You might think that a product made from silicon would flow through a supply chain like sand through an hourglass. But that's hardly the case for Texas Instruments Inc. (TI), one of the world's largest makers of silicon chips. Though its products may not present handling challenges, the Dallas, Texas-based company still faces the same difficulties that confront any business trying to coordinate the movement of materials through a far-flung global supply chain. And for TI, those challenges have only been magnified as the company's manufacturing process has become increasingly complex.
Those changes in Texas Instruments' manufacturing process over the years are largely a reflection of marketplace developments. Since TI introduced the first integrated circuit to the world in the middle of the last century, the market has exploded into a multibillion-dollar global business. The company, which once concentrated on making chips for use in computers, now produces 55,000 different semiconductor products that are incorporated into a wide variety of electronic devices, including mobile phones, modems, and DVD players. Today, the computer industry accounts for only about 30 percent of TI's semiconductor sales, while customers in the communications industry consume at least half of the 10 billion-plus chips TI makes each year.
Not surprisingly, these changes have also had repercussions for TI's supply chain. Compared to a few decades ago, there are now more steps in the manufacturing process and, because TI has contracted with third parties for some of its manufacturing and distribution needs, more players in the chain. The conventional wisdom holds that the more links in the chain, the greater the potential for delays and other disruptions to the flow of materials and information among the various parties. Yet that hasn't been the case at TI. In the face of added challenges, the semiconductor maker has actually responded by streamlining its operations.
Semiconductors—also called integrated circuits or chips—are big business for TI, which makes both analog and digital versions. In 2006, the most recent year for which financial figures are available, US $13.7 billion of the company's US $14.2 billion in revenue (96.5 percent) came from its semiconductor business. Asia and Europe each accounted for 25 percent of the company's semiconductor sales; the United States accounted for another 20 percent.
The chips themselves are made from silicon wafers in highly specialized factories known as fabrication plants, or "fabs." From the fabs, they move to assembly and test (A/T) facilities, where the wafers are cut into individual chips, which are then assembled into packages and tested.
Not so long ago, back when most of TI's chips were sold for use in personal computers (PCs), chip manufacturing was a relatively straightforward business. "The world used to be fairly simple," says Jan De Meulder, TI's director of supply chain logistics. "You were building chips for one PC application in one fab, sending them to one assembly and test site for completion, and your end customer was IBM, who was doing everything else. That was back in the '70s."
These days, it's no longer so simple. "Today, we have some processes [that] start in a first fab and then go to a second fab to complete the wafer's fabrication," explains De Meulder. "Then, they could be packaged in an assembly plant, followed by burn-in (tests in which the devices are subjected to high temperatures to assure quality) and final test processes in yet another site. Quite often, we then have to send those to an electronic manufacturing corporation that builds subassembly boards." From there, the units might be shipped directly to the customer's factory, where end products such as cell phones are assembled.
At the same time, more players have been introduced into the process. Three decades ago, Texas Instruments owned most of its chip-making facilities. But over the years, the company has outsourced part of its production to third-party foundries. At present, Texas Instruments uses more than 30 fabs and foundries around the globe. (Fabs make product strictly for TI's customers; foundries take orders from multiple customers, including TI's competitors.)
Delivering the goods
TI's process for moving semiconductors out to its customers, which now number more than 3,000 worldwide, is no less complicated. About 75 percent of the company's semiconductor products move through its distribution network, which includes four big regional distribution centers and more than 70 smaller hubs (see Figure 1). The company uses a regional DC in Singapore to serve customers in Asia; one in Dallas, Texas, to serve North America; one in Utrecht, the Netherlands, to serve Europe; and one in Tsukuba, Japan, to serve markets in that country. But Texas Instruments doesn't manage these facilities itself; it uses third-party logistics service providers (3PLs) to handle the day-to-day operations of those warehouses.
Another 10 percent of TI's chips move directly from its factories to customers. The other 15 percent are sent to warehouses near key customers' factories. TI maintains inventories for those customers at the sites on a consignment basis.
To move its products, Texas Instruments relies heavily on air carriers, although the company has begun experimenting with ocean shipments for products with long lead times. Given its global reach, TI must keep track of rates on more than 1,000 different shipping routes.
All in all, the process is a lengthy one. On average, it takes eight months to source material, build the various semiconductor components, and deliver them into the end customers' hands. Texas Instruments keeps about 90 days' worth of inventory on hand to meet demand.
All together now!
As for how TI has managed to streamline its supply chain despite the additional steps, the explanation lies partly in its effective use of electronic communications. For starters, TI has standardized its information technology platform, deploying a common global IT system to handle all orders and shipments. The company now uses a single version of SAP's enterprise resource planning (ERP) system across all business units around the globe. The SAP system allows Texas Instruments to take an order from any customer anywhere on the planet and check whether it can meet the order. "People can look at orders and inventory anywhere around the world," says De Meulder. "It allows us to track changes in real time."
At the same time, the company has set up a global connectivity platform to exchange information with its external partners. It uses a variety of methods, ranging from electronic data interchange (EDI) to XML-messaging on the Internet, to connect with those external players. "When you have so many touch points with suppliers, you have to be connected by IT to your partners," De Meulder says.
TI's efforts to standardize its information base have extended to other areas of the operation as well. For example, the company uses a single version of i2's production planning software and has adopted a sales and operations planning (S&OP) process that has pushed everyone in the organization to use a standard set of data. "Everybody is aligned on what the company will aim for, what revenues we're looking for, and what the factories will build to," De Meulder says. "And everybody will execute the same plan."
As part of that process, Texas Instruments conducts a monthly review to spot potential gaps between supply and demand, so that it can act swiftly to resolve disparities. That monthly plan drives the weekly production plan for the factories, which must be kept running in order to be cost effective. "We can't afford to have the factory idle," De Meulder explains.
Along with its IT and planning initiatives, Texas Instruments has also introduced several innovative transportation programs. To coordinate inbound parts shipments from offshore suppliers to its North American production plants, for example, the company has set up an Inbound Routing Center in Dallas. As it did with its regional distribution centers, TI has contracted with a 3PL to run the Inbound Routing Center. Among other functions, the 3PL is responsible for determining the most costefficient manner of shipping.
To help ensure a steady flow of parts and components needed for production, the Dallas chipmaker has also contracted with suppliers to set up vendormanaged inventory hubs near its fabs and A/T factories in Asia and Mexico. "We are asking suppliers to put key components right in front of our factories," says De Meulder, who notes that these programs are similar to the ones TI operates for its own customers.
Initiatives aimed at streamlining the company's outbound transportation include what TI calls the "ship-packed-to-sales-order" program. Under this program, which is designed to expedite order shipping, a factory in, say, Malaysia will consolidate individual orders for Japanese customers into one container for shipment to TI's Tsukuba distribution center. Before it leaves the factory, each package is labeled with the final customer's name and other delivery details. When the shipment arrives at Tsukuba, workers at the DC break down the load into individual orders for final delivery.
Texas Instruments has also begun deploying transportation management software (TMS) to help it move shipments to customers swiftly at the lowest possible cost as well as to obtain better visibility of shipments in transit. Although it now uses the software only at its distribution centers, the company has plans to deploy the same TMS applications at all of its assembly and test facilities, which will allow those sites to take over tasks like filling out customs and shipping documents. "We want the factory to be able to do the same thing the DC can do," says De Meulder.
The company has also developed contingency plans to keep the network running in case of supply chain disruptions. It has re-examined its shipping patterns and routes to ensure that it has an alternative carrier to move products and supplies on every key inbound and outbound lane. "If something happens, we have a backup plan with another strong provider," De Meulder reports.
A perfect delivery network
For all of its successful improvement initiatives, Texas Instruments still considers its supply chain to be a work in progress. It recently engaged an outside research firm to model its distribution network to determine the optimum locations for its distribution centers. "We will use that model to project the future," De Meulder says. He adds that he expects TI to relocate more DC operations to Asia in an effort to get closer to Asian customers, increase its presence in that part of world, and reduce its operating costs.
"We are busy working on developing a truly optimized network that can handle any shipment to any customer anywhere," says De Meulder. "Customers are not … forgiving today; they want a perfect delivery network."
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