ensuring successful manufacturing execution...

ENSURING SUCCESSFUL MANUFACTURINGEXECUTION IN THE FABLESSSEMICONDUCTOR MODEL

SAP Executive Insight

The number of semiconductor companies adopting a fab-less manufacturing model continues to increase. And to thrive in this highly competitive market, the fabless compa-ny must produce the best product designs for its intended market, synchronize effectively with its business partner ecosystem, and achieve the highest levels of customer service. Success requires a shift in business strategies.

The “new” operations department of a fabless organiza-tion has to interoperate effectively with a variety of business partners throughout an outsourced, and often complex, semiconductor supply chain. The role of opera-tions has changed, with a greater emphasis placed on procurement, partner management, manufacturing, and quality oversight. In addition, the systems and data sup-porting this business model are also adapting to the ecosystem environment created by the fabless model.

This SAP Executive Insight examines the growing trend to-ward the fabless manufacturing model and answers the following questions:

• What are the key business drivers and challenges?

• What is the changing role of the operations department?

• What IT solution best supports the fabless model?

2 SAP Executive Insight – Ensuring Successful Manufacturing Execution in the Fabless Semiconductor Model

EXECUTIVE AGENDAAT A GLANCE

Drivers and Challenges

Many semiconductor processes are going “virtual” as companies rely on a network of business partners to exe-cute manufacturing functions. This model requires companies to:• Form strategic business partner-

ships. The successful fabless organi-zation looks at contract manufactur-ers as extensions of its own operations. Changes in core compa-ny processes are necessary to maxi-mize the benefits of these relationships.

• Sharpen their focus on customer expectations. It is fair to say that the fabless organization is held to even higher standards defined by more demanding customer expectations and operating metrics.

• Effectively answer the challenges. Companies must overcome new challenges presented by the fabless model – while dealing with traditional challenges inherent in the semicon-ductor industry.

The Role of Operations

The traditional role of manufacturing operations within a semiconductor company changes in the fabless model. Today, the following adjustments are paramount to successfully serving cus-tomers and achieving organizational objectives:• Implement necessary process

changes. Both standard and new semiconductor processes are required to ensure close alignment among departments and business partners. Availability of information and coordination across a company’s business functions is critical.

• Understand the new performance indicators. With the changing busi-ness model, there has also been a shift in the metrics that measure a company’s success.

• Maintain visibility and control. It is essential that fabless organizations maintain control and visibility within this virtual model. And this must be achieved without the manufacturing system and personnel resources of traditional integrated-device manufacturers.

IT Support for Manufacturing Execution

A solution created specifically for the fabless semiconductor industry should:• Provide both standard and tailored

functionality. The fabless organiza-tion needs to meet standard semiconductor manufacturing requirements while sharing unique processes with business partners.

• Provide comprehensive real-time tools. The fabless organization needs innovative tools to execute in real time and enable an operations department to work successfully with customer service, engineering, pro-curement, and finance.

3SAP Executive Insight – Ensuring Successful Manufacturing Execution in the Fabless Semiconductor Model

vide their customers with the highest level of customer service to ensure continued business during application maturity. Indeed, the market trend from fab to fabless represents a shift from a manufacturing-centric mind set to a more customer-centric focus.

Facing the Challenges

The fabless business model, however, does pose some unique challenges. And of course, your company must continue to contend with complexities inherent to the semiconductor busi-ness. Processes in a fabless company must be precise and compressed, yet agile enough to effectively deal with issues such as the following.• Fabless companies must provide the

required level of customer service and product quality while relying on third-party participation within the development and manufacturing process.

• The semiconductor industry contin-ues to focus on growth, revenue, and margin objectives.

• The cost of quality can be much high-er than the cost of the material; detecting chip defects downstream and servicing finished products is many times more expensive than the chip itself. First-pass yield and similar quality metrics remain critical regard-less of who owns the manufacturing operation.

• Semiconductor lead times continue to be longer than most industry aver-age (see Figure 1). Long lead times typically decrease a company’s ability to meet customer requests without holding excess inventory.

• Fabless semiconductor companies still maintain relatively high inventory levels (see Figure 1). Such inventory levels increase the financial risk due to excess and obsolescence.

• With front-end manufacturing cycle times still measured in weeks, cus-tomer response cycle times are slow.

84

GROWTH AND CHALLENGESOF THE FABLESS MODEL

For a growing number of semiconduc-tor companies, the fabless manufactur-ing model has proven itself an agile approach to conducting business. It enables companies to focus on core competencies such as product design and marketing, while maintaining a flexi-ble manufacturing cost structure. As a result, many traditional integrated-device manufacturers (IDMs) are spin-ning off their wafer fabs and adopting the fabless or “fab lite” model. This business model has an obvious appeal to start-up companies as well – with the cost of building a fabrication facility today running upward of US$1 to 3 billion.

It’s not surprising that, as the number of fabless applications has grown, most fabless semiconductor companies view their contract manufacturers as strate-gic partners in the design and product delivery processes. Even companies with heavy capital investments in their manufacturing operations are looking at outsourcing as a cost-effective way to address dynamic, high-growth business markets.

Evolving Customer Expectations

Although reduced labor rates and a low barrier to entry remain the primary mar-ket drivers, changing customer expec-tations are also steering companies toward the fabless business model. Increasingly, customers are demanding more services and greater specializa-tion, such as faster innovation time and specific IP applications. To achieve design wins, companies must better match innovation to customer needs. And then, those companies must pro-

Figure 1: SAP Supply Chain Benchmarks for Semiconductor Companies(Source: ASUG 2007 Semico Benchmarks)

Order to delivery –request

(percentage)

Inventorybenchmarks

(number of days)

Lead times –make to stock

(number of days)

Lead times – make to order

(number of days)

918171615141312111

1

Average

Top-Performing

79.7

94.5

133

41

12

56


THE CHANGING ROLE OF OPERATIONS

Within a fabless company, operations specialists are faced with their own set of evolving challenges. Typically, fab-less semiconductor companies are ask-ing their operations personnel to do more with less – as such organizations tend to have a much lower percentage of employees performing manufactur-ing duties than do their more traditional IDM counterparts. However, the fab-less operations department is actually required to analyze more information, communicate more with vendors, and achieve greater efficiencies in daily work routines to support this high-growth business model.

Adjusting to an Outsourced Environment

Engineering, quality, and operations management need to converge in the fabless model. Of particular impor-tance, operations personnel must:• Track in-process, lot-specific informa-

tion and gain full traceability• Collect real-time yield information at

specific production stages• Ensure availability of key bill of mate-

rial components (such as substrates or memory)

• Effectively allocate lots based on characteristics for downstream oper-ations and demand

• Seamlessly automate settlement and communication with vendors

The information gained from such tasks is critical for supporting both strategic new products and the mature portfolio. And as fabless companies grow, their product portfolios grow accordingly – along with the number of products and coproducts manufactured.

Access to this data is important to operations, customer service, quality engineering, finance, and procurement personnel alike. Yet tracking these details accurately is typically too com-plex for manual methods and requires automation.

Changing Key Performance Indicators

As supply networks are reengineered, new metrics are being developed to direct operational resources and assess the fabless organization’s effec-tiveness, as follows• Profit and profitable growth are an

increasingly important focus in the industry.

• Standard fulfillment metrics are mov-ing along a scale of precision. In the past, the focus was generally on ful-fillment of order-to-commit date. Today, fabless companies focus on a more precise metric: fulfillment of order-to-request date. An increasing number of companies are moving even further along the line of preci-sion, striving to achieve a perfect order every time.

• Given the high velocity of new-product introduction and the distribut-ed nature of the supply chain, more exact inventory-measuring metrics are required. All owned inventory – including that beyond your immediate four walls – must be included in your inventory balances.

The Risks of Ineffective Change

For both existing IDMs and emerging fabless companies, contract manufac-turing can dramatically reduce labor, capital equipment, and market entry costs (see Figure 2). However, the ben-efits of outsourcing can be compro-mised – and potentially offset – if a company does not have the right busi-ness processes and metrics in place to support the business model effectively. As Charlie Barnhart, senior consultant from research firm Technology Fore-casters Inc., noted, “For many brand owners, the internal costs of managing external contract manufacturers are often higher than the direct cost sav-ings of outsourcing manufacturing. In many cases, the net cost of manufac-turing actually increases instead of falling.”

Figure 2: How Managing the OutsourcingProcess Can Offset Savings

Degree of Outsourcing

OptimalOutsourcing

Today’sPosition

Cumulative Costs

Transaction Costs

Unit Cost


Manufacturing Execution System Layer: shop floor, asset management, & quality control

SUPPORTING MANUFACTURINGEXECUTION IN THE FABLESS MODEL

The fabless semiconductor company cannot expect to achieve high marks from customers and improve the latest set of key performance indicators by replicating the same business process-es as the traditional IDM. Nor can you afford to work at arm’s length from your business partners. Traditional rela-tionships driven by more standard pur-chasing documents and relationships, for example, do not provide the level of visibility around work in progress (WIP), costing, yield, and order status coordination required of the fabless model. In short, you need repeatable, scalable business processes, based on systems that are specifically set up to support manufacturing execution for the fabless environment. Only then can you overcome the challenges associat-ed with this business model and achieve better operational metrics.

Emerging Process Layers in Fabless Manufacturing

In any manufacturing model, there are specific processes required to suc-cessfully plan and execute your operations. And these manufacturing processes can be grouped in hierarchi-cal layers – although the interpretation of the various levels tends to differ slightly from company to company (see Figure 3). In the new model, the fabless semiconductor company and the con-tract manufacturer share the system investment as each focuses on differ-ent aspects of the process stack. Fur-ther, the fabless model has redefined the collaborative layer that addresses the new business partner relationship.

Figure 3: Manufacturing Layers in the Fabless Model

NVIDIA Corporation

Industry High techRevenue US$3.77 billionEmployees: More than 4,000SummaryNVIDIA Corporation, a market leader in graphics and digital media processors, relied on SAP® Consulting to drive the evolution of a virtual manufacturing monitoring system to enable real-time inventory visibility across partner production facilities and global distribution locations.Implementation Highlights• 400 users in virtual manufacturing

system• Implementation of 9 core enterprise

resource planning applications in 5.5 months

Project Objectives• Begin to develop a virtual

manufacturing system• Optimize logistics process• Proactively meet global trade

compliance requirements• Provide access to real-time supply

chain data• Support exponential business growth

with a flexible application platform

Manufacturing Integration & Visibility Layer

EnterpriseLayer

ManufacturingCollaboration

Layer

FablessControlSystems

ContractManufacturer Control Systems


ENABLING THE VIRTUAL PLANTWITH SAP® SOLUTIONS

The ideal IT solution for the fabless model would flatten the required layers of traditional technology. By removing the need to maintain a detailed manu-facturing execution system (MES) layer, a fabless company can focus its efforts on gaining visibility and control ofexternal operations without significant overhead. The solution should offer comprehensive out-of-the-box function-ality and provide data synchronized in real time. As a result, a solution fine-tuned for the fabless organization would leverage the company’s core enterprise layer, enhance collaboration, and extend visibility into key manufac-turing data.

Specifically, a solution tailored for the fabless environment should:• Eliminate the need for fabless compa-

nies to replicate detailed MES data and maintain multiple systems of record

• Provide streamlined execution pro-cesses and easy-to-use screens for more efficient management of lots and better visibility to WIP, costing, and yield

• Extend enterprise manufacturing pro-cesses through collaboration tools that provide visibility and real-time contract manufacturing response

• Extend the collaboration framework into a set of configurable dashboards that provide management, engineer-ing, and customer service personnel with quick visibility to operational status

• Provide quality management function-ality that offers a real-time view of key yield metrics and trends

• Provide WIP tracking and lot manage-ment enabling companies to track the complete manufacturing process at a milestone level – from die purchase through back-end assembly and test

• Provide cost management that auto-mates cost accumulation for each good’s movement for each lot in real time

SAP has created a solution to specifi-cally address these requirements and allow you to successfully operate in this virtual model. SAP® software sup-porting outsourced manufacturing was built with input from both our fabless semiconductor customers and leading third parties that focus on this industry.

Further ReadingTo learn more, please visitwww.sap.com/usa or contact your SAP representative about the following:• Supply Change Management at

Freescale – Case study• Fulfilling the Promise of Distrib-

uted Manufacturing – White paper• NVIDIA Customer Success Story

– High-tech company success story

• Building a Better Supply Chain: Successful Collaboration in the Fabless Semiconductor Industry – Study available at FSA Web site (www.fsa.org)

About the AuthorMark David is an SAP industry principal with the high-tech industry group. David has extensive experi-ence in all phases of supply chain management and has spent more than 16 years focusing on high-tech and semiconductor business practices. He also has expertise in SAP® solutions and business processes for manufacturing, supply chain management, supplier relationship management, and product life-cycle management.


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