Chip industry learns from past mistakes, prepares for upcoming sprint

Scott Grant, MD, Accenture’s Semiconductor Business

USA: Not many industries are as consistently volatile as semiconductors. Year after year for decades, working in this industry has been akin to regularly climbing aboard an adults-only, furiously fast, roller-coaster journey.

During the past decade, the industry has gone through wild ups and downs in supply and demand. In the months leading up to the September 11 terrorist attacks, semiconductor company chip inventories were overflowing because of widespread anticipation of strong demand.

After that event, many semiconductor companies dramatically scaled back chip production. It was a tough time to survive. Predicting demand has been one of the industry’s thorniest problems for decades. Companies consistently build too much inventory or not enough, and often at the wrong times.

Similar to the events of 2001, in 2008 inventory concerns rose to the top of the industry’s agenda as early signs were steamrolling in that a global economic recession was coming fast and furious. Yet this time the industry, in quite a desperate state, was so cautious about not getting burned again holding excess inventory that it turned off the semiconductor production spigots much faster than usual, and to a much deeper extent. Some companies cut their semiconductor production by as much as 50 percent.

Overall, semiconductor manufacturing capacity fell to 50 percent, well below typical averages of 80 percent. With good reason these firms were cutting back swiftly in anticipation of a recession they were hearing could last a few years. There were signs globally that this would be the case not only in semiconductors but in the economy overall.

As aggressively as the industry slammed its brakes, it turned out to be one of the industry’s finest moves ever. Learning from past mistakes, manufacturers were able to reduce production and inventory costs. By slowing production, not only did the industry save money. It also set itself up for a fortunate, yet widely unforeseen, swift market turnaround.

The semiconductor industry’s worst nightmare, whereby the market crashed and stayed at ocean depths for several years, did not happen. The market rebounded faster and with greater strength and pace than perhaps in any economic cycle in the industry’s history. Better than expected consumer demand occurred in the second quarter of 2009. The market is expected to grow during the next few years. The industry has traveled a long way in a short period of time.

Why did the market come back so fast? There are several reasons.

First, the US and Chinese government’s economic stimulus spending played a role. More funds in the economy have stimulated more consumer purchases. With the investment by China to sustain internal growth, small luxury items (laptops, media devices and smartphones) continued to attain unexpected growth with a ripple affect in North America. This “small luxury” item trend followed to the US, and the semiconductor industry experienced sustained growth in communi cations and consumer electronics end markets.

Second, regardless of the global economic recession, China’s strong demand, especially for mobile handsets each of which house several semiconductor chips, remained relatively robust. In fact, according to a recent Accenture survey of Internet-enabled consumers, 63 percent of Chinese consumers occasionally watch videos on mobile devices. And, 59 percent use web-enabled mobile handsets which is more than any other country surveyed.

Third, demand for analog chips used in consumer electronics and communications equipment remained relatively strong. Analog radio frequency and power management chips maintained consistent sales in Global Position Satellite (GPS), WiFi, and Bluetooth wireless handsets such as smartphones. State-of-the-art power management chips enable a smartphone’s battery life to last several hours longer than a typical smartphone powered by previous generation chips.

Likewise, location and navigation capabilities that GPS technology enables on smartphones address the intensifying need to improve the customer experience. These analog chips are also used in other relatively hot consumer electronics products such as Bluray players, set-top boxes, HDTVs, and digital video recorders.

Fourth, a growing number of corporate IT organizations are finally starting to buy and upgrade communications equipment. And PC sales have held up relatively well despite tough economic conditions.

To capitalize on these market opportunities in the current growth cycle, companies in the semiconductor industry need to make fundamental, structural improvements. They need to re-think business models and strategies to make business operations more efficient, lower cost, and more effective at generating more revenues and profits.

There are several ways to do that. They include:

Transforming the sales force
An effective sales force is critical for making the most of every customer relationship. It’s essential to have a robust customer relationship management (CRM) system that provides an accurate picture of the sales pipeline. The CRM system should also be integrated with the company’s product lifecycle management (PLM) and enterprise resource planning (ERP) systems to achieve a tighter connection with relevant stakeholders and processes from across the organization.

Creating new metrics and reward structures is another key to improving sales force effectiveness. These should make sales people accountable for pure sales (driven by commissions), health of the pipeline, accuracy of forecasts, time between sales stages, and conversion rates. Companies should be mindful of the profitability, opportunity cost and strategic value of each deal, not just its size. They also should consider taking steps to ensure that the potential value of each deal is depicted accurately.

Improving R&D
Semiconductor companies should focus sharply on improving research and development processes and efficiencies such as product lifecycle management and product portfolio management. It’s becoming increasingly important that semiconductor firms retain deep knowledge about specific chip products, such as microprocessors or analog devices, as opposed to general knowledge about a much larger number of chip product types.

Companies that specialize, focus their research in particular product areas where they can potentially develop a design advantage that, if it persists for a business cycle or two, may force competitors to shift their focus. In addition, R&D efforts should be more focused on leveraging a company’s unique strengths; the industry trend is moving in this direction rapidly.

Innovating supply chains
Companies should also focus on innovating and optimizing their supply chain operations and processes. They need to sharpen their supply and demand planning procedures. In some cases it will be necessary to reconstitute their supply chains. Semiconductor companies should consider integrating their external supply chain partners by developing and deploying extended relationship management capabilities.

By doing so, such firms facilitate integration of important and accurate data from design partners and suppliers on the manufacturing side, and customer and channel partner data on the demand side. This improves demand forecasts, production plans and the acquisition of manufacturing capacity. And this allows chip companies to make better decisions and improve customer service and profit.

Planning and fulfillment
To expand visibility and use all available information, it is best to consolidate all disparate planning assets and processes across the organization into a single, unified system. It is vital to evaluate and reset planning algorithms to optimize results, and deploy comprehensive training to get all planning resources up to speed on the new system.

Data quality is important for optimizing fulfillment throughout the supply side. Total data quality management (TDQM) programs that train employees to improve their order entry, planning and reporting, while standardizing the system, are keys to success in this area. These management programs help reduce errors, reduce the number of human touches on a given order and enable better decision making. This results in more realistic and meaningful capacity planning and demand forecasts.

Final thoughts
A growing number of companies are asking us to get them ready for the market sprint that is about to begin. They are asking for help managing and monitoring engineering capacity and product inventories.

Right now inventory management should be a huge priority. As such, companies should strive to supply their global distribution centers in accordance with their latest demand projections, using integrated data and common processes. Like with improved planning, the ultimate payoff of optimized fulfillment is the ability to provide customers with the products they need as quickly and consistently as possible.

Furthermore, companies need to become more deliberate with product offerings, product development, product innovation, research and development efficiency, product design operations, product management, human resources management, supply chain performance, inventory optimization, operational efficiency, knowledge delivery.

In short, they need to convert themselves from transaction-based companies to value-valued companies. The value add these companies deliver that will determine which ones finish as high performers in this industry rebound phase.