Born in the late 1950s, Fairchild Semiconductor is the granddaddy of all semiconductor producers. Its techniques formed the basis of the information technology revolution. But 40 years later, when Fairchild began looking for a supply-chain system to manage orders and inventory, it had no history on which to draw.
"It was a greenfield," recalls retired Army Gen. John Watkins, now senior vice president and chief information officer of South Portland, Maine-based Fairchild. In 1997, the company was spun off from National Semiconductor, which had purchased the unit 10 years earlier from the French conglomerate Schlumberger. All of a sudden, the former high-tech maverick was on its own again. It needed a raft of internal systems with which to compete in the cutthroat world of semiconductors.
Overseeing the changeover was Kirk P. Pond, former chief operating officer of National Semiconductor, who became chairman, president and chief executive officer of the newly independent Fairchild. From a customer standpoint, he had to keep on serving some of the biggest names in high-tech manufacturing, including Dell Computer, Sony, Motorola, IBM, Boeing, Chrysler and Cisco Systems. Yet it wasn't a question of business as usual. Fairchild had to devise a more efficient way of managing global inventories and filling orders, in an industry whose margins were rapidly shrinking.
Pond had a bit of grace time; he was able to piggyback off the information systems of former parent National Semiconductor for the first 18 months. According to Watkins, however, the "startup" harbored a greater vision. Pond not only saw growing demand for Fairchild's existing devices, such as diodes, transistors, switches and transceivers. He predicted a big market for emerging power devices, found today in everything from home appliances to aircraft. That strategy culminated in the purchase of Samsung Electronics' Power Device Division in 1999.
The current high-tech slump hit Fairchild at roughly the time it was struggling to reinvent its supply chain. But Pond knew the semiconductor business runs in cycles of five to six years, swinging from a dearth of orders and a glut of inventories to a market where producers can't hope to meet demand. The goal, says Watkins, was to put into place a system by which Fairchild could book, build and ship orders to customers in the same day. The company would gain market share even in slow times. And it would be in even better position to compete, once conditions improved.
Many such projects succeed or fail based on key decisions made at their onset. Watkins, who spearheaded the supply-chain project, saw it primarily as a people issue. "One of the best things we did," says implementation leader Linda Linehan, "was put ownership for the success of the project on the business side of the organization." Leaving it in the hands of IT experts would have ignored the need for process change company-wide, she says.
Watkins's philosophy stems from 26 years in the military, including stints as director of the Defense Information Systems Agency and commanding general of the Information Systems Engineering Command. That experience, he says, translates easily to the private sector. The key in all cases lies in "the way we leverage human capital. You make sure you position the right people, train them, and empower them to do what needs to be done."
An intensive review of vendors ended with Fairchild's choice of two software partners. PeopleSoft Inc., headquartered in Pleasanton, Calif., provided the enterprise resource planning backbone for financials, manufacturing and human resources. Dallas-based i2 Technologies Inc. was the supplier of choice for multiple supply-chain planning and fulfillment applications.
From PeopleSoft, Fairchild got an ERP system that oversees the entire order-to-cash cycle, says Char Jorgenson, the vendor's director of customer fulfillment management strategy. John Webb, vice president of product management, adds that Fairchild was attracted by PeopleSoft's determination to move away from the client/server environment and embrace the internet.
Pattern of Upgrades
In fact, Fairchild first acquired a fairly primitive version of PeopleSoft's product, and has since upgraded to one with far more functionality, Webb says. The newest version combines more order-management capabilities with a portal that is open both to suppliers and customers of Fairchild. It allows for pricing flexibility, the creation of buying agreements, and a substantial amount of customer self-service for routine tasks such as order status. In addition, the new software involves multiple "bolt-on" applications, bypassing the heavy customization on which Fairchild insisted for the original implementation.
PeopleSoft also provides supply-chain execution capability, including warehouse management, along with a customer relationship management module that can pull data from a variety of databases. The PeopleSoft system integrates smoothly with those of i2, Jorgenson says.
"Don't underestimate the importance of the data and business-process change required. Some of our planners had been doing this for 20 years."
Watkins says Fairchild was drawn to i2 in part because of the vendor's deep experience in the semiconductor industry. In fact, i2 had developed a generic semiconductor template for supply-chain optimization. And that was fine with Fairchild. Having experienced the pains of customizing the PeopleSoft system, the company was determined to "buy off the shelf, and implement vanilla," says Linehan. Rather than build modifications into the system on the spot, Fairchild preferred to have i2 incorporate them into subsequent upgrades, which became part of the vendor's standard industry offering.
One enhancement of the i2 Demand Fulfillment module was potential replaceable inventory (PRI), which gave Fairchild the ability to recommit a long-term order to an immediate customer, then replenish the item in time to ship it to the original buyer. That has helped to reduce standing inventory and shorten order cycles, according to George Tometich, director of i2's high-tech global services organization. Another change modifies the frequency of Fairchild's planning engine from weekly to daily, to keep factories better informed of the latest orders.
Fairchild started out with i2's Demand Planner, a relatively straightforward forecasting tool, throughout the organization. It was vital to have accurate demand data, which feeds into the master planning and demand fulfillment systems, says Dave Kayton, i2's high-tech program manager.
From there, things got more complex. i2's Master Planner and Demand Fulfillment modules were first tried out in Fairchild's Interface and Logic Division, which makes such devices as receivers, clock drivers, buffers and logic gates. One of four major Fairchild divisions, Interface and Logic accounts for just 15 percent of the company's business, making it a relatively easy place to start. In addition, the unit had the greatest number of staffers based at headquarters, where they could aid in implementation.
A Slow Beginning
Even so, that first major stage took longer than anticipated. Begun in September 2000, the whole project was supposed to last two years. But it took a full year just to implement Master Planner in the Logic Division. Fairchild had built itself into a $1.4bn company through acquisitions, notes Watkins, and each unit had its own way of doing things. He spent a great deal of time getting "buy-in" from employees around the world.
"Don't ever underestimate the importance of the data and business-process change required," Watkins says. "Some of our planners had been doing this for 20 years. They needed convincing that a system could do it better than they can."
After that, things went more smoothly. Two more divisions - Analog and Discrete - came online with Master Planner and Demand Fulfillment within six more months. That left only the Power Device Division (PDD), formerly of Samsung, which presents Fairchild with its biggest implementation challenge.
The division's size is a major reason; it accounts for half of Fairchild's sales. Another is the culture issue. With most of the division's staff based in South Korea, the company is likely to be dealing with a substantial difference in business practices. Finally, Fairchild has had to spend time migrating the PDD from another vendor's ERP system to that of PeopleSoft.
Still to be resolved as of early January was precisely how Fairchild would integrate PDD's data volumes into the system. One alternative was to create a separate planning engine. Another was to scale up the planning algorithm within a single engine, which would output daily results for all of Fairchild. Tometich says the single engine is the more desirable approach, but that in any case the company expects the i2 applications to go live in the PDD within the first half of this year.
Even in the early stages of the project, the benefits were evident. Receiving more than 4,300 new customer queries following the implementation, Fairchild saw a 10-percent improvement in matching deliveries to request dates. After just 10 days, the revenue impact was around $100,000, the company says.
Linehan says Fairchild has already achieved dramatic reductions in inventory reductions, along with increased turns. Inventories in the third quarter of 2002 dropped by $3.4m, down to 68 days from 71. It was the sixth straight quarter of reductions in inventory days.
At the same time, turns have gone from just over three to around five and a half. i2 has defined a "best-in-class" level of 7.5 turns for the semiconductor industry. "We're definitely on our way," says Linehan.
Fairchild's administrative burden has been considerably lightened. For example, at its Hong Kong sales office, four staffers used to spend up to three days planning inventory shifts between locations. Today, that process takes less than 30 seconds.
i2's Demand Fulfillment module allows Fairchild to deviate from fixed lead times, Kayton says. In the past, the company might lose a sale because it couldn't promise the order in time. Or it might quote an unreasonably short period of availability. Either way, it was operating out of ignorance about real conditions. Now, with better visibility of global inventory, it can quote accurate lead times.
Continued performance monitoring is essential. Fairchild relies on an "Executive Dashboard," which gives executives a global, real-time view of customer demand, inventory availability, shipment status and sales levels. To keep users from being inundated with data, the system is based on exception reporting, triggering alerts when something goes awry. "We don't want to get involved in micro-management," says Watkins. "We only want to see when things are moving outside of tolerance."
The need for data varies according to the user. An automated series of some 14 slides offers a wealth of information, but managers can choose what they want to see. The system is available to every key leader in the company, from the executive suite to sales offices at overseas locations.
Many of the innovations have a direct bearing on the customer. With better information, Fairchild has acquired the ability to ship product on the same day it's ordered. But it can also adjust to customers' varying needs.
Most place orders in a 26-week window, says Watkins. They might simply want to know the status of those orders as they draw closer to taking delivery for the assembly line. Mere visibility can help to maintain just-in-time fulfillment pipelines - while calming the nerves of jittery customers.
Last year, Fairchild introduced Direct Ship Plus, which allows for the shipment of product from plant to customer, without relying on excess inventory at regional warehouses. It also reduces the need for suppliers or third-party logistics providers to maintain large caches of inventory under vendor-managed inventory programs.
Direct Ship Plus was launched at Fairchild plants in Penang, Malaysia; Cebu, the Philippines; and Bucheon, South Korea. For the first time, customers could draw on inventories from virtually any location in the world, receiving product in three days or less. Such a program wouldn't have been possible without the visibility afforded by the new software packages.
Also high on Fairchild's project list is an electronic business initiative. Launched just over two years ago, it is designed to transfer the bulk of the company's processes, including production planning, ordering, tracking and customer service, to the internet.
Three years ago, most of Fairchild's business was done by phone, fax and e-mail, Watkins says. More than 70 percent is handled electronically today, and the number is rising. Supply-chain reengineering is a major reason, giving managers the ability to view over the internet competitive information from around the world.
Having focused most of his efforts to date on the customer side, Watkins plans to implement a system for electronic procurement. He expects big savings through a coordinated, global buying program of basic supplies. "That's the next major initiative in e-commerce," he says.
i2 and Fairchild are jointly exploring several new areas for change, Tometich says. One is an even more sophisticated inventory-planning package. Fairchild is looking to automate a concept it calls supply-chain characterization, by which it assesses the impact of changes in demand, factories and cycle times on underlying costs and customer support. Tometich also sees the possibility of tighter integration between Fairchild and its customers on demand signals, forecasts and purchase orders.
As for PeopleSoft, it wants to talk to Fairchild about improvements in such areas as strategic sourcing, using collaborative requests for quotation (RFQs) and reverse auctions, and analytics tools for better performance measurement across the enterprise, Webb says.
The most remarkable thing about Fairchild's supply-chain effort might be that it continues to exist. Like all semiconductor producers - indeed, all high-tech manufacturers - Fairchild has been weathering tough times. It started losing money in 2000, about the same time it began implementing those pricey supply-chain optimization systems. Since then, it has seesawed between profit and loss on a quarter-by-quarter basis.
Another company might have backed off from a big investment in supply-chain optimization. Many executives have shifted their limited IT budgets to execution-based systems, such as transportation and warehousing, which are generally cheaper and show a much faster return on investment.
Watkins expects full payback on the i2 systems in less than three years - not an unreasonable goal, but an eternity in the minds of many modern-day chief financial officers. Today, the company remains on schedule, if not slightly ahead of itself, and on budget. "This is best time to be implementing a supply-chain system," says Linehan. "When activity is down, it's easier to get the kinks out."
Apparently, top management agrees with her. Watkins says the budget for the massive i2 implementation remains protected (as it does at i2, where a recent wave of layoffs might otherwise have jeopardized the project). All this despite what Watkins acknowledges as "the worst downturn in the history of semiconductors."
Recent developments have shown a glimmer of hope. Pond has warned investors that 2002 fourth-quarter revenues will be flat or down by as much as 3 percent. Yet inventories continue to fall, and distribution channels remain lean. Pond predicts that 2003 first-quarter revenues will also be down, with a big percentage gain in gross margins by the end of this year.
Watkins says Fairchild will continue to focus on the long term through better supply-chain planning and optimization. At times like this, he says, "You don't slow down. You accelerate."
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