Outsourcing: A Strategic Edge

How to evaluate, manage and strengthen relationships with outside vendors

By Eric Newton, Director of Operations Crossing Automation, Inc.

Abstract

Outsourcing as a business practice has evolved beyond the short term, cost saving transactional “build to print” model into a virtual total manufacturing and support model. Outsourcing not only reduces asset and operational costs, it accelerates time to market, enable fast ramp up of production and help survival in the inevitable market fluctuations in our industry. To be successful, a seamless relationship must be developed. The outsource supplier must be a virtual “department” of their customer. They must look, act, feel and respond as if they are one company.

Introduction

Outsourcing as a business practice is evolving from a simple transaction “build to print” paradigm into a multi-dimensional relationship that can embrace all elements of product development.

By collaborating with others, opportunities are available for the original equipment manufacturer (OEM) to enhance core competency, improve product delivery, rapidly deploy talented engineering resources, manage inventories and add to the bottom line. Better still, these opportunities exist in local venues, not in a different time zone or on a different continent.

Crossing Automation, based in Mountain View, California, is an ideal candidate for an outsourcing relationship. A leading developer of automated wafer transfer systems, Crossing Automation delivers engineering talent, manufacturing management, and highly re-usable yet customizable systems to leading semiconductor equipment manufacturers who prefer to focus their investment on their core competencies.

The purpose of this position paper is to submit our view of outsourcing trends in the semiconductor industry. We propose arguments to support outsourcing, and list the criteria we believe will ensure a successful business relationship.

The Popularity of Outsourcing as a Business Alternative

In cubicles and around the water coolers of any high tech industry, outsourcing is generally regarded as a negative issue, primarily as it represents the export of jobs and manufacturing capability. At the same time, boardroom and management discussions dwell on the positive impacts of outsourcing on the bottom line.

Despite the attraction of inherent cost savings, acceptance of outsourcing in the semiconductor industry lags, compared to other industries.

One reason, according to Jeffrey Macher in his empirical study “Practices and Performance in Semiconductor Manufacturing”, may be simply the complexity of our business. In the conclusion of his benchmark study, he states:

“Even the replication of a complex technology within a single organization is a demanding task. Given such compelling evidence of the problems of intrafirm transfer of technology, it is hardly surprising that the resources and capabilities emphasized in the resource-based view remain so highly “embedded” in the firm.”

Yet as we experience the cyclic nature of the industry, respond to the challenges of new technology, push for ever decreasing process nodes, and address the high expectations of our customers and the consumer, we believe that outsourcing is a powerful strategic process.

Although it is not as popular in the semiconductor equipment manufacturing industry, outsourcing is not a completely new concept, nor is it insignificant. The Manufacturing Market Insider once measured the outsourcing market in the semiconductor industry to be in excess of $100 billion. Not bad, but there is room for growth.

The common justifications for outsourcing are cost reduction and accelerated time to market. For decades, “build versus buy” decisions have been critical processes for any company’s product development cycle. But as Macher points out, such decisions are tougher in the semiconductor industry for a number of historical reasons:

• Our knowledge-rich business environment discourages widespread collaboration.

• There is a lack of understanding (or at least forethought) of the total cost of the strategic decision.

• Customer service is diminished.

• Once a customer makes a decision to adopt outsourcing as part of its development plan, in-house resources and core competency depart. Recovery of those assets is painful and slow, so decisions to outsource are regarded as non-retractable.

Like everything else, though, times and attitudes change. We observe the performance of outsourcing in other industries, and note their successes and failures. We notice how collaborations have been established in Asia and Europe, and note their growth as a result. We see the compressed time to market schedules from others in the industry, and we are eager to compete.

As Harry White, president of Momentum Computer, acknowledged:

“It’s no longer enough for one company, no matter how large or small, to come up with a great idea, develop and prove every aspect of the design, set up manufacturing processes, and send the product to market.”

One company cannot do it alone. There is a growing requirement for companies to partner with a diverse group of collaborators, competitors and “co-petitors” (competitors that collaborate on addressing technical challenges) that comprise the semiconductor capital equipment industry. One product launch can contain a chain of interdependent companies. At Crossing Automation, we define our link in the chain as an OEM of integrated wafer transfer systems. We identify leading semiconductor equipment manufacturers as our customer. To strengthen our position in the supply chain, we develop outsource relationships with suppliers that are upstream of the development process.

Outsourcing is a Practical Strategic Operations Tool

Reduce asset and operations cost

In the good old days, the role between the customer and supplier was simply “build to print” (Figure 1). The relationship was a transaction. The OEM designed the product and issued the drawings and/or specification for competitive bid. A chosen few of the qualified suppliers bid on the project. The low bidder got the job. The OEM received the part and built it into the core product.

Figure 1: Traditional Outsourcing relationships were focused solely on procurement.

With a more sophisticated out-sourcing relationship, an OEM can reduce costs even further. If the long term decision is made to outsource manufacturing of non value-added products, there is no need to invest in the similarly non value-added assets required to manufacture the products in-house. Capital expenditure is thereby reduced.

The OEM’s responsibility for inventory control is also reduced. Accountability to maintain inventories is transferred to the supplier, while the liabilities for the inventory levels can be negotiated.

Naturally, as these fixed costs are re-directed, the resulting savings accrue in infrastructure, such as manufacturing, shipping and receiving, and procurement . The task is a less complex supply chain management issue.

Product cycle times are less as well. Since the issues of asset and resource assignments are someone else’s responsibility, cycle time is simply reduced to the agreed delivery of the outsource product to the OEM.

The decision to outsource may be complex, but the rewards of cost reduction and simplification are significant. When done correctly, this enables an OEM to focus more on core competency and its value added contribution to the industry.

Accelerate time to market

Another time-tested virtue of an outsourcing candidate is their ability to accelerate a successful and timely launch.

Every company faces the same challenge when a new product introduction is considered. New products are a natural tool for organic growth, but success is determined by many factors, including the perceived value of the product as well as its time to enter the market. It is worth the effort to seek an outside supplier of components, accessories, and sub-units; as there may be a turnkey solution to an integration problem that will strip weeks or even months from the launch schedule.

Furthermore, an outsource supplier delivers their own core competency to challenges that the OEM may not have the time to develop. For example, a contract manufacturer will have in place all of the necessary (and time consuming) compliance resources in order to comply with CE, UL, and RoH S requirements.

A good example of accelerated time to market comes from Cisco Systems. As a manufacturer of literally thousands of electronic products for the backbone of the Internet, they chose Speck Design Group for the mechanical engineering portion of its 12000 series gigabyte switch router. Cisco definitely had the talent on hand; they simply did not have the time to put an in-house development team together.

A good outsourcing supplier can fill the critical path gaps in your organization. The gaps may include design, development, manufacturing, or simply the ingenuity needed to rapidly bring a product to market. Rather than construct from the ground up internally, it is faster to look outside of the company. Such is the case when Microsoft went out to Flextronics for the design and manufacture of the Xbox gaming console. As a software company, Microsoft was not prepared to sacrifice the time to become an electronics company in order to enter the game box business.

In both of the Cisco Systems and Microsoft cases, each definitely had the resources to invest in teams to develop the product in house. However, they made the conscious choice to partner with an outsourcing supplier in order to rapidly achieve success.

Anticipate a faster ramp up

Success is fun. Your customers love your idea. Orders pour in. The bad news is that orders pour in too quickly. The challenge is to deliver on time and maintain quality.

With your outsource supplier on board, manufacturing expansion is not solely your responsibility. Your outsource supplier  has their own well developed relationships with their suppliers (or even with your customer’s approved suppliers), already has an integrated quality program, and has the foresight and the resources to be ready when the orders flood in. Resources are available to support growth when it comes.

An important asset for an outsource supplier candidate is to be able to anticipate, demonstrate, and apply the scalable infrastructure and procedures required to enable a fast ramp up. It is important for all parties to be aware of them, that they are in place and proven before the cascade of orders arrives.

An outsource supplier may spread its presence horizontally, occupy a niche or sub niche, work with several customers in the same industry, or even have a presence in other industries. The result is that their volume of business is already larger, and already has access to larger volumes of raw materials. What may seem as a deluge of orders to an individual customer may be an easily handled (and welcome) increment to an outsource supplier that delivers similar components elsewhere. The required additional labor and tooling is simply shifted from one area to another. Supplier and customer thereby benefit by the economies of scale and avoid the agony of extended backlogs.

Enjoy protection from market fluctuation

An outsource supplier can definitely suffer from market fluctuations. However, effect of a down cycle may not be as significant as it is for the OEM that “goes alone”.

The overhead of manufacturing infrastructure is the supplier’s responsibility. They have the ability to shift people and machinery from one product line to the other. If an outsourced supplier is involved in a number of different market segments, the decrease in business in one market is buffered by the stability, or perhaps increases, in another. They can re-deploy assets to accommodate their respective business cycles.

How Crossing Automation Contributes to Your Success

Currently, the wafer automation paradigm is for highly customized robotic transfer systems for each individual cluster tool. Crossing Automation’s approach is significantly different, in that a number of interchangeable and re-usable components are integrated to address an infinite number of wafer automation architectures.

Figure 2: Crossing Automation delivers integrated subsystems and manages supply chains.

During the development of our subassemblies, as well as in system integration projects, we have fostered strategic partnerships with other firms in the industry (Figure 2). We are adopting the following business practices that will contribute to our success.

Utilize World Class Contract Manufacturers

Contract Manufacturers have become a major part of the manufacturing landscape over the past ten years. Their experience, capability and worldwide presence, make them an attractive alternative to the vertically integrated equipment suppliers. In addition to recognized quality, compliance and delivery performance, their low cost overseas manufacturing capabilities make them a very attractive alternative for a start-up as well as an established company. The capability to  build locally, and then transfer manufacturing under an ISO process to low cost regions of the world, ensure that the lower cost and comparable quality will be maintained. Order visibility, communications and a strong supply chain are also critical components to the selection process and are vital to ensure success.

Integrate Resources & Extend Global Reach

Development of the next generation product is not sufficient for success. It is just as critical to apply considerable resources to manufacturing, delivery, and after market service, especially when the product is distributed world wide. We leverage our experience to develop alliances with other leading manufacturers in order to offer responsive, high quality, and scalable world class manufacturing capability.

One benefit of the 21st century is the burgeoning growth of tools and global resources for specialty manufacturing. Crossing Automation is experienced, trained and ready to utilize these resources in order to deliver products world-wide.

Enables Focus on Your Core Competencies

Our objective is to allow you to focus clearly on “Results on Wafer” which is typically driven by value added to the process module. We replace the current standard of highly customized and expensive wafer automation with systems and components that are far less complicated to manufacture and require no complex motion control hardware and software. As specialists in wafer automation, we have invested more into development of systems, and have implemented reusable components in order to accelerate development, increase reliability, and reduce cost.

For many of our customers, the process is the value-added portion of the tool. Wafer transfer is simply a necessary but time consuming task to efficiently move the wafer from one process to the next.

By allocating wafer transfer design and development upstream to your supply chain, your focus is concentrated on your key core competency, the process. Crossing Automation delivers components and systems integration solutions for any wafer transfer architecture.

Evaluate Progress with Appropriate Data

In the traditional, “procurement only” outsourcing model, the metrics of cost and delivery were primary factors in supply chain management. The vendor with the best quoted price and delivery received the business. Although these metrics are still important, they tell only part of the story in more sophisticated business relationships. The supplier with the best price and delivery may lose favor if different metrics are applied to evaluate the business relationship.

At Crossing Automation we believe the success of a good relationship is data-driven and includes comprehensive and meaningful metrics that are agreed upon in advance. Aside from the typical price and delivery statistics, we have found that these metrics are just as important:

• Quality. Does the system meet industry standard quality guidelines? Is there a mutually agreed quality control process? Is there a policy favoring continuous improvement?

• On time delivery. Is there a history for good performance against an agreed delivery schedule? Is there a visible and responsive way for the vendor to track delivery? Is the supplier responsive to emergency delivery requests?

• Performance against DFM: does the outsourced product comply with the customer’s standard for excellent manufacture?

• Reliability: Does the product have a lower than anticipated failure rate? Can the product simplify the maintenance requirements? What documentation does the vendor offer to assist in long term operation?

• Cycle Time: Does the outsourcing supplier respond well to engineering changes? How difficult is the process to integrate the product? Are products able to be ordered and delivered in 30 days.

• Inventories: Is inventory management small enough to be cost effective, yet large enough to avoid delivery problems?

Every business relationship is different, yet Crossing Automation gladly submits these metrics as a visible, progressive, and accurate way to monitor progress.

Monitor Progress in Real Time from Your Desk

There is a burgeoning availability of productivity tools available to help businesses keep their clients up to date on progress.

On the business software side, both SAP and Oracle have introduced on-demand business products that assist any size of business; you do not have to be a Fortune 500 company to enjoy the benefits of good business software.

As the Internet continues to evolve, incredibly useful (and secure) business tools become more useful and economical. And one of the many benefits of the Internet is that visibility is available 24 hours a day, seven days a week.

Numerous order processing packages are available to enable customers to securely use the Internet to monitor progress of their order from a dashboard interface on their computer. Order entry and parts availability is in virtual real time. Order sites are easily encrypted and password controlled, to ensure privacy and eliminate the risk of competitor interference.

Keep Continuous Contact

The traditional communication path between two companies was between the salesperson and the buyer. The salesperson submits a proposal, the buyer accepts it, and the terms and conditions of the proposal are the basis of the business relationship.

That communication pathway worked when the relationship was strictly a transactional one. However, more complex relationships require more sophisticated communication pathways.

Crossing Automation joins many other progressive companies by adopting a communications strategy whereby we are an “invisible department” within the company. The relationship can be so close that we are essentially an extension of your enterprise.

The most effective communication pathway between customer and supplier is one that is transparent and fast. Counterparts in each organization must know how to reach each other and to effectively communicate their needs. The level of detail of reports must be well understood. Supply chain data must be comprehensive, readily available, and clearly understood by everybody.

Conclusion

Out sourcing began as a rather simple cost saving model. Over time, though, the practice has matured into a catalyst that improves time to market, enables more resources to focus on core competencies, and adds value to the final product. Certainly, business tools have also evolved to make the relationship between the OEM and outsource supplier into a much closer relationship, to the point that an outsource supplier is essentially perceived as an “invisible department” of the OEM.

At Crossing Automation, we have seen first hand how this new paradigm has improved our business. We are very pleased to share our experience, and look forward to mutual success.

About the Author: Eric Newton, Director of Operations of Crossing Automation, Inc., has 25+ years expertise in semiconductor and semiconductor capital equipment.