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2/17/2005
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Chipmaker Moves To Minimize Supply-Chain Risk

Making big bets on capacity and waiting to see if demand matches them is a risk ON Semiconductor wanted to minimize.

The issue of how to manage risk in the supply chain is the next big challenge facing supply-chain managers. For ON Semiconductor Corp., which supplies customers such as DaimlerChrysler, Nokia, Siemens, and Sony with thousands of chips, making big bets on capacity and waiting to see if demand matches them can be risky. ON Semiconductor implemented Vivecon's predictive-analytics software to make better investment decisions and to reduce risk in its production capacity.

Manufacturing semiconductors is complex and consists of both front-end and back-end processes, which are often outsourced to reduce costs. In order to create power semiconductor devices that go into computers, cars, cell phones, and virtually all electronic devices, ON Semiconductor first has to manufacture silicon wafers either internally at one of its wafer-fabrication plants or by outsourcing to another manufacturer. The wafers are then assembled into packages at one of ON Semiconductor's packaging locations and sold either directly to its customers or through one of several distribution channels.

Pieces of silicon chips will fly back and forth across the ocean two or three times before they become finished products. "So we need sophisticated software to drive cost competitiveness in our market," says Sal Barlett, director of operations at ON Semiconductor's Integrated Power Group. "The software plays a critical role in helping us make capital decisions."

ON Semiconductor's Integrated Power Group piloted Vivecon's Launch Manager in December to manage risks associated with uncertainties in demand and instability in the marketplace. During the pilot, Launch Manager helped the supplier make tradeoff decisions instead of simply reacting to events, Barlett says.

The software recommended the best possible amount of production capacity for wafers to limit ON Semiconductor's initial investment in capacity, allowing the company to add capacity as needed. It also sent out alerts in case of constraints, provided capacity-expansion recommendations, and structured options for capacity expansion in the event of rising demand.

In the past, ON Semiconductor planned multiple scenarios at the beginning of the year and didn't invest in capacity before having demand for it. Now it can define demand uncertainty using Launch Manager to make better capital decisions, set up its outsourcing time checks, and monitor its supply chain on a regular basis. Ultimately, ON Semiconductor will use the software's forward-looking monitoring capabilities to get an early warning of future capacity shortfalls, Barlett says.

Over the next two months, ON Semiconductor will use Launch Manager to make eight capital decisions, and the company expects to reduce capital costs 9% to 15% using the software, Barlett says. "The basic concept is to minimize our overall supply-chain costs."

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