Chip Makers Play Catch Up
(11/10/97; 9:30 a.m. EST)
By Larry Marion and Emily Kay, Semiconductor Business News
The semiconductor industry is playing a massive game
of catch up. Its favorite customers, the personal
computer makers, are leading the way in shifting their
production lines to the "build-to-order" model. Now the
OEMs, which are in a life-and-death struggle to reduce
their supply-chain costs, are demanding that chip
makers follow their lead.
"Our customers don't want to hold inventory anymore,"
pointed out Bill Casey, corporate credit manager at
Analog Devices Inc. in Norwood, Mass. "Most [of
them] like to get product when they need it, and get it
right into their gear and not hold it in inventory." When
these OEM customers say they need it next
Wednesday, he said, that means "they would love for
us to deliver it on Tuesday, but not Thursday or
Monday."
The chip makers significantly lag the computer industry
when it comes to the percentage of revenues that come
from products built to order. But leading semiconductor
vendors expect to reach parity with their customers
within the next several years.
They'll have to move fast. The computer and electronics
industries have been rapidly moving their production
over to the build-to-order model. Some 61% of their
revenues last year were based on the BTO approach,
according to surveys made by consulting firm Pittiglio
Rabin Todd and McGrath. This percentage is up from
just 38% in 1991.
While the success of Dell, Micron, Gateway, and other
direct marketers of personal computers is the driving
force behind the OEM industry's rising BTO revenues,
the phenomenon extends throughout the electronics and
computer industries, according to Jim Forquer, a
director of PRTM at its office in Mountain View, Calif.
And he added, the proportion of BTO revenues "has
grown very significantly" since 1996.
The entire electronics and computer industry food chain
is moving quickly to adopt the BTO model, usually by
reworking existing systems and processes. Chip
companies like Intel, Motorola, Analog Devices, LSI
Logic, and National Semiconductor are revamping their
internal information systems to enhance their ability to
build-to-order components.
Even mighty Intel Corp. acknowledged that it is
revamping operations to improve cycle time and
customer service, and reduce internal costs. "We
started to slip - not deliver on time," said Dennis
Lundien, director of Intel's planning and logistics group
in Folsom, Calif.
The microprocessor company's legacy systems and
build-to-forecast procedures started leading to excess
inventories and other problems in the early 1990s. "We
would have the wrong product in the wrong place, or
not know where inventory was, or how to move it to
where it was needed," Lundien noted.
As these problems spread throughout the industry,
semiconductor manufacturers started adopting a variety
of build-to-order business models. While there is a long
history of chip makers fabricating application specific
integrated circuits (ASICs) with a six-month lead time,
these BTO approaches start with a 30-day cycle. They
are also offering customers more than just a choice of
ceramic and plastic packages or type of lead frame.
One of the most ambitious programs is now getting
installed at Texas Instruments Inc. The Dallas-based
chip maker is spending more than $100 million to
rebuild the information technology infrastructure of its
semiconductor business.
The four-year program to design, implement, and
operate a raft of commercial software packages is
aimed at giving TI the ability to build to order its entire
line of digital signal processors and other chips. "We
want to optimize the return from our factories,"
explained Philip Coup, vice president and chief
information officer of TI's Semiconductor Group. "The
way to improve return is by managing the way we load
the factory."
To do this, TI is completely reorganizing the way that its
fabs are operated. Instead of depending on a
mainframe computer running in a batch mode to set up
a weekly schedule of factory loadings, TI is shifting
entirely to new software. It will install a suite of
software modules known as R/3 from SAP AG of
Walldorf, Germany, as well as several other software
packages, to schedule and load its factories in real time.
The ability to manage the wafer assignment process in
real time will enable TI to reserve a portion of each
process run for last-minute orders. For example, if a
networking OEM needed a batch of gigabit Ethernet
chip-sets for a rush order of network switches, TI
would be able to insert that order in its factory
schedule. But for a premium price, of course.
TI seems to be making real progress in switching to the
new manufacturing software. More than 50% of its
revenue this year will come from build-to-order sales,
TI's Coup estimated, up from just 25% five years ago.
And the Texas chip maker is even more ambitious
about the future. "We want to get that number up to
75% over the next few years," Coup said. Industry
observers believe that TI already is ahead of its
semiconductor competitors in on-time delivery.
"TI is by far the leader in on-time delivery
performance," figured Deepak Birewar, vice president
for semiconductor industry applications at i2
Technologies Inc., a leading supplier of planning and
scheduling software based in Irving, Tex. "It is about
20-to-30% better than other [chip] companies. And TI
is a lot closer to achieving BTO goals."
Motorola Inc. is taking a different tack to BTO. Its
view is focused on customized software. Customizing a
chip these days means a lot more than integrating
different cores, ROM, and other functions, said Pat
Horrigan, vice president and director of information
systems at Motorola's Semiconductor Products Sector
in Tempe, Ariz.
More and more of the customization, according to
Motorola, is in reworking the firmware of its
microcontrollers and other devices that OEMs use to
differentiate their systems. "We are re-orienting our
whole operation to support that thrust," Horrigan said.
Intel, Motorola, and Analog Devices are essentially
taking the same approach. They're refining their
processes to improve their build-to-order capabilities,
but in less ambitious ways than TI's huge project. These
companies are rebuilding their information technology
infrastructures to improve the efficiency of their
customization efforts, improve on-time delivery of
component, and boost customer service. The chip
makers are using the same tools so that by working
together and focusing on a few vendors they can obtain
systems that are custom-tailored to solving their
problems, explained Motorola's Horrigan.
The foundation of the chip makers' BTO effort is an
enterprise resource planning (ERP) system, usually the
R/3 suite from SAP. These systems, which have been
around for more than a decade, interconnect marketing,
sales, financial functions such as accounts receivable
and general ledger, production, purchasing, logistics,
and other corporate functions. Once an order is
received, each department's own operations are
updated with the new information.
R/3 is an enormous package. It contains more than 40
million lines of code packaged in 70 functional modules.
Analog Devices already is in full production with R/3,
while Intel and Motorola have parts of their R/3
systems in operation.
A typical implementation for a large chip maker is done
in phases, with modules installed in sequence across
geographical areas. This process usually takes two
years, but the Motorola and TI projects will take at
least four years due to their large size.
A new version of R/3, expected to be shipped later this
year, is scheduled to include features that will enable
chip makers to more efficiently provide BTO services.
It was developed by SAP after Intel, Motorola, and TI
pressed the software vendor to enhance the
functionality of R/3 to support their BTO strategies. TI
is putting in a not-yet-released version of R/3 that is
expected to include advanced functions that will make it
easier for the supplier to run its flavor of BTO.
Motorola is now considering whether to upgrade to this
new edition.
A key improvement in the new R/3 is that it permits a
chip maker to optimize its production plans among a
variety of plants in several geographic areas, and to set
a delivery date to a customer in real time when the
order is received. The older system can't weigh
production capabilities of multiple locations or calculate
an optimized delivery date scenario in real time.
SAP had to repackage part of R/3 to meet chip
makers' needs to equip their sales forces with laptop
computers to deliver BTO products. Competitive ERP
packages from such vendors as Oracle, PeopleSoft,
and Baan also are being upgraded to provide similar
capabilities.
In October, for example, PeopleSoft Inc. of
Pleasanton, Calif., created a consortium of chip
manufacturers and consultants to help improve its
software for the semiconductor industry. In addition,
the PeopleSoft Semiconductor Consortium will advise
the company on how to tailor its products so they can
work with software from other vendors. The group's
members include Analog Devices, Fairchild
Semiconductor, Mitsubishi Semiconductor, Read-Rite,
Qualcomm, Amkor/Anam Assembly and Test Services,
Price Waterhouse, and OPD Solutions.
Also crucial to a BTO effort is the
supply-chain-management (SCM) software that goes
on top of the enterprise resource planning system. It is
marketed by such vendors as i2 Technologies, Red
Pepper, and Chesapeake Decision Sciences.
SCM software helps to organize the flow of materials
and production between buyers and sellers, optimizing
production and shipping schedules. Analog Devices
opted for Red Pepper' SCM, while TI recently
dropped Red Pepper in favor of i2. IBM uses
packages from both Chesapeake and i2, while
Motorola Semiconductor is now using Chesapeake but
is considering i2.
A successful BTO strategy also requires configuration
and pricing engines. These software tools ensure that
the combination of features and functions specified by
the customer will actually function as expected, and are
buildable at a profit. Configuration engines come from
such vendors as Red Pepper and SAP.
The configuration engines usually use interface software
to exchange information with CAE packages. Eigner +
Partner of Dresden, Germany provides the package for
linking Viewlogic and other semiconductor CAD
packages with R/3.
Sales force automation (SFA) tools help sales staff
price orders and other sales-related functions. Trilogy,
Vantive, Calico, and Seibel Systems are popular SFA
tools in the electronics industry. Trilogy is used by IBM,
while Motorola is considering Siebel and Vantive.
SAP and i2 have captured the bulk of the electronics
market for enterprise resource planning software,
according to consultants. More than 650 chip makers
and OEMs have started implementing SAP's R/3 during
the past four years, said Mayur Shah, director of SAP's
high-technology business unit.
As many as 1.6 million sales persons, order clerks,
purchasing managers, production chiefs, financial
analysts, and other employees in the high-technology
community will be using R/3 by the end of the decade,
the German company estimated. In most cases, they
will be using it as part of a build-to-order system.
A lot of money is being invested in these ERP systems
by the chip industry. Along with TI's expenditure of
more than $100 million, Motorola Semiconductor will
spend in excess of $200 million to implement its system,
company officials indicated. IBM is using R/3 in its
Microelectronics, Storage, and PC operations and the
price tag for these units will amount to more than $200
million, according to industry estimates. Analog Devices
spent $20 million.
Despite the amount of money being spent, there is no
guarantee that BTO systems will work as chip makers
expect. A great deal of technological, financial, and
business risk is involved, experts said. TI, for example,
is pushing the edge of the hardware envelope, hoping
that servers from Sun Microsystems Inc. will be able to
cope with the data processing load. Other large R/3
implementations at IBM and Motorola are based on
mainframe computers. The shift to BTO from the
build-to-stock approach also means a major cultural
adjustment at a time when staffers are asked to use a
new set of tools.
But officials at TI, Motorola, and Intel all say they have
no other choice. If they want to hold on to their chip
customers, they will have to be able to produce exactly
what their customers want, exactly when they want it,
and deliver it exactly where the customer wants it |
