Executive Briefings

Teradyne Outsources Manufacturing, But Keeps Visability and Control

Having visibility into its contract manufacturers allows Teradyne to better manage component supplies as well as finished inventory.

Like a lot of high-tech companies, Teradyne in recent years has outsourced the bulk of its manufacturing and assembly operations to contract manufacturers. Unlike many such companies, however, the supplier of automatic test equipment managed to maintain visibility and control of its outsourced operations, while at the same time implementing processes to mitigate supply risk, reduce costs and improve customer service.

Jim Wood, director of supply chain information systems, cites two reasons for this success: Teradyne's innovative use of Kinaxis RapidResponse software and a "heavyweight internal team" that reengineered the way the company works with suppliers of high-value parts. "Even as we moved to an outsourced environment, where the contract manufacturers actually place the purchase orders for parts, we still applied the supply chain principles we had developed," says Wood.

Teradyne's automatic test equipment is used by the semiconductor industry and also for testing complex electronics in automotive, computing, telecommunications, aerospace, defense, and consumer electronics products. The decision to outsource manufacturing added another layer of complexity to an already complex supply chain, which begins with the nature of Teradyne's products. Its testing systems can have as many as 5,000 components, including some very expensive parts, explains Wood. "You have to have a lot of electronics to test state-of-the art electronic devices," he says.

End products are big pieces of capital equipment that generally sell for half a million to a million and a half dollars. While not designed to order, the testing equipment is highly configurable. "Think of buying a personal computer and choosing what kind of processor, hard drive, video card, monitor and so on that you want," says Wood. "Then multiply that times a hundred and you have an idea of the number of different options you can buy with our systems." As a result, he says, "ours always has been a relatively high-mix, low-volume type of business."

It also is an extremely cyclical business. "Capital equipment generally is at the tail end of the bullwhip," says Wood. "Many of our customers, like the semiconductor industry, also are boom/bust kinds of industries, and we get jerked around on that as well. Demand is very unpredictable."

Unpredictability has increased in recent years due to another aspect of the outsourcing trend-Teradyne's customers are pushing out equipment testing to contract test houses. "These contract guys don't know what business they are going to get. Then they secure a contract and they need the test equipment right away," says Wood. But because of all the components, these pieces of equipment have pretty long lead times. "It's hard when you get the order at the last minute," he says.

Teradyne took a number of steps to meet these challenges even before the internal push to outsource manufacturing. In the late '90s, it was an early adopter of the RapidResponse solution from Kinaxis (then called WebPlan). At that time, says Wood, the company's primary problem was an inability to quickly give reliable delivery promises to customers, particularly on miscellaneous orders. "People would constantly order things we didn't have in the forecast or would move the timing of things that were in the forecast," he says. "RapidResponse allowed us to run different scenarios and figure out whether we could meet the delivery the customer wanted and, if not, what the obstacles were that we needed to address. It also allowed us to make a better guess at what a reasonable delivery commitment should be." This is not a simple calculation since it involves exploding material requirements through all levels of the bill of materials, Wood notes.

"That was the killer application that justified our purchase of Kinaxis and it's still a major use," Wood says. Just recently, he notes, Teradyne had a last-minute opportunity to take some business away from a competitor, if it could provide a fast turnaround. "Using Kinaxis, we were able to quickly see that 900 part numbers were a problem, so we organized a war room around that and got to work," says Wood. "As we begin to fix the problems, we could look in the system and see what the remaining ones were. The RapidResponse tool is really useful in those kinds of situations."

From this original application, Teradyne expanded its use of RapidResponse into other areas. One key application came as the company accelerated outsourcing to its current level of 85 percent of manufacturing. "We used the tool to create a 'glass pipeline' that allows us to see what is going on inside our contract manufacturers," Wood says. "Even though manufacturing is outsourced, we still have tremendous need for information about what is happening in the manufacturing process."

Teradyne already was getting feeds from its contract manufacturers' planning systems regarding demand and supply of materials, says Wood. "We began taking these weekly feeds and loading them into RapidResponse so the company can view all of the contract manufacturers as if they were one big company," he says. "We can see how demand cascades from plant to plant and there's a lot we can do with that information."

One thing the company does is monitor demand for components from all of its contract manufacturers, which enables it to take appropriate action with suppliers. On many key components, especially high-dollar and custom designed ones, Teradyne continues to own the supplier relationship, Wood explains. "We haven't delegated all of that to contract manufacturers. It is way too important to us." With this demand picture, Teradyne is able to send consolidated forecasts to component suppliers so they can better plan their production.

The glass pipeline also provides Teradyne with global visibility to components on hand at all its contract manufacturers, information that enables the company to make better use of existing inventory that may simply need to be repositioned. "We can see if some sites have excesses while others are experiencing shortages," says Wood. "In that case we can move material around rather than making additional purchases, which can mean significant savings."

Repositioning inventory within the group that manages application specific integrated circuits (ASICS) was one of Teradyne's first uses of the glass pipeline technology. ASICs are custom designed integrated circuits and are very complicated and expensive components. When this group took the feeds from all of its contract manufacturers and looked at them together, it was able to identify supply and demand imbalances between factories and reposition inventory to compensate. "We have $9m of projected consumption of these parts spread across 20 part numbers just over the next 13 weeks," says Wood. "When you have that kind of money flowing into contract manufacturers, it is worth putting a little extra effort into managing it."

 

Supplier Relationships

As the company began to get better visibility to this information, it saw the need to revamp the way it worked with suppliers of such high-dollar parts. To address that issue, the company formed a "heavyweight internal supply chain team" called Supply Chain Express that, at its peak, numbered 27 people, including Wood. "This was a fairly large team because we were inventing processes and reengineering how we managed this part of our business," Wood says. A major result of this work was to move to a demand-pull strategy on high-dollar parts, as opposed to an MRP-driven push strategy, he says. Specific suppliers were targeted "because it takes a fair amount of work to do this and you just don't have the energy to do it with everyone," says Wood. Suppliers with the most critical parts and longest lead times were targeted, as well as suppliers that make components unique to Teradyne. "These are parts that can't be sold to anyone else," says Wood. "If they made them and we walk away, they are stuck."

Teradyne began working closely with these suppliers to understand how they build product and to try and find ways to improve cycle times. "Sometimes they might be able to change something to speed production, maybe implementing lean practices or building things in parallel rather than serially," he says. "A lot of times the supplier knows that it's something they need to work on; we just give them a good excuse to do it."

A second step involves going through the bill of materials, looking especially at those parts that are unique to Teradyne. "We build a model using homegrown software that I wrote," says Wood. "It is an MRP type planning calculation, except that it uses kanban or a pull paradigm. We start with the demand for the end item that we need from the supplier."

That picture of demand is available "because we have all of our contract manufacturers' data in the Kinaxis system and we can see the demand for components," says Wood. A module of the software called Supply Consumption also provides visibility to what is driving demand, enabling planners to intervene manually to edit figures if they see the need. "We take the demand and convert it into a weekly run rate-an average demand for the week," Wood explains. "That's what you use when you do a kanban calculation, which is a function of the weekly demand rate, the lead time and variability of demand. So we size the kanban and then we convert that to what we call an authorized quantity."

In many cases the supplier is authorized to stock this amount of finished goods, which Teradyne is committed to buy, Wood says, but he adds that this quantity does not represent what is on hand at any given time. If a contract manufacturer has just pulled a large order, for example, the on-hand quantity will be low, "but the idea is that whenever you ship some you launch an order to build more. You really should think of it as a kanban loop quantity," he says.

This same process is carried through to the next level of supply as well. "This is a fairly standard kind of calculation for figuring out demand pull systems," says Wood, "but because our business is so volatile, it is not a typical case for doing demand pull. Most of the text books would say that a business like ours would not have great success using a pull system. They tend to say you have to smooth your master schedule and do the same quantity every day to make it work." To compensate for business volatility, Teradyne re-sets its kanban quantities every month, he says.

This program has a number of benefits for suppliers. Instead of getting an order here and there and having to produce in an on-again, off-again fashion, they see a longer-term commitment from Teradyne. "Also, we work with them on things like economic lot sizes, so they can be a little more efficient in how they build," says Wood. "And instead of having a purchase order and a fairly long lead time, we have a situation where if our demand stops, they stop building. In the old purchase-order system, they would keep right on building and would end up having to shut down the factory while we used up three months of inventory."

No matter what you do, he stresses, "if demand is cut in half almost overnight, you are going to have a problem. But this does smooth it out somewhat."

Teradyne benefits from the program by having shorter lead times, whether it or the contract manufacturer is ordering the part, says Wood. Instead of total procurement time, lead time is reduced to transit time or, on configured products, transit time plus final assembly. "Of course, you hope that by doing some of the lean practices and getting suppliers to work more efficiently, you can cut the cumulative lead times as well," he says. "And the way we size these authorization quantities, there is a buffer built in that covers variability, which effectively means there is a little more material in the pipeline than there would have been with standard MRP. Therefore, when our business takes off, we have some material around."

Wood cites a real-life example to illustrate this point. "We have a supplier that makes a very expensive, long lead time assembly for us," he says. "Last spring, we had a big boom in demand. Because we had pre-authorized and staged the parts, there was no problem with ramp-up. Now after our demand went up, it went down just as much and we also were able to manage the down side pretty well. We may have been liable for some parts but we didn't have a warehouse full of them."

About a year earlier, he says, the company had a similar situation "that left us with something like $1m worth of parts in our stock room doing nothing. So this latest example was a real tribute to Supply Chain Express."

Another advantage to the program is that Teradyne is liable only for the components, not for the full value of the end items. "The Supply Chain Express methodology has reduced our liabilities with suppliers by 25 to 30 percent," he says.  "That could easily total $3m or $4m just with the suppliers that we have in the program now, but I think the figure is bigger than that."

Even suppliers that are not in this targeted program benefit from the visibility to contract manufacturing operations that Kinaxis provides. "We send forecasts every week to a large number of suppliers out of the Kinaxis system and suppliers use that to pipeline material or to plan their capacity," says Wood.

Teradyne planners also use the tool to send forecast restatements to let suppliers know exactly what is needed to meet existing orders, he says. "Our planners love the fact that the tool allows them to bump the data out into an Excel format and fiddle with it," he says. "It would be nice if all the data in the system were perfect but it never is, so a planner can put it into the Excel format and tweak the numbers or add comments. It really helps them manage their suppliers."

Other departments in Teradyne have found uses for Kinaxis as well. One is a small group that focuses on discontinued parts. "Even though we are in the high-tech business, our systems are in the marketplace for a long time and inevitably there are instances where a supplier discontinues a component part," Wood says. The group managing this uses Kinaxis to help calculate last-time buys. "This can be tricky," says Wood. "If we run out we are in trouble but if we buy too many we end up with a big write-off."

With Kinaxis, the planners working this problem can simulate different demand scenarios to see the various implications. They can do this literally in seconds, Wood says. "The software has a very clever engine that can re-plan very, very fast. If we tried to do something like this in our Oracle ERP system, it would be an overnight run."

The software also is used for various types of internal reporting. "We have a fairly substantial need for reports because we have different groups of people in charge of different product lines and we want to know what is going on with each line," says Wood. "If you want to know what your obsolescence exposure is, for example, you want to see that by product line. The Kinaxis Supply Consumption tool does that with relative ease and speed."

Another group within the company spends lot of time worrying about financial and operational measurements related to inventory, such as reporting liabilities to suppliers, he notes. In this case, a liability is a purchase order or contract term that obligates Teradyne to pay the supplier at some future date or inventory being held by Teradyne or at a contract manufacturer. "So this group also does a lot of reporting-things like how much inventory is on hand and on order and how it is going to burn off," says Wood. Again, Rapid-Response provides much of the data. "It even gets into financial statements, because we have to set reserves and inventory write-offs, and we have to report our liabilities in the financial statements as footnotes. We use RapidResponse to do all of that. Also we make use of the simulation capability to help us determine the appropriate estimate of future demand to use for financial reporting."

Overall, 10 groups within the company using RapidResponse in some way. "It's really kind of pervasive," says Wood. A big reason is its ease of use, he says. "People will use RapidResponse instead of Oracle because it is so much easier," he says. "As someone who has worked in IT, I can understand that. Getting good reports out of IT is very difficult and expensive and it takes forever. Rapid Response is much more user friendly."

Like a lot of high-tech companies, Teradyne in recent years has outsourced the bulk of its manufacturing and assembly operations to contract manufacturers. Unlike many such companies, however, the supplier of automatic test equipment managed to maintain visibility and control of its outsourced operations, while at the same time implementing processes to mitigate supply risk, reduce costs and improve customer service.

Jim Wood, director of supply chain information systems, cites two reasons for this success: Teradyne's innovative use of Kinaxis RapidResponse software and a "heavyweight internal team" that reengineered the way the company works with suppliers of high-value parts. "Even as we moved to an outsourced environment, where the contract manufacturers actually place the purchase orders for parts, we still applied the supply chain principles we had developed," says Wood.

Teradyne's automatic test equipment is used by the semiconductor industry and also for testing complex electronics in automotive, computing, telecommunications, aerospace, defense, and consumer electronics products. The decision to outsource manufacturing added another layer of complexity to an already complex supply chain, which begins with the nature of Teradyne's products. Its testing systems can have as many as 5,000 components, including some very expensive parts, explains Wood. "You have to have a lot of electronics to test state-of-the art electronic devices," he says.

End products are big pieces of capital equipment that generally sell for half a million to a million and a half dollars. While not designed to order, the testing equipment is highly configurable. "Think of buying a personal computer and choosing what kind of processor, hard drive, video card, monitor and so on that you want," says Wood. "Then multiply that times a hundred and you have an idea of the number of different options you can buy with our systems." As a result, he says, "ours always has been a relatively high-mix, low-volume type of business."

It also is an extremely cyclical business. "Capital equipment generally is at the tail end of the bullwhip," says Wood. "Many of our customers, like the semiconductor industry, also are boom/bust kinds of industries, and we get jerked around on that as well. Demand is very unpredictable."

Unpredictability has increased in recent years due to another aspect of the outsourcing trend-Teradyne's customers are pushing out equipment testing to contract test houses. "These contract guys don't know what business they are going to get. Then they secure a contract and they need the test equipment right away," says Wood. But because of all the components, these pieces of equipment have pretty long lead times. "It's hard when you get the order at the last minute," he says.

Teradyne took a number of steps to meet these challenges even before the internal push to outsource manufacturing. In the late '90s, it was an early adopter of the RapidResponse solution from Kinaxis (then called WebPlan). At that time, says Wood, the company's primary problem was an inability to quickly give reliable delivery promises to customers, particularly on miscellaneous orders. "People would constantly order things we didn't have in the forecast or would move the timing of things that were in the forecast," he says. "RapidResponse allowed us to run different scenarios and figure out whether we could meet the delivery the customer wanted and, if not, what the obstacles were that we needed to address. It also allowed us to make a better guess at what a reasonable delivery commitment should be." This is not a simple calculation since it involves exploding material requirements through all levels of the bill of materials, Wood notes.

"That was the killer application that justified our purchase of Kinaxis and it's still a major use," Wood says. Just recently, he notes, Teradyne had a last-minute opportunity to take some business away from a competitor, if it could provide a fast turnaround. "Using Kinaxis, we were able to quickly see that 900 part numbers were a problem, so we organized a war room around that and got to work," says Wood. "As we begin to fix the problems, we could look in the system and see what the remaining ones were. The RapidResponse tool is really useful in those kinds of situations."

From this original application, Teradyne expanded its use of RapidResponse into other areas. One key application came as the company accelerated outsourcing to its current level of 85 percent of manufacturing. "We used the tool to create a 'glass pipeline' that allows us to see what is going on inside our contract manufacturers," Wood says. "Even though manufacturing is outsourced, we still have tremendous need for information about what is happening in the manufacturing process."

Teradyne already was getting feeds from its contract manufacturers' planning systems regarding demand and supply of materials, says Wood. "We began taking these weekly feeds and loading them into RapidResponse so the company can view all of the contract manufacturers as if they were one big company," he says. "We can see how demand cascades from plant to plant and there's a lot we can do with that information."

One thing the company does is monitor demand for components from all of its contract manufacturers, which enables it to take appropriate action with suppliers. On many key components, especially high-dollar and custom designed ones, Teradyne continues to own the supplier relationship, Wood explains. "We haven't delegated all of that to contract manufacturers. It is way too important to us." With this demand picture, Teradyne is able to send consolidated forecasts to component suppliers so they can better plan their production.

The glass pipeline also provides Teradyne with global visibility to components on hand at all its contract manufacturers, information that enables the company to make better use of existing inventory that may simply need to be repositioned. "We can see if some sites have excesses while others are experiencing shortages," says Wood. "In that case we can move material around rather than making additional purchases, which can mean significant savings."

Repositioning inventory within the group that manages application specific integrated circuits (ASICS) was one of Teradyne's first uses of the glass pipeline technology. ASICs are custom designed integrated circuits and are very complicated and expensive components. When this group took the feeds from all of its contract manufacturers and looked at them together, it was able to identify supply and demand imbalances between factories and reposition inventory to compensate. "We have $9m of projected consumption of these parts spread across 20 part numbers just over the next 13 weeks," says Wood. "When you have that kind of money flowing into contract manufacturers, it is worth putting a little extra effort into managing it."

 

Supplier Relationships

As the company began to get better visibility to this information, it saw the need to revamp the way it worked with suppliers of such high-dollar parts. To address that issue, the company formed a "heavyweight internal supply chain team" called Supply Chain Express that, at its peak, numbered 27 people, including Wood. "This was a fairly large team because we were inventing processes and reengineering how we managed this part of our business," Wood says. A major result of this work was to move to a demand-pull strategy on high-dollar parts, as opposed to an MRP-driven push strategy, he says. Specific suppliers were targeted "because it takes a fair amount of work to do this and you just don't have the energy to do it with everyone," says Wood. Suppliers with the most critical parts and longest lead times were targeted, as well as suppliers that make components unique to Teradyne. "These are parts that can't be sold to anyone else," says Wood. "If they made them and we walk away, they are stuck."

Teradyne began working closely with these suppliers to understand how they build product and to try and find ways to improve cycle times. "Sometimes they might be able to change something to speed production, maybe implementing lean practices or building things in parallel rather than serially," he says. "A lot of times the supplier knows that it's something they need to work on; we just give them a good excuse to do it."

A second step involves going through the bill of materials, looking especially at those parts that are unique to Teradyne. "We build a model using homegrown software that I wrote," says Wood. "It is an MRP type planning calculation, except that it uses kanban or a pull paradigm. We start with the demand for the end item that we need from the supplier."

That picture of demand is available "because we have all of our contract manufacturers' data in the Kinaxis system and we can see the demand for components," says Wood. A module of the software called Supply Consumption also provides visibility to what is driving demand, enabling planners to intervene manually to edit figures if they see the need. "We take the demand and convert it into a weekly run rate-an average demand for the week," Wood explains. "That's what you use when you do a kanban calculation, which is a function of the weekly demand rate, the lead time and variability of demand. So we size the kanban and then we convert that to what we call an authorized quantity."

In many cases the supplier is authorized to stock this amount of finished goods, which Teradyne is committed to buy, Wood says, but he adds that this quantity does not represent what is on hand at any given time. If a contract manufacturer has just pulled a large order, for example, the on-hand quantity will be low, "but the idea is that whenever you ship some you launch an order to build more. You really should think of it as a kanban loop quantity," he says.

This same process is carried through to the next level of supply as well. "This is a fairly standard kind of calculation for figuring out demand pull systems," says Wood, "but because our business is so volatile, it is not a typical case for doing demand pull. Most of the text books would say that a business like ours would not have great success using a pull system. They tend to say you have to smooth your master schedule and do the same quantity every day to make it work." To compensate for business volatility, Teradyne re-sets its kanban quantities every month, he says.

This program has a number of benefits for suppliers. Instead of getting an order here and there and having to produce in an on-again, off-again fashion, they see a longer-term commitment from Teradyne. "Also, we work with them on things like economic lot sizes, so they can be a little more efficient in how they build," says Wood. "And instead of having a purchase order and a fairly long lead time, we have a situation where if our demand stops, they stop building. In the old purchase-order system, they would keep right on building and would end up having to shut down the factory while we used up three months of inventory."

No matter what you do, he stresses, "if demand is cut in half almost overnight, you are going to have a problem. But this does smooth it out somewhat."

Teradyne benefits from the program by having shorter lead times, whether it or the contract manufacturer is ordering the part, says Wood. Instead of total procurement time, lead time is reduced to transit time or, on configured products, transit time plus final assembly. "Of course, you hope that by doing some of the lean practices and getting suppliers to work more efficiently, you can cut the cumulative lead times as well," he says. "And the way we size these authorization quantities, there is a buffer built in that covers variability, which effectively means there is a little more material in the pipeline than there would have been with standard MRP. Therefore, when our business takes off, we have some material around."

Wood cites a real-life example to illustrate this point. "We have a supplier that makes a very expensive, long lead time assembly for us," he says. "Last spring, we had a big boom in demand. Because we had pre-authorized and staged the parts, there was no problem with ramp-up. Now after our demand went up, it went down just as much and we also were able to manage the down side pretty well. We may have been liable for some parts but we didn't have a warehouse full of them."

About a year earlier, he says, the company had a similar situation "that left us with something like $1m worth of parts in our stock room doing nothing. So this latest example was a real tribute to Supply Chain Express."

Another advantage to the program is that Teradyne is liable only for the components, not for the full value of the end items. "The Supply Chain Express methodology has reduced our liabilities with suppliers by 25 to 30 percent," he says.  "That could easily total $3m or $4m just with the suppliers that we have in the program now, but I think the figure is bigger than that."

Even suppliers that are not in this targeted program benefit from the visibility to contract manufacturing operations that Kinaxis provides. "We send forecasts every week to a large number of suppliers out of the Kinaxis system and suppliers use that to pipeline material or to plan their capacity," says Wood.

Teradyne planners also use the tool to send forecast restatements to let suppliers know exactly what is needed to meet existing orders, he says. "Our planners love the fact that the tool allows them to bump the data out into an Excel format and fiddle with it," he says. "It would be nice if all the data in the system were perfect but it never is, so a planner can put it into the Excel format and tweak the numbers or add comments. It really helps them manage their suppliers."

Other departments in Teradyne have found uses for Kinaxis as well. One is a small group that focuses on discontinued parts. "Even though we are in the high-tech business, our systems are in the marketplace for a long time and inevitably there are instances where a supplier discontinues a component part," Wood says. The group managing this uses Kinaxis to help calculate last-time buys. "This can be tricky," says Wood. "If we run out we are in trouble but if we buy too many we end up with a big write-off."

With Kinaxis, the planners working this problem can simulate different demand scenarios to see the various implications. They can do this literally in seconds, Wood says. "The software has a very clever engine that can re-plan very, very fast. If we tried to do something like this in our Oracle ERP system, it would be an overnight run."

The software also is used for various types of internal reporting. "We have a fairly substantial need for reports because we have different groups of people in charge of different product lines and we want to know what is going on with each line," says Wood. "If you want to know what your obsolescence exposure is, for example, you want to see that by product line. The Kinaxis Supply Consumption tool does that with relative ease and speed."

Another group within the company spends lot of time worrying about financial and operational measurements related to inventory, such as reporting liabilities to suppliers, he notes. In this case, a liability is a purchase order or contract term that obligates Teradyne to pay the supplier at some future date or inventory being held by Teradyne or at a contract manufacturer. "So this group also does a lot of reporting-things like how much inventory is on hand and on order and how it is going to burn off," says Wood. Again, Rapid-Response provides much of the data. "It even gets into financial statements, because we have to set reserves and inventory write-offs, and we have to report our liabilities in the financial statements as footnotes. We use RapidResponse to do all of that. Also we make use of the simulation capability to help us determine the appropriate estimate of future demand to use for financial reporting."

Overall, 10 groups within the company using RapidResponse in some way. "It's really kind of pervasive," says Wood. A big reason is its ease of use, he says. "People will use RapidResponse instead of Oracle because it is so much easier," he says. "As someone who has worked in IT, I can understand that. Getting good reports out of IT is very difficult and expensive and it takes forever. Rapid Response is much more user friendly."