Elephant in the Room: Thoughts on Metrics That Matter in Semiconductor and Hard Disk Drives

CJWehlage

Metrics That Matter in Semiconductor and Hard Disk Drives

Supply Chain Insights recently published a Metrics That Matter report covering both the Semiconductor and Hard Disk Drive (HDD) industries. Despite being hit hard by the recent recession, overall the research shows that these two industries have fared well over the last decade and are positioned to continue that success.

Success, provided they monitor the 7 “elephants” in the room.

Consolidation

Notice in the Supply Chain Insights report, there are only two HDD companies.  That industry has already gone through consolidations.  Semiconductor is poised to consolidate, which will have huge impact on the metrics.  It’s already happening with Avago/LSI, RF Micro/TriQuint, Micron/Elpida, MediaTek/MStar and Fujitsu/Panasonic.  Speed to integrate the planning functions during an acquisition is critical.

Profitability

With the OEM’s driving down the price, the semiconductor/HDD companies will have to follow (or innovate new products).  Lower price means lower profitability. This will begin to impact the semi/HDD ability to raise capital and innovate/expand.  Cost pressures and faster time to market in the planning processes will be required.

Global pressure

Consider that the Chinese and India governments are investing in the semiconductor industry.  With China already a source for semiconductor raw materials and the China/India end consumer market growing, there will be pressure to supply chips and hard drives to local China/India OEM’s first.  This could create a shortage in the US/Europe OEM chain.  Understanding inventory planning will take on a new dynamic.

Of course, like any industry, Semiconductor and HDD manufactures are faced with a set of unique challenges in their space that puts their supply chain at risk.  The largest risk being a balance between shrinking product lifecycles in the OEM world versus expensive asset utilization.  We are at a time where consumer electronic brands have a 9 month (that’s 270 days) lifecycle, while Semiconductor & HDD supply chains have 6 month component lead-time, with 3-5 year depreciation of capacity.  After reading the research, I would summarize the main obstacles as follows:

Position in the Supply Chain

As suppliers of technology embedded in more complex products, Semiconductors and HDD manufacturers find themselves further back in the supply chain, often 3-5 levels down. This can make it difficult (compared to those closer to the front of the supply chain) to find balance in what Supply Chain Insights calls the Effective Frontier – growth, profitability, cycle and complexity. The ‘bullwhip effect’ certainly plays a role here, creating wide fluctuations (over and under) of supply and demand – due to disorganization, lack of communication or miscommunication, incorrect demand information, etc. – as information moves down the supply chain to the manufacturer.

Potential for Tightening Margins

Related to their position in the supply chain, competitive and consumer pressures that drive down pricing are often pushed down the supply chain, forcing suppliers to tighten their costs.

Supply Chain Length

Reliance on suppliers beyond the US borders has extended the length of the supply chain, and opened it up to significantly more risk, as demonstrated by the impact of the Thailand flooding on both the Semiconductor and HDD segments.

Growing Complexity

As one of several suppliers contributing to the creation of a single product, Semiconductor and HDD manufacturers are susceptible to issues experienced by others in the supply chain, as explained by Broadcom in the Supply Chain Insights report: “Our products are incorporated into complex devices and systems, creating supply chain cross-dependencies. Accordingly, supply chain disruptions affecting components of our customers’ devices and/or systems could negatively impact the demand for our products, even if the supply of our products is not directly affected.”

Despite these challenges, the Supply Chain Insights dive into financial data shows that these two industries have fared well, thanks to strengths in product innovation and supply chain planning functions. More specifically, the research shows strong year-over-year growth and large (and increasing) operating margins (with minimal impact -so far-on from upstream cost pressures).

On the downside, it appears that these industries are struggling with inventory issues. The research shows the cash-to-cash cycle has increased, as have days of inventory, and inventory turns are on the decline. Supply Chain Insight’s look at four key Semiconductor companies and two key HDD companies indicates these inventory issues are not the result of poor inventory management but rather an industry trend. The research suggests that both product complexity and the length of the supply chain are contributing factors.

Based on the above, it seems clear that putting a focus on optimizing inventory management practices, making risk management initiatives a priority, and building strong collaborative S&OP practices with their customers, will help Semiconductor and HDD manufacturers continue to see success in the coming years.  This comes with a solid planning system of record.  One that will remove manual steps in the process, drive real time information from the semiconductor/HDD testing to the OEM demand, and connecting the end-to-end decisions with the planning model.

P.S. The Supply Chain Insights’ research report covers additional areas than what I’ve summarized here, and supplies comparative financial data. If you’d like to read the Supply Chain Metrics That Matter: Semiconductors and Hard Disk Drives report in its entirety, you can download a copy here, with no registration required.

 

CJWehlage

CJ joined Kinaxis in 2013 with the responsibility to guide the company’s industry strategy within the high tech vertical.

With extensive experience, both as a supply chain practitioner and an industry research analyst, CJ serves as a strategic advisor to the company, while also supporting global field teams and working with prospects and customers as they define and pursue supply chain excellence strategies.

C.J. Wehlage has over twenty three years of industry experience as a supply chain professional, researcher, and technologist. Before joining Kinaxis, he was VP of High Tech Sales at Jonova, and prior to that, VP of Supply Chain at Sony Electronics. CJ was also ran the High Tech Practice at AMR Research, responsible for supply chain best practice research & thought leadership in the high tech industry. In addition, Wehlage has held leadership roles at EMC, where he was responsible for S&OP, Manufacturing M&A, Supply Chain IT, and Lean design; Bose, where he led a large scale ERP integration, and Apple, where he led Pacific Operations & WW Desktop Planning. C.J. has also served as an adjunct professor at Northeastern University, APICS CSCP, Six Sigma Black Belt, and a frequent speaker at supply chain conferences.

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