Using hybrid supply chains and virtual manufacturing to overcome profit and price declines

The asset-lite manufacturing model can allow semiconductor companies to overcome profit, price, and increased expense problems and help to deliver high-performance, according to Accenture's Scott Grant.

By Scott Grant, Accenture -- Electronic Business, 6/10/2008

Many players in the semiconductor industry finds themselves stymied year after year by falling product prices, dwindling corporate profits, and billion dollar expenses associated with owning and operating a manufacturing facility. To counteract these difficulties, a growing number of semiconductor companies have shifted recently to an asset-lite business model whereby they hire other companies to manufacturer a growing percentage of their devices.

Asset-lite manufacturing has enormous potential to reduce capital expenditures and risk, increase agility and responsiveness to customer demand, and broaden a company’s access to additional manufacturing capabilities. As this sweeping trend continues to unfold, semiconductor companies should focus on delivering three capabilities: a flexible “hybrid” supply chain; a robust virtual-manufacturing network; and an effective vendor-relationship strategy.

If implemented properly, these capabilities can provide the keys to achieving new economies of scale, new sources of revenue, new vendor opportunities, and new ways of leveraging innovation to achieve high performance.

Designing a flexible hybrid supply chain

An asset-lite supply chain functions as a cost-effective operation that leverages disparate manufacturing and logistics processes. To achieve this, a company needs to disaggregate its supply-chain components to create a distinct supply-chain operation defined by production steps and physical location.

Semiconductor companies usually manage their entire manufacturing process using a built-to-forecast model. By contrast, a hybrid supply-chain strategy employs a pull-oriented approach to the process. This strategy also aligns with an asset-lite manufacturing model where separate physical locations are used for distinct manufacturing processes.

At the epicenter of an effective hybrid supply-chain strategy are the transition points where distinct production steps and physical locations interconnect. Semiconductor companies should revise their planning and inventory management to place special emphasis on managing these transition points. This will ensure that the flexibility of the hybrid supply chain is exploited to the fullest, enabling its implementers to be more responsive to customers’ demands.

Developing a flexible and robust virtual manufacturing network

An asset-lite strategy for semiconductor companies depends heavily on a virtual network of carefully chosen manufacturing partners. These companies must become “master integrators.” This requires them to decide how manufacturing business partners can come together to expand manufacturing capacity in the areas where it is most constrained, while quickly and economically addressing changes in demand and product mix.

A successful asset-lite manufacturing strategy combines the external network with an organization’s internal manufacturing capabilities. This combination can create a finely tuned, cross-functional, decision-making capability focused on making astute build-versus-buy decisions.

Also, an updated sales and operations process, which combines planning and inventory management with the company’s role as master integrator of the manufacturing network, is important to implement as it increases flexibility achieved through improved, mix-planning capabilities.

Develop an effective vendor relationship strategy

The final building block to the asset-lite foundation is the creation of long-term, mutually beneficial relationships with external manufacturers. A company must develop a comprehensive approach beginning with a commitment to understand internal processes of each vendor and how the relationship generates mutual benefits. Furthermore, a long-term, vendor-relationship strategy should be developed to integrate continuous improvement initiatives. The external manufacturing vendors must also be integrated into the sales operations planning process.

Asset-lite: Accurate, available, and actionable

The asset-lite manufacturing model can allow semiconductor companies to overcome profit, price, and increased expense problems and help to deliver high-performance. The model requires sourcing, manufacturing, and distribution capabilities that are responsive, flexible, and information-driven. And the model requires discipline, a sharp focus on customers and their needs, and a commitment to business outcomes. High performers have been shown to excel in the design of information flows that maximize real-time visibility across the supply chain. Accurate, available, and actionable information is a cornerstone of both high performance and asset-lite manufacturing.

About the author
Scott Grant is a senior executive with Accenture’s semiconductor business practice.