continued growth, which is exactly where one would hope to be at the beginning of an upturn.
To be sure, there are no "silver bullets" in any business re-vamp, but there are strategies and techniques that provide more desirable outcomes than others. The ability to recognize which techniques work for your business model is a hallmark of a lean organization — one whose business model can stand up to the test of our industry's unique market volatility.
For more information, contact Kevin Brewer at Axcelis Technologies Inc., 108 Cherry Hill Dr., Beverly, MA 01915-1053; ph 978/787-4000, fax 978/787-4200.
The benefits of "insourcing"
 John Heaton |
John Heaton, president and CEO, Nanometrics Inc., Milpitas, California
One of the most significant market upturn challenges facing semiconductor equipment companies this time around is control of the manufacturing process, which is so critical to lead-time. During the downturn, many companies increased their reliance on outsourcing as a means of survival — pushing manufacturing down the supply chain to third-party vendors to reduce the amount of investment required for in-house manufacturing. At first glance, allowing more specialized firms to build parts for our complex systems seems like a compelling strategy to keep an equipment supplier more structurally nimble and responsive to the cyclicality of our industry. However, outsourcing can quite easily be taken too far. Companies that are now outsourcing the majority — or even all — of their manufacturing will soon find that there are serious drawbacks to this strategy.
While no semiconductor equipment executive would deny the clear benefits to outsourcing certain noncritical pieces of a product (principally those that have become commodities, such as robotics), performing the majority of manufacturing in-house offers immeasurable advantages that show up in the end product and, ultimately, in a company's bottom line. Particularly for small- and medium-sized semiconductor equipment companies, "insourcing" or "smart outsourcing" is a much more sound business strategy that results in
- better responsiveness,
- superior product quality,
- lower manufacturing costs,
- faster turnaround times, and
- greater customer satisfaction.
There are several reasons for this:
Control. The first and most obvious benefit to insourcing is the unparalleled control a company achieves over manufacturing by keeping the majority of the process in-house. Outsourcing by its very nature leaves companies at the mercy of their suppliers. While there are certain steps a company can take to ensure some accountability from its supplier base, they can never be as effective as retaining these functions internally. In simple terms, there is just no substitute for the ability to physically walk down the hall to deal with a manufacturing issue or assess progress.
Today, the issue of control is more relevant than ever. The reality is that our systems have become so complex that outsourcing manufacturing means dealing with dozens, if not hundreds, of suppliers, each responsible for some small piece of a finished product. Even if nearly every supplier delivers on time and executes perfectly, a system can still be hung up by one or two suppliers that did not.
Insourcing also offers the greatest assurance of quality control. No matter how well you know or how much you trust your suppliers, you are still dealing with another organization that has its own business systems and controls, and its own best interests at heart. Secondly, suppliers are typically commissioned to build a part from a technical drawing, without true understanding of how that part fits into the complete system. The only way to truly know that the critical parts of your system are manufactured up to your organization's quality standards is to preside over their fabrication internally. No matter who builds the individual parts, the system itself is going off to your customer with your company's name on it.
Cost advantages. Suppliers are in the business of supplying parts to turn a profit. While their specialization theoretically allows them to build the parts at less expense, they also are adding a profit margin to improve their own bottom line. Particularly for a company that supplies other OEMs, such as Nanometrics, a system built primarily or exclusively through outsourcing means passing a lot of built-in costs up the line to end customers. This can add significantly to a system's total cost. Insourcing allows much greater control of the manufacturing cost, and, ultimately, the total cost of a system.
The streamlined communication made possible by insourcing offers cost advantages that may not be visible at first glance. With engineers, designers, and machinists working in a close environment, opportunities arise to devise and incorporate simple changes to a part that improve manufacturing efficiency and lower costs without altering the performance or functionality of the end product. These simple tweaks improve the efficiency and effectiveness of the manufacturing process and are one of the principal benefits of insourcing, ultimately resulting in better cost control and improved product quality. Using a third-party supplier eliminates, or at least severely reduces, the chances of these discoveries.
Availability. The issue of availability is particularly relevant today, with the industry finally recovering from the longest and most sustained downturn in its history. The downturn was certainly rough on equipment companies, but it was trying for our suppliers as well. Many of them, particularly machine shops, no longer exist or have been forced to lay off many experienced employees. In Silicon Valley, many of those displaced manufacturing workers have left the area. As a result, much of the manufacturing capability that existed in 2000 is no longer available. Most likely, some of it will resurface, but in the form of newer, less established suppliers, who may be based further away (even overseas), creating challenges such as turnaround time, accountability, and, particularly in the case of overseas suppliers, bureaucracy.
For small- and medium-sized equipment companies, the availability of supplier capacity is an even bigger problem, especially as the industry ramps up. Suppliers are starting to get very busy. When suppliers' resources are strained, priority becomes an issue. Unless you are one of the major players, doing volume business with particular suppliers, you will find that lead-times for your parts get longer and longer. Ultimately, this means it takes longer to make delivery to your customer.
In the end, each company must weigh carefully the benefits of outsourcing vs. the benefits of insourcing. The most effective strategy is to adopt a "smart outsourcing" strategy — an approach that outsources noncritical elements of a system but maintains strict in-house manufacturing control over the majority of system manufacturing.
For more information, contact John Heaton at Nanometrics Inc., 1550 Buckeye Dr., Milpitas, CA 95035; ph 408/435-9600, fax 408/232-5910.