@ Supply Chain Management

A news item today points to the return of an experiment in liberty – Milwaukee neighborhoods could print own money. I love it, absolutely love it.

Residents from the Milwaukee neighborhoods of Riverwest and East Side are scheduled to meet Wednesday to discuss printing their own money.The idea is that the local cash could be used at neighborhood stores and businesses, thus encouraging local spending. The result, supporters hope, would be a bustling local economy, even as the rest of the nation deals with a recession.

If it

A little while ago, I blogged about the very real threat of supply chain shocks primarily originating from the drama in the credit markets – Are you ready for the Supply Chain Shock?. While those risks remain, there is a lot more to think about now – It’s time for the next whammy – Demand shock. This article reported in the International Herald Tribune – A sea of unwanted auto imports is symptomatic of the problem. What is recounted in the article,

In the 150-acre terminal where Toyotas are unloaded, there is a sea of Corollas, Camrys and RAV4s. The mere presence of so many cars is not unusual, given that Toyota brings in 250,000 cars a year in biweekly shipments. But in a sign that something is amiss, dozens of tractor-trailers that transport new cars to dealers sat empty last week amid the rows of Toyotas.
Kurt Golledge, 48, was one of just two truckers loading his green, 75-foot-long hauler with cars lastweek. Golledge said eight of his colleagues were laid off this month because Toyota dealers did not want more deliveries.
"I was dropping cars in Henderson, Nevada, about a month ago and the dealer told me: ’Take ’em somewhere else and dump ’em,’ " said Golledge, who works for a company called Allied Systems. "All the dealers are telling us the same thing."

and,

It is more unusual to see a lot at the California port filled with thousands of unsold Mercedeses, most of them gathering dirt on the plastic white film that protects their hoods and trunks. Some appeared to have been stashed at the port for several months.

smacks of demand shock. This glut of cars which is but one product attests to the emptying of the pipeline inventory and WIP that existed as most of these firms have cut back their production. Multiply this picture across the spectrum of imported goods and you begin to see the scale of the problem. Now, not only is it difficult to fund operations for a factory/firm, there is less demand for those products as well as consumers cut back. That points to the obvious, as there is less need for production – more layoffs to come. And this downward spiral reinforces itself.

I leave you with a question of the times – Do you really think that the Keynsians of the incoming administration are about to do any better than the departing one? And, if so, Why?

It is as they say of second marriages – "The triumph of hope over experience."

Update: Some more evidence of Demand shock rippling through the Supply Chain: Workers riot at Chinese toy factory

Tags: Demand Shock, Toyotas at Ports, Pipeline Inventory

I’m sure that you’re drowning in the much bandied about term – Credit crisis or Credit crunch or liquidity crisis or the like. And I’ve come across some explanations of what event or series of events underlie this crisis. For a very good explanation of the problem and the failed bailout by the current Treasury Secretary Paulson, I refer you to this site – Understanding Tax.

As I pointed out in the previous post – Are you ready for the Supply Chain Shock?, a credit crisis is not a laughing matter and a serious credit crisis will send numerous shocks through the numerous supply chains of the world. The author of the article also points that out,

You might think of short-term money as the lubricant that keeps the world’s economic engine turning over smoothly. If there’s no lubricant,the engine freezes. No paydays, no goods on the shelves. Seriously.

So what is the purpose of the bailout bill? Let’s be clear about the probable scope of the current crisis – it’s not going away tomorrow if the bill is somehow passed in the House.

Note that Mr. Paulson’s proposal was not intended to solve the teaser-rate mortgage problem, either now or in the future. In the transactions that created the teaser-rate mortgages in the first place,both parties made bad decisions – the lender and the borrower. Mr.Paulson’s proposal was not intended to help either. One of its unavoidable side effects, however, was to relieve lenders of the consequences of their bad decisions, while leaving borrowers to suffer the consequences of theirs. This made it politically less palatable.
In addition, at least $500 billion more of teaser-rate mortgages are scheduled to reset over the next several years. In all likelihood, they too will go into default and become toxic waste. Nothing in Mr.Paulson’s original proposal was intended to do anything about this next$500 billion installment – or, indeed, to prevent lenders from making more teaser-rate mortgages in the future.
Similarly, Mr. Paulson’s proposal was not intended as a general Wall Street bail- out, although to some extent it would have had that effect.Note that the outstanding overhang of credit default swaps alone is estimated to be between $45 and $60 trillion – three to four times the size of our annual gross domestic product. The requested $700 billion, although the single biggest appropriation request in U.S.history, was miniscule when compared with the toxic waste problem as a whole. Mr. Paulson’s proposed solution was to cost just 1% of the size of the problem and was aimed only at a small part of that problem. (It is unnerving to realize that the U.S. government – the

My apologies for the dip in blogging frequency but I was delightfully detained by the birth of my daughter – Mikayla Sara Abraham last Monday. What an interesting world she inherits in but a week’s time?

If you’re glued to the Dow/Nasdaq/S&P 500, let me ask you whether you’re equally glued to your supply chain cockpit i.e. if you have one? Regardless, if there is going to be a Supply Chain shock that is a consequence of tightened credit requirements, what is your plan, your firm’s plan for dealing with the fallout? Since offshoring and outsourcing have created a manufacturing base overseas, the impact of tightening credit requirements will not only be felt stateside but at all points along that financial supply chain.

If there is a shock that has been building up in your supply chain – for example, a supplier that might be facing a hard time raising money for his/her continuing operations for whatever reason – then you can be sure that this shock will be transmitted into you material flow supply chain at some point in the future. What if a supplier just closed shop because he couldn’t pay his payroll any longer and they were a single source supplier? Time to get busy finding another source before that become a real problem, you’d think? But perhaps your firm is the problem for your suppliers and your own delays in making good on payments to suppliers squeezes their cash flow sending them into a downward spiral – internal improvements would need to be made after assessing which of your suppliers might benefit the most in this regard. In some cases, your firm might even need to step in as a guarantor in the relationship between a supplier and the credit facility – be it local or global. This is a time for building close relationships with every facet of your supply chain that has the potential to cause serious disruptions within.

Also, since the transportation lead time is for most firms (I mean those that have gone the outsourcing route) a fixed quantity right now – given that one has to factor the average shipping, drayage etc on average and one cannot really change this without forking out more in transportation costs and given that one has to hold the larger inventory over this additional lead time, any improvements to driving down the magnitude of this inventory as well as improving inventory turns should free up working capital for continuing operations.

While oil is the physical commodity that greases the global supply chain and you might not have liked the era of soaring oil prices and how it affected your margins if you were not able to pass on the costs to consumers, credit is the real handshake that enables the global supply chain – the current credit squeeze makes the handshaking that goes on everyday (that needs to continue to go on into the future) a little less forthcoming. Anything that you can do to free up working capital in your firm such as speeding up material to cash conversion can only help but more importantly planning for it now (or hopefully, some months ago) will give you an edge no matter which way this ill-wind blows.

Update: If you wanted a recent news article that describes the relationship between credit markets and continuing business operations – Banks in miser mode send borrowing rates soaring.

Tags: SCM, Credit squeeze and the Supply Chain, Credit squeeze, Improving cash flow, Supply Chain shocks

JDA is all set to acquire i2 Technologies for approximately USD $346 million – the huger for scale is relentless, it seems but whether or not it succeeds is a different matter altogether.

In this part of The New Economics of Semiconductor Manufacturing, an article that you can find at the IEEE Spectrum site, I mean to look at the specific claims and experiences that the authors of the article had in their TPS consulting journey at the unnamed IDM. The following are the four specific "distilled" rules (that earlier Harvard researchers have conducted research on – Decoding the DNA of the Toyota Production System. My own foray into this matter is in this review – Toyota, Toyota

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.

Tags: Semiconductor Manufacturing, Moore’s Law, Lives and Deaths of Moore’s Law, Ilkka Tuomi , Lean within Semiconductor Manufacturing, WIP in a wafer fab