Velocity is prime mover in equipment maker's portal
Anne Millen Porter -- Purchasing, 1/16/2003 2:00:00 AM
Many e-procurement/e-sourcing systems emphasize straightforward cost reduction—either in the form of lower prices through auctions or lower overhead costs through catalog-based procurement systems. So it's refreshing to find Gloucester, Mass.-based Varian Semiconductor Equipment Associates creating a very different kind of proprietary electronic sourcing system—a supplier portal built on a goal of effective, increasingly rapid supply chain performance.
"The biggest emphasis for us in this fiscal year is to shrink our cash-to-cash cycle—from receipt of order to 'first silicon' processed by the customer," says Jim White, director of supply chain management for Varian Semiconductor. "There are two ways we can accomplish this. First, we can reduce our internal build times. Second, we can shrink our leadtimes from suppliers." But, to do the latter, White says, "We need flawless execution of our demand to suppliers with quality that is 100% 'plug and play.'"
Varian Semiconductor is a leading producer of ion implantation equipment, which is used very early in the semiconductor manufacturing process, essentially to impregnate silicon wafers with energy particles. The machines are typically large, the size of a small room or a two-car garage and have several layers of customization—selects (required elements with choices), options, plus special features requested by particular customers.
Typically, Varian Semiconductor's customers are looking for exact ontime delivery, so that's one reason supplier leadtimes are so important to White's organization.
A second reason is an extremely competitive aftermarket for consumable parts, which comprise some 90% of goods sourced by White's organization. "We have competitors who list 'Varian compatible' parts right on their Web sites," he says, noting that some Varian Semiconductor customers claim they make a million dollars an hour with the output from one of the company's machines. "We can't afford to get a call saying, 'My machine is down, I'm losing a million dollars an hour because I don't have a $25 piece of graphite'," White says.
A third reason for the emphasis on shrinking supplier leadtimes is the fact that Varian Semiconductor maintains an exceptionally high gross margin goal of 50%. "For the semiconductor manufacturing industry to reach its breakthrough technology goals, we need to be funding research and development very heavily," White says. "That means we need to be improving not only our own cash-to-cash cycle time and returns on investment (ROI), but also our suppliers' cash-to-cash cycle times and ROIs." Maintaining exceptional delivery performance from suppliers, allowing Varian Semiconductor to turn inventories rapidly, is a big part of the company's strategy for achieving its high gross margin goal.
Enter 'the portal'
Cycle-time reduction, according to White, was a goal for Varian Semiconductor long before e-procurement/e-sourcing technologies burst on the scene in 1999-2000. He estimates the company's pre-e-commerce cycle time reduction (covering the total time from order of material to the delivery of a machine) at around 20%, admitting, however, that many of the early successes came from "lots of people doing lots of expediting."
The idea for a supplier portal sprang from Varian Semiconductor's customer-facing e-commerce system called vShop. "This was a tool we created so our customers could come in, view, and order parts, check availability, check delivery status, etc. We thought we could turn the tool around and use it with our supply chain. Instead of customers using it to place demand on us, we could use it to place demand on our suppliers."
In its phase-one incarnation, Varian Semiconductor's supplier portal is essentially a communications tool for orders that have already been placed. "The deals are done, pricing and leadtimes are set," White says. Varian Semiconductor's MRP reports flow directly in to the portal. Each day, buyers or commodity specialists go the portal to review MRP reports and determine if adjustments—either in or out—need to be made to suppliers' delivery dates. If changes are needed, buyers first verify the MRP data, then transmit demand signals to their suppliers.
Suppliers, meantime, designate agents to access their own secure areas of the Web site. "They can sort by what is due for delivery, what's being pulled in, pushed out, or canceled," White says. If there's a change, suppliers can accept the new delivery date, counter it, or refuse the change while providing a narrative explaining their refusal.
"Suppliers say the biggest advantage of our portal compared to others is its provision for two-way communications," White says. "For example, if they feel they can't meet a new delivery demand, they can explain why or suggest what needs to happen to allow them to meet the demand. A supplier might say, 'I would love to deliver this power supply, but I'm missing a particular diode stack.' We may have access to the part or know of another source," White notes.
Varian Semiconductor's supplier portal also serves as an automated conduit for ontime and quality performance data from the company's SAP enterprise resource planning (ERP) system. "We use the quality management (QM) module of SAP to automatically capture supplier ontime delivery and quality," White says. "There is no manual data input. The information flows directly to the portal and is released to suppliers by our commodity managers." For the time being, he notes, supplier performance data updates occur once per month. As a check for data accuracy, he says, "we send a snapshot of ontime delivery data to the supplier before we publish the data on the portal to give them a chance to spot any errors."
Varian Semiconductor also uses its supplier portal to manage supplier corrective action requests (SCARs) coming out of its quality management (QM) process. "Not only do suppliers have access to their raw statistics about ontime delivery and quality, they can also monitor their backlog of SCARs. They can see how many have been written, how many are still open, and how many are beyond what we consider to be an acceptable response time—about 30 days at present."
To aid suppliers in planning their production more effectively, Varian Semiconductor broadcasts six-month forecast data directly from its MRP system through the portal to suppliers. "These are not firm commitments," White notes, "but it's a window into our MRP, which can give suppliers some assistance in their production planning. MRP takes information from both the production and services sides of our house, giving suppliers a look at our aggregated demand for a six-month window."
Features planned for future versions of Varian Semiconductor's supplier portal include:
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Online launching of RFQs, orders, order releases, etc. "Features in SAP already allow us to generate RFQs," White says. "We're going to be porting many of those requirements to our supplier portal so we can manage our entire bid process online."
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Automatic supplier payment tied to consumption. "We're looking to link point-of-use delivery and consumption to supplier payments; no purchase order, no invoice, just a straight funds transfers between Varian Semiconductor and suppliers because we want our suppliers' cash-to-cash cycles to be as clean and tight as our own," White says.
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ECO alerts. "We would also like to be able to bridge our process for engineering change orders (ECOs) to our supplier portal as well," White says. While suppliers will be involved very early ECO processes, he says the portal will be where Varian Semiconductor communicates to suppliers that an ECO has gone into effect.
Measuring success
Varian Semiconductor's goal is to add 10 suppliers per month to the new portal. "That is our minimum expectation," White says. "We met our initial rollout target of 50; our goal is to have our top 100 suppliers by volume on the portal plus any critical smaller-volume suppliers that are associated with product configuration issues (selects or options on our machines) that are apt to change frequently."
Varian Semiconductor runs various metrics to gauge the success of its portal at delivering shorter supplier leadtimes. "We monitor which suppliers are accessing the portal and how many transactions are being touched every day." Varian Semiconductor is also running reports to see if ontime delivery-to-commit dates are improving. In the short period of time the portal has been live—since the beginning of October—White says Varian Semiconductor has seen a correlation between ontime delivery improvement with suppliers that are on the portal versus those not on the portal.
In one respect, White says this may be a function of cleaner record keeping in the automated system. A more important factor, he believes, is the way the portal serves as a constant reminder of demand. "The portal says to the supplier's agent, 'Remember, I'm due tomorrow.' Regardless of the white noise that person experiences every day, they have a constant reminder of what they need to accomplish for us. And we purposely frame those reminders in terms that are attractive to suppliers. We call items that are due their 'revenue items.'"
Another benefit of the portal, according to White, is the ability for his staff to concentrate on managing exceptions only. With the semiconductor equipment industry suffering a prolonged downturn, White says his organization is buying the same numbers of parts, albeit in smaller quantities, with roughly half the staffing levels of two to three years ago. "Without the portal, we couldn't be doing what we are doing with the number of people we have today. The portal has improved tremendously the abilities of our buyers, commodity managers and specialists to execute transactions (vs. following up on them). It's nice to manage only exceptions. If the supplier clicks 'accept' on a demand change, we spend literally no time thinking about it."
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