Agile Manufacturing: Competitive Advantage for Semiconductors Industry

Sixteenth Annual Conference of POMS, Chicago, IL, April 29 – May 2, 2005

Abstract Number: 003-0048

Title: Agile Manufacturing: Competitive Advantage for Semiconductors Industry

Lee Gan Kai William

Singapore Institute of Manufacturing Technology (SIMTech), 71 Nanyang Drive,

Singapore 638075, Singapore

Email:

Phone: +65 6793 8265

Fax: +65 6791 6377

Tim S. Baines, Benny Tjahjono

School of Industrial and Manufacturing Science, CranfieldUniversity, Cranfield,

BedfordshireMK43 0AL, England

Email: ,

Phone: +44 (0) 1234 750111 (ext 5484, 5453)

Fax: +44 (0) 1234 752159

Abstract: Semiconductors industry has been the heart of transformation of advanced economies. The economic network resulted from this industry has also been widely recognized as a powerful generators of wealth, employment, and innovation. In the light of the global trends of shortened product lifecycle, increasing product customisation, high demand variability and increasing expectation of lower leadtime, agile manufacturing strategy has been proposed as the key to achieve competitive advantage in the semiconductors industry. This paper identifies the research gaps in the area of manufacturing strategy for semiconductors industry through literature review of agile manufacturing strategy and critical review of the challenges, opportunities, and the technology and globalisation trends facing this industry. Through the analysis of operational effectiveness versusstrategy, agile manufacturing has been identified as the manufacturing strategy for attaining sustainable competitiveness in the semiconductors industry. Research gap for agile manufacturing research is also discussed as a foundation to guide future research in the application of agile manufacturing strategy for semiconductors industry.

Keywords:Manufacturing Strategy, Agile Manufacturing, Agility, Manufacturing Strategy, Semiconductors, Competitive Advantage.

1Introduction

The semiconductors industry has been at the heart of the transformation of advanced economies of the West, powering firms such as Intel, Sun Microsystems, Texas Instruments, and IBM to the world's technological frontier. The economic networks such as those of Silicon Valley that link these firms have been widely recognized as being powerful generators of wealth, employment, and innovation(Matthews 1999).

The industry has distinguished itself by the rapid pace of improvement in its products for the past 40 years and this growth has resulted principally from the industry’s ability to decrease exponentially the minimum feature sizes it uses to fabricate integrated circuits, commonly referred to as Moore’s Law (Moore 1965). However, this law seems to be running out of steam in the near future in face of the technical and physical obstacles in the current semiconductor technology (Yen 2004).

In this paper, an overview of the semiconductors industry will be presented. This is followed by discussions on the challenges and opportunities faced in the semiconductors industry as well as the technology and globalization trends influencing the formulation of manufacturing strategy for the coming decade. Importance of manufacturing strategy in achieving competitiveness is discussed with the contribution of productivity improvement and technological advancement in relation to Porter’s argument of operational effectiveness versus strategy (Porter 1996) for continual growth of the semiconductors industry. Finally, through the literature review of agile manufacturing strategy, discussion on industry challenges faced, opportunities for agile manufacturing strategy and review of research gap for agile manufacturing research, recommendation is made for future direction in manufacturing strategy research for agile manufacturing in the semiconductors industry to achieve sustainable competitiveness and growth.

2Semiconductors Industry Value Chain

The semiconductors industry value chain starts with the design of integrated circuits (ICs), performing with sophisticated computer-aided design tools. This results in the production of circuit diagrams in multiple layers, each of which is etched onto the silicon substrate of the chip. The value chain then moves through the production of specialized intermediates such as the silicon wafer and the masks. These are used to etch the pattern of the circuits on the silicon through a series of highly complex steps known as photolithography. The result is a finished wafer on which the ICs are found, built up through various layers of metal and semiconductor materials in silicon. The finished wafers are then proceed through the testing of the circuits, the cutting of the wafer to secure the individual chips, and their packaging onto plastic or resin substrates to form the familiar chips with their multiple leads for insertion into circuit boards(Wu and Chua 2004).

Figure 1 shows the structure of the semiconductors industry’s value chain from IC design to fabrication, testing and packaging with figure 2 showing the manufacturing process steps from the silicon ingots to the final tested and packaged chips that are ready to be shipped to distributors or placed in electronic products.

Figure 1: Structure of Semiconductors Industry Value Chain

Figure 2: Semiconductors manufacturing process steps (Source:

3Challenges and Opportunities for Semiconductors Industry

The semiconductor industry has distinguished itself by the rapid pace of improvement in its products for the past 40 years. This growth has resulted principally from the industry’s ability to decrease exponentially the minimum feature sizes it uses to fabricate integrated circuits, commonly referred to as Moore’s Law from Gordan Moore who famously predicted that the density of microprocessors would double every 18 months (Moore 1965). However, this law seems to be running out of steam in the near future in face of the technical and physical obstacles in the current semiconductor technology(Yen 2004).

Over the past two decades, the phenomenal increase in research and development (R&D) investments has motivated industry collaboration and spawned many partnerships, consortia, and other cooperative ventures. The International Technology Roadmaps for Semiconductors (ITRS) is an especially successful worldwide cooperation that presents an industry-wide consensus on the “best current estimate” of its R&D needs out to a 15-year horizon. Some of thesechallenges and opportunities highlighted in the recently published ITRS roadmap (Allan et al. 2002; Edenfeld et al. 2004)as well as the technology and globalization trends observed are presented for discussion.

3.1Changing Environment of the Semiconductors Industry

Over the years, the global semiconductor market has been growing at an average rate of 17% and it is showing no signs of slowing especially with the recent growth in mobile communications devices like mobile phones which dramatically raises the semiconductor content in these electronic equipment. Despite the general steady growth throughout the period, large year-to-year fluctuation in the annual growth rate in dollar terms is observed with cyclical variation from +40% to -8%(Claasen 1999). Primary reason for these variations is due to the price erosion of aging products which can be seen in the memory market for example. With each increase in memory size, prices start high and quickly erode as production ramps up, thus resulting in a continual drop in the cost per megabyte.

The continuous reduction in feature size and packing more bits/capacitors/transistors per year into a chip in accordance to Moore’s law of doubling functions per chip every 1.5 to 2 years is accompanied by a historical trend of reducing the cost/function ratio by 25 to 30 percent per year in the industry. This has resulted in the continuous need for enhancement of equipment productivity, increasing manufacturing yield and wafer sizes in order to increase the number of chips available on a wafer and achieve a lower production cost per chip. Other technological challenges also include (Hirose 2002)(Allan et al. 2002)(Edenfeld et al. 2004),

  1. Increasing power densities in chip that worsen the thermal impact on reliability and performance.
  2. Increasing noise and interference in ICs as prevailing signal integrity methodologies has reaches their limits of practicality.
  3. Increasing transient and permanent failures of signals, logic values, devices and interconnects as the technology scaling goes below the 100nm technology node.
  4. Growing gap between the assembly and test equipment (ATE) performance and the semiconductor off-chip speed which resulted in yield losses due to tester inaccuracy.

Today, the introduction of new technology solutions is increasingly application-driven, with products for different markets using different technology combinations at different times. General-purpose digital microprocessors for personal computers have been joined by mixed-signal systems for wireless communication and embedded applications. Battery-powered mobile devices are as strong a driver as wall-plugged servers. System-on-chip (SoC) and system-in-package (SiP) designs that incorporate building blocks from multiple sources are supplanting in-house, single-source chip designs. The 2003 ITRS system drivers chapter presents an overarching SoC context for future semiconductors industry development (Edenfeld et al. 2004).

SoC product class provides lower implementation cost through platform-based design, silicon implementation regularity and other novel circuit and system architecture paradigms. Cost consideration also drive the deployment of low-power process and low-cost packaging solutions, along with fast-turnaround-time design methodologies. Overall, SoC designs present many challenges to design, test, process integration and packaging technologies. Some of these challenges include,

  1. Design complexity with tightly coupled design processes for modular applications that operate concurrently and share design data in memory. Further advances are needed to avoid noise problems, minimize power dissipation and ensure manufacturability
  2. Cost optimization associated with multitechnology integration in SoC as well as codesign of die, package and substrate levels. System cost optimization must span many degrees of freedom with multiple-die and stacked-die options, package and board interconnects intellectual property reuse across process generation and the use of reprogrammable blocks.
  3. Pressure for cost reduction of test for mixed-technology designs associated with SoC as these designs break the traditional barriers between digital, analog, radio frequency and mixed-signal test equipment capability requirement.
  4. Meeting the process requirements at 65 nm and 45 nm technology nodes’ running production volume where the small process windows and tight process targets in many modules make process control increasingly difficult.

3.2Technology and Globalisation trends

(St. John et al. 2001) have identified the technological, global and workforce trends that will affect the formulation and implementation of manufacturing strategy in the next decade which includes

  1. Ubiquitous availability and distribution of information
  2. Accelerating pace of change in technology
  3. Rapidly expanding technology access
  4. Globalization of markets and business competition
  5. Global wage and job skills shifts
  6. Environmental responsibility and resource limitations
  7. Increasing customer expectations

Advancements in technology are allowing critical business information to be available around the world instantaneously. Decision-makers can communicate with each other from any place at any time. These technology advancements are making time zones, national boundaries, and the physical location of management increasingly unimportant. Furthermore, improvements in transportation and increasing standards of living in most nations of the world are making the physical location of manufacturing facilities less important than in the past. Finally, as customers become more educated and improve their standard of living around the world, they will become more demanding on manufacturers.

Sophisticated and readily available information technologies will allow firms to combine mechanisms for collecting information about customers (i.e. user profiles from e-commerce transactions, scanner data) with data mining and neural networks for pattern recognition, which will allow deeper understanding of customer behaviour and more accurate forecasting. Lower cost, more sophisticated computer-integrated manufacturing techniques will allow more manufacturers to move toward mass customisation. Advances in rapid prototyping processes will move that technology from predominantly a design tool to a tooling and production technique, which will also facilitate mass customisation. Increased use of simulation testing of new products will allow much more rapid new product launch. Web communications and web commerce will make new products known to a world market immediately. These technologies, working in concert, will collapse the time-span between the idea for the product and market launch to days, not months or years. Consequently, products will saturate the market and reach maturity much faster as informed, on-line customers react quickly to new product announcements. From the point of view of operations, these trends have implications for design-manufacturing integration, dynamic capacity planning and scheduling, management of supplier networks, and workforce coordination across cultural and language barriers (Hauptman and Hirji 1999).

In light of these technology and globalization trends, integrating activities both within and beyond organizational boundaries has become a major challenge at century’s end and will likely continue for the foreseeable future (Mabert and Venkatraman 1998).

4Manufacturing Strategy for the Semiconductors Industry

The strategic view of manufacturing as a competitive weapon dates back at least to (Miller and Rogers 1956). They did not differentiate between a business strategy and a manufacturing strategy. Rather, they saw manufacturing policies as necessary ingredients of business strategy. In the past, manufacturing has been considered as an eminently technical function, the result of a set of decisions which are merely routine, operational and exclusively focused on obtaining maximum efficiency. Traditional management has overlooked any strategic consideration regarding manufacturing activities. In fact, (Skinner 1969)was the first to articulate and propound the concept of manufacturing strategy, used to avoid the isolation of this area from the rest of the functional areas and from the firm’s competitive strategy.

The studies on the strategic nature of manufacturing have their origin in the seminal work of (Skinner 1969)and consider that production management can be a fundamental cornerstone for the competitive strategy of a firm, or at least on an equal level with the rest of the functional areas. This is also the approach underlying, among others works of (Hayes and Schmenner 1978), (Skinner 1978), (Hayes and Wheelwright 1984), (Fine and Hax 1985), (Cleveland et al. 1989) and (Corbett and Van Wassenhove 1993). It is suggested that manufacturing can contribute to firms' success supporting the implementation of the competitive strategy. Thus, manufacturing can become one of the main competitive advantages of the firms in the extent that the strategy of this area is in line with the competitive strategy and supports its implementation. The key to business success lies in the explicit formulation of a manufacturing competitive priority (or capability) and the implementation of the corresponding manufacturing decisions upholding it.

In the following sub-sections, a literature review on agile manufacturing strategy will be presented. Contribution of productivity improvement and technological advancement in relation to operational effectiveness and strategy for continual growth of the semiconductors industry will be discussed. In the light of challenges, opportunities and trends faced in the industry, agile manufacturing strategy is proposed as the key to achieve sustainable competitive advantage. Finally, the research gap for agile manufacturing research is discussed to form a foundation in guiding future research in the application of agile manufacturing strategy for semiconductors industry.

4.1Agile Manufacturing Strategy

The term “agile manufacturing” (AM) was coined by a US government sponsored research programme at LehighUniversity and, latterly, MIT (Nagel et al. 1991). It seeks to cope with demand volatility by allowing changes to be made in an economically viable and timely manner (Kidd 1994). AM has been defined with respect to the agile enterprise, products, workforce, capabilities and the environment that gives impetus to the development of agile paradigm. The main points of the definition of various authors may be summarised as follow:

  • High quality and highly customised products (Goldman and Nagel 1993), (Kidd 1994), (Booth 1996)
  • Products and services with high information and value-adding content (Goldman and Nagel 1993), (Goldman et al. 1995)
  • Mobilisation of core competencies (Goldman and Nagel 1993), (Kidd 1994)
  • Responsiveness to social and environmental issues (Goldman and Nagel 1993), (Kidd 1994)
  • Synthesis of diverse technologies (Burgess 1994), (Kidd 1994)
  • Response to change and uncertainty (Goldman and Nagel 1993), (Pandiarajan and Patun 1994), (Goldman et al. 1995)
  • Intra-enterprise and inter-enterprise integration (Youssef 1992), (Vastag et al. 1994), (Kidd 1994)

(Youssef 1992)argues that agility should not be equated just with the speed of doing things, for it goes beyond speed and it requires massive structural and infrastructural changes. Agility incorporates speed and flexibility (Kidd 1994)and more as it is a synthesised use of the developed and well-known technologies and methods of manufacturing. That is, it is mutually compatible with Lean Manufacturing (LM), Computer Integrated Manufacturing (CIM), Total Quality Management (TQM), Manufacturing Resource Planning (MRPII), Business Process Reengineering (BPR) and Employee Empowerment. This view is supported by (Goldman and Nagel 1993).

A comprehensive definition of agility can be found in (Yusuf et al. 1999)where agility is defined as the successful exploration of competitive bases (speed, flexibility, innovation proactivity, quality and profitability) through the integration of reconfigurable resources and best practices in a knowledge-rich environment to provide customer-driven products and services in a fast changing market environment.

4.2Achieving Sustainable Competitive Advantage

(Porter 1996) made the distinction between operational effectiveness and strategy. He define operational effectiveness as performing similar activities better than rivals performing them while strategy is the creation of a unique and valuable position, involving a different set of activities. He also argues that the quest for productivity, quality and speed has spawned a remarkable amount of management tools and techniques such as TQM, LM, BPR, benchmarking, outsourcing, change management, which resulted in dramatic operational improvement gains which many companies are unable to translate to sustainable profitability. Therefore, he proposes that companies need to establish a valuable and unique strategic position for sustainable competitive advantage.