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The New Economics of Semiconductor Manufacturing – Part 1

The New Economics of Semiconductor Manufacturing is a new-ish article that you can find at the IEEE Spectrum site which delves into the application of Lean methodology into the wafer fab (fabrication facility) of as yet unnamed integrated device manufacturer. The authors of this article are Clayton M. Christensen, Steven King, Matt Verlinden, and Woodward Yang. Since, I work in semiconductor scheduling and optimization, the experience recounted in this article is of direct interest to me simply because most of these problems have been solved using the "system" I’ve been a part of deploying. Nevertheless for some/many of you who have never walked into a wafer fab, the following is a good snapshot of what you’d normally see:

Walk into a multibillion-dollar chip-fabrication plant-a fab-and you may very well get the impression that the industry is headed for a spectacular meltdown. One of the first things you’ll see is a bay the size of two basketball courts packed with equipment for projecting a lithographic design onto wafers. Nearby, you’ll find a towering bin, called a stocker, filled with wafers waiting to be processed by this equipment. The wafers are worth from US $10 million to $100 million-all of it idle inventory.

Why? To amortize the $5 billion investment in a fab over a five-year schedule costs more than $3 million a day. Conventional wisdom holds that to generate that much money you must keep all the equipment running all the time, even if that means creating large unused queues of wafers. What’s more, to justify that scale, you have to produce a semiconductor product in volumes of at least 5000 to 10 000 wafers per month.

So you can well imagine the wheels spinning in the heads of accountants and finance folk that are dead set on amortizing (all pun intended, "mort" is from the french verb to kill or die) the capital spent in purchasing these very expensive machinery. But that is very much the truth of the matter in my experience where even operations folk blindly follow the utilization mantra in some form or the other. But you should also know that there’s something that is called Moore’s Law

Moore’s law describes an important trend in the history of computer hardware: that the number of transistors that can be inexpensively placed on an integrated circuit is increasing exponentially, doubling approximately every two years. The observation was first made by Intel co-founder Gordon E. Moore in a 1965 paper. The trend has continued for more than half a century and is not expected to stop for another decade at least and perhaps much longer.

While Moore’s law makes this important observation about the rate at which transistors can be "inexpensively" placed on an integrated circuit, it has become some sort of mantra in itself,

Although Moore’s law was initially made in the form of an observation and forecast, the more widely it became accepted, the more it served as a goal for an entire industry. This drove both marketing and engineering departments of semiconductor manufacturers to focus enormous energy aiming for the specified increase in processing power that it was presumed one or more of their competitors would soon actually attain. In this regard, it can be viewed as a self-fulfilling prophecy.

The direct implication of this widely adopted mantra is that the inventory referred to above which is sitting in stockers and in WIP (work in process inventory) any given day is at high risk of obsolescence simply because of development and innovation going on both inside and outside the firm. But also,

More than anything else, Moore’s Law has been responsible for the gigantic costs. It takes huge amounts of capital to support the incessant cycles of investment and obsolescence that keep Moore’s Law on the march. That rapid cycling explains why a company’s shining jewels can turn into white elephants in just five years.

A contrary view of Moore’s Law by Ilkka Tuomi is available here : The Lives and Death of Moore’s Law (and verily to my delight) that follows a strictly empirical approach of analyzing and validating Moore’s law in its multiple variants. I strongly encourage reading this article as it will shed a clarifying eye on the nature of abstractions that we make in this technological march forward.

So regardless of whether you buy the argument that Moore’s law is a self fulfilling prophecy which creates several layers of obsolescence within short periods of time or that development and innovation within the semiconductor industry has largely been the result of interactions between other industries and itself, the facts of the industry do not change in the sense that equipment is costly to acquire, requires significant investments of time, effort and money to use effectively and is a victim/creator of boom-bust cycles. The central claim of the authors is as follows:

In early 2007, we had the opportunity not merely to emulate Toyota’s system but to apply its principles to a logic fab belonging to an integrated device manufacturer (IDM). As consultants, we are not at liberty to divulge the company’s name; however, it’s safe to say that the company is highly competitive-that is, it has survived and prospered by pursuing Moore’s Law, always remaining at the forefront in technology and operational excellence. But Moore’s Law was turning this jewel of a fab into a white elephant while the equipment was still relatively new.

In just seven months, the organization was able to reduce the manufacturing cost per wafer by 12 percent and the cycle time-the time it takes to turn a blank silicon wafer into a finished wafer, full of logic chips-by 67 percent. It did all this without investing in new equipment or changing the product design or technical specifications. And this short experiment has exposed only the tip of the iceberg. We believe that these early results point to what we call the new economics of semiconductor manufacturing and that this will have a profound and lasting effect on the industry and create new opportunities for growth.

In the next part of the series, I will go into the claims made here, essential principles of TPS/Lean that have been used and compare and contrast with my own experiences.

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The news of my day is…

The news of my morning is …

IBM and ILOG today announced they have signed an agreement regarding a proposed acquisition by IBM of ILOG to be implemented by way of concurrent cash public tender offers in both France and the United States. Through this proposed transaction, IBM will combine its business process management (BPM), business optimization, and service oriented architecture (SOA) technologies with ILOG

Supply Chain Risk Management Event

Kate Marston sent me an email about an event that she’s doing some research about/helping organize. I think that the event would be a good one to attend for SCM professionals. From the SCRM 2008 website:

The Supply Chain Risk Management Summit 2008 (SCRM 2008) is the conference and networking event that will highlight once again the key issues in supply chain risk management and offer the latest strategies for maximising supply chain excellence and minimising vulnerability and exposure to risk.

The topics include:

    • Identifying and recognising risk as a key business opportunity in the supply chain
    • The weakened economy: driving your supply chain to remain competitive in the credit crunch
    • China’s relationship with the rest of the world
    • Maximising end-to-end visibility to eliminate risk in the supply chain
    • Supplier Relationship Management: auditing supplier performance to measure up to your standards
    • Speeding up crisis response time: dealing with supply chain disruption

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Ten days in Istanbul…

I spent ten days in Istanbul from Jun 18th to Jun 27th and this was a vacation that I’m not likely to forget for a long time. And with the recent attack outside the US Consulate in Istanbul(actually Istiniye), I have a couple of lumps in my throat. That’s because I was at the consulate for three days and I saw, met and talked to some of those guards outside the consulate – I was there to get my visa stamped in order to get back into the US. And a few days later, a gun battle right there where people line up outside the consulate.

Istanbul (earlier Constantinople) straddles the Bosphorous which divides Europe from Asia and for ages been a thoroughfare for trade and culture. Thus, it is no accident that it had been coveted by several empires through the ages. What we call today – globalization et al, is another chapter of the same ol’ story in which Istanbul loomed as one of the players of a bygone era. So visiting Istanbul is like taking a pilgrimage into one of the grand narratives that we traverse – that of trade, of cultures, of peoples colliding, of empires formed and lost etc. As Istanbul is today, so will your favorite city be henceforth – what is to be, already was but we add new pages in our efforts – that is all. All I want to say is that it was beautiful.

I used to love flying – ever since I can remember, I wanted to fly, be a pilot of something or the other. I used to check the itinerary to see how many layovers we’d have traveling back and forth from Africa to India – so that I could "experience" the landings and take offs (As an aside, do you know that English is one of the impossible languages – when I was a kid, I always use to say take-offing instead of taking off because ’to land’ expands into ’landing’, ergo, ’take- off’ expands into ’take-offing’). Traveling to and from Istanbul, we flew Iberia which transits through Madrid and as we were sitting at the gate, I was just watching the jets line up one after the other. I calculated that at the Madrid airport, each jet waited on average 17 minutes before being cleared for take-off. That’s 17 minutes of fuel being burnt for nothing – in other words, WASTE. Now, as you can imagine, the Madrid airport was not really that busy. We flew back into JFK, landed pretty much without circling round and round, all around and round… but after touching down, waited over an hour before getting to the gate at JFK. The flight itself was a little less than 8 hours but the time on the ground was a full 1.5 hours. If you were/are at the short end of the stick of these multiple effects rippling around a busy airport such as JFK – it’s no wonder that flying is a royal pain these days.

Since most of my current work is in semiconductor scheduling these days, I was piqued by these delays. I can almost readily see that transferring/translating my work into airport scheduling and taxiing – it’s pretty much some of the same stuff. So, I looked up similar researchers working on this problem:

An optimisation model for Airport Taxi Scheduling

Airport Surface Movement Optimization (MIT)

And some work that is in progress in the real world:

Surface Movement Advisor

As people around the world fly more, the numbers of flights multiply and airplanes become larger, these problems are going to increase in their magnitude and effects. So here’s hoping for better flying days ahead.

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Fellows in the air – Brown & Yellow

The headline read: UPS plans air deal with DHL in US, the byline of which is,

UPS plans up to 10-year air deal with DHL within the US, expects $1B in added annual sales

Only, I don’t think that it is UPS’s plan – It sounds more like DHL going around with a bowl in hand. That’s too dramatic? But, the roots of this story goes back about 5 years – a failed strategic acquisition/strategy and the resultant. Where do I read that? Right from the same story,

The arrangement with UPS is part of a U.S. restructuring announced by DHL parent Deutsche Post. DHL is slashing network capacity in the U.S. by 30 percent, which includes closing and consolidating sorting facilities and streamlining pickup and delivery routes. The company did not say how many employees would be affected.
DHL’s U.S. business has posted repeated losses and slipping sales as it continues to lose market share to UPS and FedEx Corp.

That is the real story within the story but to get that I think a little background is in order. Back in 2003, DHL acquired Airborne Express for a little over $1 billion USD. At that time, this deal was considered a strategic acquisition by DHL and Deutsche Post (DHL’s parent company and the privatized German Postal Company) in order to expand into the US market.

The long and short on the impact of DHL- Airborne (3/18/2004)

DHL’s American Adventure (11/29/2004)

At that time, one of the critical decisions made with Airborne’s assets was to keep its ground assets including the sorting facility in Wilmington, OH but spinning of Airborne’s air assets into a separate company – now known as ABX Air. This might have been a critical error but the decision might have been forced at DHL (DHL deal with UPS could end thousands of jobs in Ohio)

When DHL bought Airborne Express in 2003, it spun off its airline into the independent ABX Air because DHL, owned by Deutsche Post AG of Germany, was not allowed to own an American airline.

So up until the UPS air freight deal, DHL contracted ABX Air and ASTAR Air Cargo to shuttle the packages across the country. The statement from ABX Air when apprised of this deal reads:

"We cannot now determine whether those negotiations will lead to an agreement, or what other steps DHL might consider to reverse its losses in the U.S.," Joe Hete, chief executive of Air Transport Services Group, said in the statement. "In the meantime, we intend to continue to perform under our current agreements with DHL while aggressively pursuing our strategy of expanding our business with other customers,based on the technical and cost advantages of our fleet of advanced Boeing 767 cargo aircraft."

So clearly, DHL seems to be hurting from using ABX Air and possibly ASTAR Air Cargo – but in what way? It might very well be the case that UPS is able to leverage its economies of scale better than ABX Air and/or ASTAR Air Cargo. Or it could be that operational costs at the Wilmington hub are relatively higher and DHL’s declining volumes could be handled within its own sorting facility. So what got DHL to this point? That’s what I want to know and went looking for. The starkness of the headlines you read about this story these days compared with the big splash headlines back in 2003 contrast like night and day. While it is certainly wise to read comments posted on an internet board with a grain of salt – when two and two are put together, you ought to get four:

I departed in late 2006 amid a series of ill-advised and puzzling moves. The first and biggest blunder of DHL in the US was their decision to dismiss all but one of the former Airborne executives after a very brief transition. The ineptitude of the DHL senior management team was clearly demonstrated early on with a mindset that DHL was now a big player in the US market. They added on an unprecedented cost structure almost immediately; layers of personnel,new hubs, IT changes, significant service upgrades, etc, without the benefit of a dramatic increase in shipments. Airborne was methodical and cost conscious, so the culture was very unfamiliar and local managers often received conflicting messages regarding service and cost: a balancing act of two goals that can be mutually exclusive.Essentially, DHL brought on the cost structure of a FedEx sized company with Airborne-sized revenue and units. Almost overnight they began to offer premium service to thousands of new zip codes in the US regardless of potential revenue, just to say they can compete head-to-head with UPS and FedEx.

and,

Lastly, the consolidation of the two air hubs was ill-timed and poorly executed. The concept was correct, but the plan for it (short timeline, no test runs, incomplete sort facility in Wilmington ) was faulty and the project failed from the outset. I personally was there that first night to watch it unfold (while unloading containers and sorting packages). Tugs were lined up 20 deep waiting to offload aircraft containers; sorters stood for 10 minutes ata time waiting for packages; some slides were empty while others overflowed onto the ground in piles up to 6 feet high with no shift of labor from one to the other. Most shift supervisors were new and in experienced. The new sort facility was designed for a larger container type and workers were unfamiliar with how to process them.Packages were backed up for weeks while aircraft departed well under capacity due to the inability to process the containers in a timely fashion. Much of the backup was finally shifted to ground transfer to help catch up with the backlog, but not until the second week. By then,many major shippers had already rerouted their shipments to competitors. Many of them never returned.

These snafus correlate very well with the personnel management changes at the highest level at DHL Express USA. So the story so far as I see it for DHL Express USA:

1. Big splash.

2. Very deep pool – barely swimming, maybe drowning.

3. Latch onto a shark to swim to the other side.

But what is DHL supposed to do now?

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Two challenges on your plate…

Or rather on my plate. I want to draw your attention to these two challenges that are floating out there in cyberspace – prize money being offered for your (my) troubles as well if one contributes something of value:

1. The first one is the older of the two – The Netflix Prize, which is a problem in improving the accuracy of the movie recommendation system that is used by Netflix (in addition to several other ecommerce sites). This is something that I started working on before I got deluged at work but I hope to pick up the pieces again and make a try.

2. The second challenge is being offered by ROADEF, the French Society of Operations Research – which is to use OR techniques in Disruption Management for Commercial Aviation. I’m sure that if you fly these days, you’d appreciate a little succor from such sources and I’m glad that people are being invited to contribute towards solving this problem. Since I’m working in applying optimization to such problems, this is something I definitely will consider working on.

So, any takers?

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Outsourcing Reverse Logistics

Outsourcing Reverse Logistics is a recent article posted Modern Materials Handling.com that has an interview with Tim Konrad of GENCO (my former employer) – it’s a niche for GENCO that it has been rather good at exploiting . He notes the following key points concerning reverse logistics as practiced by a 3PL:

Do it in volume

Establish vendor agreements

Implement a software package

Receive, inspect and dispose

Reconciliation

If you wanted to know what happens to a product that you returned for whatever reason:

About me

I am Chris Jacob Abraham and I live, work and blog from Newburgh, New York. I work for IBM as a Senior consultant in the Fab PowerOps group that works around the issue of detailed Fab (semiconductor fab) level scheduling on a continual basis. My erstwhile company ILOG was recently acquired by IBM and I've joined the Industry Solutions Group there.

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