Service Supply Chain Transformation at KLA-Tencor

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Service Supply Chain Transformation at KLA-Tencor

John NunesDirector of Strategic Consulting, MCA
SolutionsSupply Chain World North America 4 -
6 April 2005 ? Anaheim, California
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Agenda

• Aftermarket Opportunity
• Semiconductor Overview
• KLA-Tencor Change Roadmap
• Some Preliminary Results
• Lessons Learned

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Session Overview

• In many capital equipment sectors, the service
  supply chain has become increasingly important to
  business success. Experience shows that the key
  to success is finding the right balance between
  supply chain investments and customer
  satisfaction. This presentation will demonstrate
  how semiconductor equipment maker KLA-Tencor
  found the right balance. How the development of
  benchmarks and targeted metrics was key to
  transforming service supply chain management from
  a source of customer dissatisfaction into a
  competitive differentiator will also be
  explained.

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Evolution of Technology
The supply of aftermarket parts is a 400B
business that covers everything from toner
cartridges to cruise ship engines. Sales of such
items are an important source of profit for
companies that sell durable equipment. Indeed,
many of those in the Fortune 100 rely on the
aftermarket for up to 40 percent of their
profits. The McKinsey Quarterly, February 2005.
Innovation
Differentiation
Commoditization
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Aftermarket Revenue Opportunity

• Service revenue contribution is growing.
• Revenue over the Product Life Cycle is
  high-margin/low risk
• Pressure continues to mount on Service Revenue
  streams to match Product profit contributions.
• In many industries Service lags
• While pressure mounts for Service to achieve the
  same contribution, investment in IT Solutions
  lags
• Service contribution provides some down cycle -
  insulating performance.
• Source of differentiation, customer acquisition
  retention

Source AMR Research
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Mfg vs. Service Supply Chain
Characteristic Mfg Supply Chain Service Supply Chain
Item Demands Very High Low 1 to 2 a year
Demand Events Predictable standard forecasting tools Random
Response Times Manufacture to order 2 and 4 hour
Delivery Network Continued simplification Increasing in complexity
Profit Margins Decreasing Increasing
Inventory Strategy Postponement/JIT Pre-position
IT investment Very high Under-funded
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Who is KLA-Tencor?

• The world leader in yield management and process
  control solutions for semiconductor mfg.
• Because yield improvement is key to increasing
  manufacturing productivity and profitability,
  KLA-Tencor has outperformed the semiconductor
  capital equipment segment as a whole.
• KLA-Tencor technology is used by every major
  semiconductor manufacturer around the world.

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Semiconductor Manufacturing

• Leading-Edge Technology
• Latest generation Materials, Process, and
  Equipment Technology provide the capability to
  build integrated circuits with 70 nanometer
  critical dimensions
• Capital Intensive Manufacturing
• The cost of a state-of-the-art 300mm wafer
  fabrication facility can exceed 3B and the
  revenue impact from an hour of machine down time
  can exceed 1M
• Epic Boom and Bust Cycles
• The seeds of the next downturn are being sown as
  we speak
• Captive Supply Chain/Sourcing
• Copy Exactly! philosophy drives single-source
  supply constraints
• Shrinking Customer Base
• Continuing trend toward foundry manufacturing
• 10 companies make up 80 of industry revenue

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Wafer Fabrication Food Chain

• Growing aftermarket opportunity for Wafer Fab
  Equipment Manufacturers.

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Rising Share of New Fab Spending
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Global Wafer Fabs 375 and growing!
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Change Roadmap
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The Problem May 2001

• Poor parts availability is a major customer
  complaint and threatens to impact future
  business.
• Past investments in inventory and service supply
  chain improvements have failed to achieve
  sustained results.
• Cost of poor operational performance is creating
  significant drain on service profitability.
• Service profitability is key to success during
  downturn.

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Change Drivers

• Business Performance
• Cyclical pressure on service profitability
• Low profitability relative to benchmarks
• Poor ROI on past efforts
• Competitive Environment
• Competitor service and support offerings
• Customer Pressure
• Poor performance relative to competition
• Relentless focus on cost reduction

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Change Roadmap
?
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Deteriorating Inventory Performance

• Inventory growth outpaced installed base growth.

and was more than 3 times higher than best in
class performance
Growth from Jan 2002 Baseline
PRTM/PMG 2003 Service Supply Chain Benchmark
Study for electronics equipment manufacturers
while field inventory targets were growing
uncontrollably
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Performance Benchmarking

• Cross-industry benchmarks provided limited
  insight to relative performance due to a wide
  range of customer requirements and performance
  metrics fill rate is simply too broad of a
  measure.
• Within-industry benchmarks were skewed toward
  process equipment with a heavy reliance on
  consumable parts.
• The key to success was understanding customer
  requirements and measuring current performance
  relative to customer benchmarks.

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Metrology vs. Process Tools
Metrology Inspection Equipment Manufacturer
Wafer Process Equipment Manufacturer

• lt10 of Aftermarket Revenue from Spare
  Parts/Consumables
• Target Fill Rate 65 in 4 hours
• lt10 consumables
• 70 of active parts are repairable
• 0.5 part per tool per month
• 5,000 pieces per month

• gt70 of Aftermarket Revenue from Spare
  Parts/Consumables
• Target Fill Rate 85 in 4 hours
• gt70 consumables
• 20-30 of active parts are repairable
• 20 parts per tool per month
• 400,000 pieces per month

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Parts Contribution to Unscheduled Downtime

• The role of service planning is to minimize
  equipment downtime related to parts.
• The industry standard metric is Mean Down
  Awaiting Part (MDAP).
• In an informal survey of International Sematech
  members, the benchmark for MDAP was defined as
  lt1 of total machine time.
• Historically, KLA-Tencor had not been able to
  achieve this benchmark.

Source SEMI E10-90
SEMI E10 Equipment State Stack
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Unscheduled Service Event
Source Cohen, M.A., Zheng, Y., Agrawal, V.,
(1997) Service parts logistics a benchmark
analysis. IIE Transactions 29, 627-639.
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Change Roadmap
?
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Root Cause Summary

• Forecasting capability of existing planning and
  execution systems (ERP/DRP) was not designed to
  be effective in an extreme low usage environment.
• Field inventory positioning model did not achieve
  an optimum balance between fill rate performance
  and inventory investment.
• Poor interface between multiple planning and
  execution systems created data integrity and
  timing issues.
• Past improvement efforts had relied on short-term
  actions which prioritized material by location,
  customer or product. These actions could not be
  sustained when other priorities arose.

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Challenge of Low Failure Rate Planning

• Of 15,000 Active parts, 75 had 1 demand or less
  in the past 12 months.
• Of 5,000 Parts with Demand, 3,000 had demand of 3
  or less in the past 12 months.

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Forecasting Service Part Demand
Traditional Forecast Concepts Do Not Apply to
Service Parts

• A stable installed base population of 100 parts
  may have one failure during the previous 12
  months, and 5 during the next 12 months. This is
  not a trend.
• The same installed base population of 100 parts
  may have 1 failure in 12 months at one location
  but 5 at another and 0 at another. This does not
  mean that there should be no stock at the
  location with zero demand.
• The Pick the Best Forecast Method approach
  assumes that historical patterns will repeat.
  This creates a tendency to pick inappropriate
  forecasting methods that attempt to predict
  trends and seasonality.

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Change Roadmap
?
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Service Supply Chain Challenge
110
A) Current system capability
B) Achieving current process entitlement
100
A
90
C
C) Improving service with increased cost
Service Supply Chain Cost
B
80
D) Shifting the curve with Multi-Echelon
Optimization methods
D
70
60
99
How can you improve service levels without
dramatically increasing inventory?
92
94
96
98
Service Performance
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Service Supply Chain Strategy

• Part Sourcing Tied to Service Programs
• Reserve last part for contract/warranty customers
• Multi-Echelon Fulfillment Process
• Local/Regional/Global service targets to achieve
  MDAP goal
• Global Demand/Inventory Visibility
• Ability to source parts globally 7 x 24 x 365
• Service Planning and Optimization (SPO)
• World-class spares planning system
• Configured Installed Base Database
• Detailed knowledge of local installed base at the
  component level
• Global Supply Chain Capability
• Sourcing, Quality, Test, Reverse Logistics

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Multi-Echelon Fulfillment Model

• The optimal balance between inventory and MDAP
  requires a multi-echelon approach to order
  fulfillment.
• Customer requirements for equipment up-time and
  part wait time (MDAP) drive the selection of
  appropriate service levels.

Part Wait Calculator
Multi-Echelon Fulfillment Targets
Local Depot
65 Local Target lt 4 hour response
Regional Depot
95 Regional Target lt 24 hour response
Customer
Distribution Center
98.5 Global Target lt 72 hour response
Factory/ Supplier
99.5 Global Target lt 96 hour response
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Phase I Segmentation Business Rules

• Parts are categorized into material class
  groups based on cost and demand frequency.
• Demand by group is then summed and groups are
  added until the target performance is achieved.
  Target includes safety factor for supply chain
  gaps.
• Stock levels are then determined based on local
  population and global local demand history for
  the each part.

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Phase II True Multi-Echelon Optimization
Positioning business rules did not allow for a
part to be local at one forward location and
regional at another forward location.

• The mathematics of multi-echelon optimization
  were developed to deal explicitly with
  low/sporadic demand parts and complex fill rate
  requirements.
• The business rules approach falls apart rapidly
  under these conditions with too much reliance on
  simple rules of thumb and existing business
  practices.

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Overall Improvement Roadmap
Disable Linear Forecasting Models
Implement field stocking model based on Material
Class
3PL Global outsourcing and integration
Develop improved configured installed base
database
3PL IT Integration
New mgmt team takes over SSCM
Begin pilot of Multi-Echelon Optimization System
(SPO)
Implement single ERP for inventory and order mgmt
Full integration of Multi-Echelon Optimization
Capability (SPO)
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Change Roadmap
?
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Field Target Trend
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Product X Fill Rate Improvement
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Improvement in Key Service Metrics
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Service Supply Chain Expense

• The mix is moving in the right direction.
• Excess expense at its lowest point in 3 years.

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Lessons Learned

• Use Performance Benchmarks to get buy-in for
  change at the highest levels in the organization.
• Customer benchmarks are more useful than
  competitive benchmarks. While fill rate is a
  useful metric for competitive comparison in
  service supply chain management, it isnt always
  meaningful to a customer.
• The pain generated by poor performance must be
  greater than the pain generated by the remedy.
• Begin with an 80 solution - early wins drive
  momentum for continued change.
• Establish a performance measurement system early
  on. When performance improves its easy to forget
  how bad it used to be.

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Further Reading

• J.J. Chamberlain and J. Nunes, Service Parts
  Management A Real Life Success Story, Supply
  Chain Management Review, September 2004, pp.
  38-44.
• M.A. Cohen, N. Agrawal, V. Agrawal, Achieving
  Breakthrough Service Delivery Through Dynamic
  Asset Deployment Strategies (to be published).
• R. Wise and P. Baumgartner, Go Downstream The
  New Profit Imperative in Manufacturing, Harvard
  Business Review, September-October 1999, pp.
  133-141.
• M.J. Dennis and A. Kambil, Service Management
  Building Profits After the Sale, Supply Chain
  Management Review, January-February 2003, pp.
  42-49.
• R.G. Bundschuh and T.M. Dezvane, How to make
  after-sales services payoff, The McKinsey
  Quarterly, 2003 Number 4, pp. 116-127.
• T. Gallagher, M.D. Mitchke, and M.C. Rogers,
  Profiting from spare parts, The McKinsey
  Quarterly, February 2005.