Executive Briefings

Chipmaker Goes 'Fab-Lite' While Still Wielding Control

Agere, an AT&T spinoff, outsources its global semiconductor manufacturing-but manages to keep a tight rein on operations.

Companies, like people, can't stop the process of aging. But they can also get younger.

Agere Systems Inc., a provider of semiconductors for networking and communications devices, is just over five years old in its current form. Yet the history of the Allentown, Pa.-based company extends much further back. Agere is the former Microelectronics Group of Lucent Technologies, itself a 1996 spinoff of the venerable AT&T.

Through its various incarnations, Agere has struggled with the ups and downs- mostly downs in recent years-of the semiconductor business. It has laid off staff, downsized operations and posted losses. (Sales for fiscal 2005, ending Sept. 30, were $1.68bn, down from $1.91bn in the prior year.) Now, the company has hit on a strategy that it believes will ensure success in a tumultuous industry. The key is outsourcing.

Agere is converting to a "fab-lite" supply chain, in which outsiders do nearly all the actual chip manufacturing while it concentrates on value-added services and reliable delivery of product. Manufacturing partners include the foundries Chartered Semiconductor Manufacturing Ltd. and Taiwan Semiconductor Manufacturing Co. In essence, Agere is copying the example of brand-name manufacturers further down the supply chain, who have shielded themselves from the vagaries of the business, not to mention the huge financial burden that ownership of factories entails, through the use of contract manufacturing.

The newly independent Agere had little choice but to outsource, says Donal Alvine, vice president of supply chain. Although it ranks among the world's top 25 semiconductor providers, the company lacks the resources of its biggest competitors, whose revenues are three to four times greater. It must rely on outsiders to shoulder much of the burden of continuous innovation. Today, says Alvine, Agere is almost completely "fabless," except for a joint venture with Chartered Semiconductor in Singapore, under the name Silicon Manufacturing Partners.

Lead-Time Disparity
But every plan has its risks. In adding partners to the supply chain, Agere complicated the task of matching supply to demand. In particular, it had to grapple with the built-in disconnect between manufacturers at one end, and customers at the other. Most semiconductor parts have a long lead time, up to 13 weeks. Agere's period of demand certainty is just one week. Somehow the company must satisfy immediate customer demand while ensuring that it has the right kind and quantity of product in the pipeline.

Agere's overriding goal is to "become best in class in cycle time," Alvine says. "The tighter it is, the better you can utilize the demand signal."

A forecast made 13 weeks in advance is by definition inaccurate; customer demand changes too quickly to set anything in stone that early. The only solution, says Alvine, is to shrink the forecasting interval. But that's not possible without a world-class system for exchanging data and documents between partners.

E2open Inc., based in Redwood City, Calif., is a provider of software for managing processes between companies. It was selected by Agere to monitor manufacturing from a distance. With the vendor's system, Alvine says, Agere can track the location of all piece parts and work in progress. It can draw data out of manufacturers with disparate platforms in order to manage performance measurement, consignment, replenishment, ordering and delivery, among other things.

Agere and E2open knew of each other's existence. The latter, whose very formation was a product of the outsourcing trend, had been providing similar systems to large customers of Agere such as Seagate Technology Inc. and Hitachi Global Storage Technologies. Agere was drawn to E2open's experience in installing multi-tier visibility processes, says Greg Clark, president and chief executive officer of the software vendor. Beginning in the late 1990s, his company found itself tapped by numerous integrated-circuit producers that were looking to shed assets through outsourcing, yet maintain strict control over manufacturing.

Agere implemented the E2open software in October 2004. At the time, says Alvine, it was upgrading to the latest version of enterprise resource planning software from Oracle Corp. It was vital that the two systems integrate smoothly.

Reacting to Change
Agere drew on E2open's forecasting and commitment tools to lock in orders with suppliers. The software also allows for the tracking of orders from their placement through work in progress, final delivery, acceptance and payment. The pinpoint monitoring lets Agere adjust quickly to changes in orders or sudden shortages of product, Clark says.

Alvine praises the system for its ability to link up with multiple vendors, regardless of IT platform. "It clearly helped us to manage our suppliers in a very consistent way, instead of in 20 to 30 formats." At the same time, he says, the software reduced Agere's information-technology costs, with fewer people need to monitor data exchange with suppliers.

E2open, adds Clark, "gave them the same visibility they had when they did it all internally."

Alvine sees further applications for the software by Agere. The next step, he says, is to get access to suppliers' material requirements planning (MRP) systems. That would boost the ability to adjust quantities and deliveries to the immediate needs of buyers. Alvine says Agere has had to overcome reluctance among some suppliers to such an intimate link.

On the other end of the supply chain, Alvine wants to see customer-demand data flowing through the E2open system. Currently it arrives in a variety of forms, including electronic data interchange files, spreadsheets and e-mail.

The additional capability would help Agere better to balance supply and demand signals. Using historical information from customers as a starting point, the company devises actual orders based on multiple inputs, including statistical probabilities and the amount of buffer inventory in the supply chain. The looser the link between supply chain partners, the more each one tends to hedge its bets and deviate from the forecast, says Alvine. And that builds unnecessary inventory into the supply chain.

Alvine would like to achieve full access to suppliers' MRP systems sometime this year. Then Agere will address the customer side. "There are limited resources," he says. "You have to pick what's most important."

Companies, like people, can't stop the process of aging. But they can also get younger.

Agere Systems Inc., a provider of semiconductors for networking and communications devices, is just over five years old in its current form. Yet the history of the Allentown, Pa.-based company extends much further back. Agere is the former Microelectronics Group of Lucent Technologies, itself a 1996 spinoff of the venerable AT&T.

Through its various incarnations, Agere has struggled with the ups and downs- mostly downs in recent years-of the semiconductor business. It has laid off staff, downsized operations and posted losses. (Sales for fiscal 2005, ending Sept. 30, were $1.68bn, down from $1.91bn in the prior year.) Now, the company has hit on a strategy that it believes will ensure success in a tumultuous industry. The key is outsourcing.

Agere is converting to a "fab-lite" supply chain, in which outsiders do nearly all the actual chip manufacturing while it concentrates on value-added services and reliable delivery of product. Manufacturing partners include the foundries Chartered Semiconductor Manufacturing Ltd. and Taiwan Semiconductor Manufacturing Co. In essence, Agere is copying the example of brand-name manufacturers further down the supply chain, who have shielded themselves from the vagaries of the business, not to mention the huge financial burden that ownership of factories entails, through the use of contract manufacturing.

The newly independent Agere had little choice but to outsource, says Donal Alvine, vice president of supply chain. Although it ranks among the world's top 25 semiconductor providers, the company lacks the resources of its biggest competitors, whose revenues are three to four times greater. It must rely on outsiders to shoulder much of the burden of continuous innovation. Today, says Alvine, Agere is almost completely "fabless," except for a joint venture with Chartered Semiconductor in Singapore, under the name Silicon Manufacturing Partners.

Lead-Time Disparity
But every plan has its risks. In adding partners to the supply chain, Agere complicated the task of matching supply to demand. In particular, it had to grapple with the built-in disconnect between manufacturers at one end, and customers at the other. Most semiconductor parts have a long lead time, up to 13 weeks. Agere's period of demand certainty is just one week. Somehow the company must satisfy immediate customer demand while ensuring that it has the right kind and quantity of product in the pipeline.

Agere's overriding goal is to "become best in class in cycle time," Alvine says. "The tighter it is, the better you can utilize the demand signal."

A forecast made 13 weeks in advance is by definition inaccurate; customer demand changes too quickly to set anything in stone that early. The only solution, says Alvine, is to shrink the forecasting interval. But that's not possible without a world-class system for exchanging data and documents between partners.

E2open Inc., based in Redwood City, Calif., is a provider of software for managing processes between companies. It was selected by Agere to monitor manufacturing from a distance. With the vendor's system, Alvine says, Agere can track the location of all piece parts and work in progress. It can draw data out of manufacturers with disparate platforms in order to manage performance measurement, consignment, replenishment, ordering and delivery, among other things.

Agere and E2open knew of each other's existence. The latter, whose very formation was a product of the outsourcing trend, had been providing similar systems to large customers of Agere such as Seagate Technology Inc. and Hitachi Global Storage Technologies. Agere was drawn to E2open's experience in installing multi-tier visibility processes, says Greg Clark, president and chief executive officer of the software vendor. Beginning in the late 1990s, his company found itself tapped by numerous integrated-circuit producers that were looking to shed assets through outsourcing, yet maintain strict control over manufacturing.

Agere implemented the E2open software in October 2004. At the time, says Alvine, it was upgrading to the latest version of enterprise resource planning software from Oracle Corp. It was vital that the two systems integrate smoothly.

Reacting to Change
Agere drew on E2open's forecasting and commitment tools to lock in orders with suppliers. The software also allows for the tracking of orders from their placement through work in progress, final delivery, acceptance and payment. The pinpoint monitoring lets Agere adjust quickly to changes in orders or sudden shortages of product, Clark says.

Alvine praises the system for its ability to link up with multiple vendors, regardless of IT platform. "It clearly helped us to manage our suppliers in a very consistent way, instead of in 20 to 30 formats." At the same time, he says, the software reduced Agere's information-technology costs, with fewer people need to monitor data exchange with suppliers.

E2open, adds Clark, "gave them the same visibility they had when they did it all internally."

Alvine sees further applications for the software by Agere. The next step, he says, is to get access to suppliers' material requirements planning (MRP) systems. That would boost the ability to adjust quantities and deliveries to the immediate needs of buyers. Alvine says Agere has had to overcome reluctance among some suppliers to such an intimate link.

On the other end of the supply chain, Alvine wants to see customer-demand data flowing through the E2open system. Currently it arrives in a variety of forms, including electronic data interchange files, spreadsheets and e-mail.

The additional capability would help Agere better to balance supply and demand signals. Using historical information from customers as a starting point, the company devises actual orders based on multiple inputs, including statistical probabilities and the amount of buffer inventory in the supply chain. The looser the link between supply chain partners, the more each one tends to hedge its bets and deviate from the forecast, says Alvine. And that builds unnecessary inventory into the supply chain.

Alvine would like to achieve full access to suppliers' MRP systems sometime this year. Then Agere will address the customer side. "There are limited resources," he says. "You have to pick what's most important."