In the semiconductor industry, the product development cycles for microprocessors were very long and it took years to bring a new chip design to the market. Billions of dollars of investment was involved in setting up a facility and billions of dollars more in R&D (Refer to Exhibit). To get a perspective, Intel’s operations were more capital intensive than an aircraft manufacturer’s. However, given such a kind of investment, the product lifecycle was very short – sometimes even less than a year. The semiconductor industry was characterized by rapid evolution of technology. To compete effectively, players in the industry had to improve their products and capabilities faster than the competition. Companies had to anticipate changing customer requirements and stay ahead of the curve as well as improve per unit economics..

Operations Case Studies | Case Study in Management, Operations, Strategies, IT and Systems, Case Studies

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INTEL’S SUPPLY CHAIN

Designing a chip took several years and hundreds of engineers. Any new version of an Intel processor had to be designed as per the required specifications. Intel’s senior designers took around a year to build such specifications by taking inputs from customers, software companies, Intel’s marketing team, and staff from the manufacturing and testing departments. The key specifications included chip size, number of transistors, and production and testing factors. A detailed document of the specifications ran into thousands of pages...

‘JUST SAY YES’

Intel used both air and ocean shipment to transport its microprocessors. It identified the customer orders with longer lead times and used ocean shipping where the costs of transport were low. Air freight was used for higher responsiveness but the mode was a costly trade-off and was employed owing to the high uncertainty in demand. Intel closely monitored its supply chain and optimized it keeping its customers in focus. For instance, in 2005, Intel executives visited customers to understand their needs better. It was found that Intel’s supply chain was designed for the time when demand exceeded supply and the company focused on sending the manufactured products to the customers within three months of the order being placed..

FOCUS ON INVENTORY

To design a new supply chain from scratch, Kellso started off by forming a team for the task. He selected the best people from Intel for the project but only requested half their time. The timeline given to Kellso’s team was six months and the project was called Low Cost Supply Chain Project (LCSC) It was understood that something radically different would be required to achieve the cost reductions. The team came up with a one page document which captured how the product flowed through the stages of a Supply Chain Operations Reference (SCOR) model that focused on Plan, Source, Make, Deliver, and Return...

THE CAPACITY AND INVENTORY TRADE-OFF

Though the team was now focused on inventory and shorter lead times, there was an obvious trade-off which the team had to consider. Intel factories were designed with a certain capacity utilization factor in mind. Traditionally, manufacturing managers favored excess capacity to excess inventory because excess capacity was perceived as expensive given the high fixed cost of the facility and the overheads involved. Moreover, Intel had to invest a lot in capital assets as it needed the latest and most technologically advanced equipment. The company also had to update and replace its chip making equipment more often than most manufacturers as a new line of microprocessors with even tiny transistors required newer and more sophisticated technology. Such costs somewhat justified the need for maximum capacity utilization..

EXHIBITS

Exhibit I:Capex in $ billions
Exhibit II: Geographic Breakdown of Revenue