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The Great Inventory Correction

The economic downturn left tech companies with mountains of goods. Now, they're rethinking how they manage their supply chains.

Now, Altera will continue to build its mainstream products to stock, but only in die banks (stores of chips before packaging and testing). “By building die, we have taken out the biggest portion of the manufacturing lead time, but the inventory is in its most flexible form, with a minimum of value added,” says Sarkisian. Only when orders are confirmed will Altera’s subcontractors package, test, and ship the PLDs.

The lead time for these products will be measured in weeks. For Altera’s mature products, “we will be strictly build-to-order,” says Sarkisian, and the lead time for those will be measured in months. Finally, new products will no longer be built on spec; a customer order will be required.

Visible Improvements

Chipmakers are at the mercy of the laws of physics. It takes anywhere from three to seven weeks to turn a raw silicon disk into a wafer with hundreds of chips, depending on the complexity of the chip and how much a customer is willing to pay, says Jim Kupec, president of United Microelectronics Corp. USA, a division of Taiwan-based foundry UMC. Additional time is required to separate, package, and test the chips. And in the real world, “things get spoiled in the fab,” says Arnold Maltz, associate professor of supply chain management at Arizona State University College of Business. “Every now and then, somebody brings the wrong batch. Capacity isn’t always available. Then you have the mismatch of supply and demand.” In a 1999 study of major U.S. chipmakers, Maltz and his fellow researchers found that the average cycle time for semiconductors, from the fab to the customer, was 117 days — plenty of time for demand to change direction.

To reduce its exposure, a chip company can postpone adding value to die bank inventory. It can also seek better information from its customers, as Altera is now doing. “We’re asking customers to give us more visibility in their inventories and build plans,” says Sarkisian. That may seem like an obvious solution, but it isn’t always available, says Maltz, because “there’s some concern on the customer side that you’re giving away strategic information.” Nevertheless, Altera recently took two big steps toward greater visibility, announcing joint ventures with Nortel and Motorola to collaborate on product development.

Chipmakers can also shrink cycle times around wafer fabrication using supply chain management (SCM) software. Altera’s i2 Technologies system, which is linked to its fabs, suppliers, and distributors, has cut weekly planning cycle time from 10 days to 1 day and reduced long- term planning cycle time from four weeks to one week. About 85 percent of production is automatically scheduled by the system. “i2 runs our foundries,” says Tom Murchie, vice president of operations. “It starts wafers by technology process, by fab, and by the strategic inventory targets we’ve chosen.”

UMC’s customers can forecast collaboratively with the foundry via its MyUMC Web portal, using i2 augmented by an available-to-promise order system. “What [MyUMC] does is automatically take a request for a customer’s order, then almost instantaneously find the best manufacturing slot,” explains Kupec.

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