For Agere, fewer suppliers is better
The movement of Agere Systems to a fabless model has resulted in the communications semiconductor company reducing its number of suppliers and forging tighter relationships with a handful of them.
By Jim Carbone -- Purchasing, 10/21/2004 2:00:00 AM
While outsourcing is a key strategy for many electronics OEMs, it is also an important strategy for many semiconductor companies.
More semiconductor companies are outsourcing chip production to semiconductor foundries. Foundry revenue is forecast to grow from $11.3 billion in 2003 to $34.6 billion in 2008, according to IC Insights, a market researcher. In addition fabless companies—chip firms that don't have production facilities—are also enjoying strong growth. Fabless revenue is forecast to rise from $20.6 billion in 2003 to $68.5 billion in 2008.
To be successful, fabless companies have to develop and closely manage supplier relationships. That's why Agere Systems, a communications IC supplier, has drastically cut its supplier base and is nurturing close relationships with critical suppliers, says Agere chief procurement officer Tom Linton.
Agere was spun off from Lucent Technologies in 2002. At the time of Lucent's divestiture, Agere had 12 fabs. It has sold off most of the fabs and plans to move completely to a fabless model as soon as it can sell its remaining two fabs.
The transition to a fabless model is having an impact on Agere's purchasing strategies. For one thing, Agere is much more de-pendent on foundries and has had to develop close relationships with them.
"A challenge has been that we have had to rethink traditional purchasing models on supplier dependency," says Linton, who is based in Singapore. He oversees a global purchasing operation of 55 buyers located in Allentown, Pa., Orlando, Fla., Munich, Taipei and Bangkok. The operation buys about $1.4 billion per year in materials and services.
Linton says when he joined Agere in September 2002 he did an assessment of suppliers to determine which ones had the biggest impact on Agere. "We had 16,000 suppliers and most of them were rarely used or were redundant with our strategic suppliers. We took that number down to less than 4,700 suppliers today and it is still dropping," he says.
Who matters?
Linton decided there are 14 key suppliers that really mattered to Agere. Those 14 get about 50% of Agere's $1.4 billion annual spend.
"Agere has aligned its focus, resources and sourcing emphasis behind our 14 strategic suppliers," says Linton. "These companies matter long term to Agere as they drive our performance. We find that by focusing on our strategic suppliers and keeping them competitive, the total number of suppliers we have to manage takes care of itself," he says.
Each year the executives of those suppliers are invited to a special supplier event at Agere. "I invite our CEO and executive committee to spend a full day every year with the CEOs and executives of the suppliers," says Linton. The high level meeting is designed to get the attention of the suppliers' leadership and to show that Agere values the suppliers. Each supplier is given a strategic supplier award.
"We also disclose a lot of things that even a lot of our employees don't know," he says. "We discuss where we are going with our strategy in communications and what we are depending on them to do."
For instance, one initiative that Agere will depend on its suppliers for is contract synchronization. "We want to synchronize our buy side contracts with sales contracts," says Linton. "When Agere signs a contract to sell parts we want to make sure we are synchronized with our suppliers. Say we have a contract that requires 40% upside within six weeks. If I don't have 40% upside in six weeks from my suppliers, it is a problem."
While Agere values its suppliers, it is still important to keep competition alive, says Linton. "I like to have two suppliers in a room who are competitors because there is nothing that manages your cost better than competition. I want even my most strategic suppliers to know that they have competition," he says. "Having two strategic suppliers in each major commodity makes sense from both security of supply and competitive aspects," he says.
Competition is important in such materials as substrates. "Substrates are the biggest direct material item I have. Substrates go into the ball grid array chip packages and are about 60% of our direct material spend. We have three major suppliers, but there are other suppliers in Japan that want to be among our strategic suppliers."
Different focus
Linton adds the focus of purchasing at a fabless company is different than that of an OEM. "In semiconductors, direct materials is a different animal because you're dealing with almost all raw materials: precious metals, silicon wafers, chemicals and leadframes. "Plus we have foundries because we are a fabless company. An OEM is at a higher point on the electronics supply chain. As such, its view is multitiered to the component level. Agere is multitiered to the raw material level," he says.
What this means is that price is less an issue at a fabless company than at an OEM. However, total cost is more important for the fabless company. To manage total cost, Agere benefits from a procurement engineering team that works to optimize the materials, processes and suppliers that Agere uses.
If a material such as a leadframe for a chip has a high cost, the procurement engineering team investigates why the cost is high. Sometime it's due to a rising cost of precious metals used in chip production. Other times cost may be high because a supplier is using an inefficient process.
"After the team determines the issue, it puts together an action plan to either identify a new source, change a process or a material, or work closely with the supplier and do value engineering to lower the suppliers costs," says Linton. With value engineering (VE) Agere and a supplier work together to find a way to take cost out of the product by making design changes to the product or using a different material or process.
Often the VE effort results in design options. For instance with chip packages, the team may say to a package supplier, " 'if you go to a 200 mil size package versus 150 mil, that will save 10 cents per package,'" says Linton. " 'If you go to .9 mil wire from one mil wire you are going to save another 10 cents. If you switch to .3 micron gold plating from .25 micron gold plating it will cost this much.'"
He says such cost analysis efforts are responsible for most of the direct material savings opportunities that Agere has achieved. The key is getting the cost savings changes worked into new products.
While buyers at Agere have to deal with a different type of supplier than OEM buyers, the supplier performance issues that they deal with are similar to the issues OEM buyers face. Agere needs high performing suppliers because its own revenues, profits and performance are directly affected by suppliers.
Scoring suppliers
Linton says he instituted a supplier scorecard program. Suppliers are rated on cost, quality, delivery, flexibility and service. "We have a comprehensive scorecard, we do it on a quarterly. We don't just give them a report card," he says. "We have a supplier improvement training process. If a supplier has a low score, we put a team in place to help them improve their score. We keep track of their performance as if it has a defect."
Linton says that the strategies that Agere has in place will help the company when the buyers' market changes to a sellers' market.
AGERE SYSTEMS: Data-driven spend success
03/16/2005TIER(x) Suppliers
06/26/2008Agere is close to global suppliers
09/29/2004
Now Playing: 
