Semiconductor vendors are particularly vulnerable to supply/demand swings that hurt profitability. They must adopt collaborative supply chain planning processes to improve customer service levels and reduce inventory risk. Any industry will benefit from better balancing of supply and demand, but the need is intensified for semiconductor vendors and their trading partners. Many products have long manufacturing lead times that complicate quick reaction to demand swings. New fabrication capacity is expensive and results in capacity increasing in large increments. The high fixed cost and rapid depreciation involved motivate semiconductor manufacturers to "push" products through the channel instead of letting customer demand "pull" needed quantities (see Figure 1). Using inventory to buffer demand swings is unappealing because rapid price reductions for semiconductor products — sometimes as much as 10 percent per week — can leave vendors or customers holding overvalued or obsolete inventory. These challenges are driving semiconductor vendors to investigate better ways to manage production and distribution commitments to customers. Constraints of the Current Processes Today, demand forecasting/management and order-book reconciliation are largely manual processes. The use of e-mail, fax and electronic data interchange (EDI) delivers modest improvements, but serious problems remain, including data inaccuracy and unacceptably long communication lead times. Too often, this results in a complete lack of useful information. Many semiconductor vendors use information from internal production systems to optimize their operations but take little account of data from trading partners. Most will share capacity availability information with customers only when pressured to do so. A major reason for discounting customer input during capacity planning is that customers often exaggerate demand forecasts when supplies are tight to improve their chances of getting required quantities. The Need for Collaborative Processes To overcome the current constraints, trading partners must establish collaborative interactions that rationalize and integrate their demand forecasting/management and order-book reconciliation processes. Semiconductor vendors must make their supply streams visible to customers, and, in return, customers must provide realistic demand forecasts. Collaboration will strengthen customer relationships and increase trust as processes are linked and realistic operating information is shared. Vendors that aggressively undertake these initiatives will gain competitive advantage through increased responsiveness and better customer service. Many semiconductor vendors use real-time capable-to-promise (CTP) systems internally to commit orders against inventory and available production capacity. Exposing CTP information to customers — enabling them to see actual supply capacity — will reduce the uncertainty that leads customers to exaggerate demand forecasts. Establishing collaborative demand-planning initiatives with key customers, including procedures for calibrating the accuracy of the forecast, will reduce overproduction that leads to excess inventories. (The collaborative interactions between vendors and customers are depicted in Figure 2.) Real-time CTP information also improves order-book reconciliation by helping vendors understand the consequences of accepting an order — such as increased delays or expenses caused elsewhere. Actions for Vendors Customers will demand collaboration sooner rather than later, so vendors should begin to prepare now. Applications supporting collaboration are immature and often require integration and augmentation to provide full solutions. Greater obstacles to collaboration lie elsewhere, though — they include ensuring data is complete and accessible, business processes are rationalized and re-engineered for a collaborative environment, and strategic trading partners are engaged and committed. Vendors should take the following actions to overcome these obstacles: Assess internal data completeness and quality, making improvements where necessary. Important data to review includes production capacity, cycle times, inventory, lot characteristic quality and yields. Jointly establish common measurement criteria with key trading partners. Internal metrics are often meaningless to trading partners. It is essential that each trading partner have the same "version of truth," which requires agreement on the definition of such metrics as forecast accuracy and commitment performance. Once metrics have been agreed on and internal data is in shape, begin pilots to provide interactive CTP information to key trading partners. Begin with just two or three strategic customers before attempting a broader rollout. Engage these strategic customers in collaborative demand-forecasting pilots to improve the timeliness and realism of their forecasts, but temper customer forecast data with other assessments. For example, consider the financial condition of trading partners — and their customers — to assess the firmness of trading-partner forecasts. Benefits of Collaborative Processes In the cyclical semiconductor industry, even small improvements to the capacity-planning and order-book reconciliation processes will reduce inventory obsolescence risks, generating significant bottom-line savings. Vendors can also improve customer service without increasing inventory risk. Better visibility of customers' changing demand patterns will not only reduce overproduction when demand falls off but also improve allocation accuracy in times of constrained supply. The financial penalty from shortcomings in these processes can be substantial for vendors and customers. Cisco Systems, a large buyer of semiconductors, illustrated this point recently when it was forced to write off $2.5 billion in inventory that it purchased because of overly optimistic demand forecasts. Cisco is now using software from Manugistics Group to implement a private marketplace that will enable it to collaborate on demand and supply with its suppliers. Bottom Line: Semiconductor vendors should collaborate with their trading partners to improve their demand forecasting/management and order-book reconciliation processes. This will increase profitability, improve customer service levels and reduce inventory risk. Winning vendors will leverage the collaborative capabilities of the Internet to achieve this. This research is part of a broader article consisting of a number of contemporaneously produced pieces. See COM-13-7435 on www.gartner.com for an overview of the article. Gartner's Electronic Commerce & Extranet Applications Research Note COM-13-5954, 25 May 2001. Inside This Issue... Supply Chain Excellence through Inventory Visibility Measuring Collaborative Supply Chain Effectiveness Collaboration Lessens Semiconductor Supply Chain Swings The E-Business Philosophy: Supply Chain Management Will Sustain Profitability Tell Us What You Think! Entire contents © 2001 by Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. 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