Modeling Profitable Semiconductor Fulfillment

Part One of a Series Inventory Buffers

A Supply Chain/Planning Department Check List for rationalizing semiconductor inventory strategy

in the electronics supply chain

Semiconductor Supply Chains:Defining Inventory Buffers

FabricationFabrication

Fabrication

DBFGS

CustomerCustomerCustomerCustomerCustomer

Disti

Die Bank Provides Protection From Forecast/Yield Uncertainty

Push-Pull (Decoupling) Point

Backend

Finished Goods Stocks Provide High Fill Rates and Manufacturing Flexibility

Lets You Treat Fabrication as Your Supplier, Insulating “Push” From “Pull”

Enables Your Role in Customers’ Supply

Chains

86

Buffer Inventory

• Semiconductor manufacturing lead times (months) require that product is “pushed” into the pipe based on forecast, buffered and “pulled” out of the pipe to fill customer demand

• Buffer inventory is a necessary element of profitable fulfillment strategy

• Buffer inventories are planned and initially based on product/market characterization

• Inventory is factored in light of fulfillment strategy, uncertainty and risk tolerance.

• Well planned buffers maximize fill rates while minimizing risk

Factors in Modeling Inventory Buffers

Historical Run Rates

Customer

Service/Fill Rate Goals

FabricationFabrication

Fabrication

DBFGS

Uncertainty

CustomerCustomerCustomerCustomer

Disti

Replenishment Lead Times

Product Life Cycle

Costs of Shortage/Overstock

Push-Pull (Decoupling) Point

Backend

87

Decoupling

• Decoupling point is where “push” stops to wait for “pull” • These decoupling points are planned and create buffers• Buffers used for postponement improve flexibility and

reduce cost and risk• Characterization of products and demand determine

strategic decoupling points and therefore the buffer location

• Fill rate strategy plays an equally important role in determining buffer distribution

Key management practices in fulfillment

Some End ItemsHave Continuing, High Volume Demand:

Moderate Stock, Build to Forecast

FabricationFabrication

Fabrication

DBFGS

CustomerCustomerCustomerCustomerCustomer

Disti

Push-Pull (Decoupling) Point

Backend

Some End ItemsHave Unreliable, Sporadic Demand:Minimum/Zero Stock, Build to Order

Some End ItemsHave Persistent but Uncertain Demand:

Significant Stock, Build to Replenish

Higher Fill Rates

Lower Fill Rates

Uncertainty

• It is all about guessing• Guess on the high side and you have the consequences

of overstock• Too conservative and you incur the wrath of the affected

customer base• Guessing is a cross functional exercise • Corporate strategy should be clear to every level with

clearly defined metrics to judge performance

Uncertainty: the Costs of Overstock and Shortage

Total Economic

Costs ($)

Inventory Investment

Lost Design Wins Obsolescence

Revenue Lost

Competitive InroadsLearning CurveImprovements

Holding Costs

Just Right!

Shortage Overstock

83

In Closing

Two important variables:1.Time is the predominant cost lever of the supply chain

(transport times, cycle-times, ...) 2.Managing uncertainty is fundamental to successful

supply chain management• Reduction in time will follow a reduction in uncertainty• Reduction in uncertainty will follow a reduction in time• Total supply chain cost reflects both• Postponement, well planned buffers, is a key supply

chain strategy for reducing both time and uncertainty

About Dean Strausldean@v-case.com

408 438 8800

• Consults to companies throughout the electronics supply chain – Helps semiconductor companies and their customers rationalize months

long semiconductor manufacturing cycle with dynamic consumer demand

– Make sense out of new emerging Integration driven supply chain model– Implementation of collaborative and scalable planning process – Training and business simulations

• Collaborates with and advices providers to the electronics supply chain

• Highlights – Founder of four contract manufacturers– Architect/implementer of the semiconductor planning model– Semiconductor Supply Chain Orientation Lab – training school– Founder Electronics Supply Chain Association– Pioneer in supply chain integration for the fabless industry