Semiconductor SC - Contracts Cathal Heavey Enterprise Research - PowerPoint PPT Presentation

Semiconductor SC - Contracts Cathal Heavey Enterprise Research Centre, University of Limerick Ireland Contributions from: Konstanze Knoblich and Peter Williams Schloss Dagstuhl, February 8-12 2016

Overview • Introduce contracts, present classifications • Then present semi-conductor characteristic with regard to contracts • Present three topics on contracts applied to semiconductors: • Implementation of contracts in companies • Examination of RHF contracts • Work on option contracts Schloss Dagstuhl, February 8-12 2016 2

Why contracts in SC • Centralized or integrated supply chain - a single decision maker • Decentralized supply chain - multiple decision makers • Decentralized SC increasing due to globalization and outsourcing • Contracts aim to align incentives so optimal SC efficiency can be achieved • Share risk due to uncertainty, mainly demand • Can promote long-term partnerships • Makes legally explicit expectation of each party Schloss Dagstuhl, February 8-12 2016 3

SC Contracts • A supply chain contract is a coordination mechanism in decentralized supply chains to motivate the supply chain partners to behave like an integrated supply chain and to benefit therefore from improved operational performance • Contracts capture three types of flow: material, information and financial Material Funds Information Schloss Dagstuhl, February 8-12 2016

Zhao, Y., Meng, X., Wang, S., & Cheng, T. E. (2015) • Zhao, Y., Meng, X., Wang, S., & Cheng, T. E. (2015). Contract Analysis and Design for Supply Chains with Stochastic Demand (Vol. 234). Springer. • Lots of literature “no commonly accepted taxonomy is available” on operational aspects Economics Inventory SC Contracts • Chapter 1: Categorizes based on the newsvendor model: Price-Dependent, Effort Dependent, Competition, Information Asymmetry, Flexibility, Risk Aversion, Empirical Research Schloss Dagstuhl, February 8-12 2016 5

Tsay, Andy A., Steven Nahmias, and Narendra Agrawal 1999 • Review by Tsay, Andy A., Steven Nahmias, and Narendra Agrawal. "Modeling supply chain contracts: A review." Quantitative models for supply chain management. Springer US, 1999. 299-336. • Classification proposed was: Specification of decision rights • Pricing • Minimum purchase commitments • Quantity flexibility • Buybacks or return policies • Allocation rules • Lead times • Quality • • 4 chapters devoted to contracts Schloss Dagstuhl, February 8-12 2016 6

Anupindi, Ravi. and Bassok, Yehuda 1999 • Review by Anupindi, Ravi. and Bassok, Yehuda. “Supply Contracts with Quantity Commitments and Stochastic Demand" Quantitative models for supply chain management. Springer US, 1999. 299-336. • SCM contracts classified into: Horizon Length – duration of contract • Pricing – financial flows • Periodicity of ordering – how often a buyer can place orders • Quantity commitment: • • Total minimum commitment – commits to purchase a certain quantity • Periodical commitment – purchase a certain quantity every period Flexibility – specifies the magnitude and frequency of adjustments • Delivery Commitment – service level agreement on delivery • Quality • Information sharing • Schloss Dagstuhl, February 8-12 2016 7

Semiconductor SC Contracts • Publications on Semiconductor SC Contracts • Mallik, S., & Harker, P. T. (2004). Coordinating supply chains with competition: Capacity allocation in semiconductor manufacturing. European Journal of Operational Research, 159(2), 330–347. – incentives for capacity allocation among managers • Terwiesch, C., Ren, J. Z., Ho, T. H., & Cohen, M. A. (2003). An Empirical Analysis of Forecast Sharing in the Semiconductor Equipment Supply Chain. Management Science, 51(2), 208-220 – sharing between set of equipment suppliers Contracts to suppliers of tools to semiconductor • manufacturers Schloss Dagstuhl, February 8-12 2016

Implementation of Contract • Process for Contract  Contract Request  Internal Alignment and Contract Creation  Contract Negotiation  Contract Approval & Signature Procedure  Archiving  Distribution and Execution of Contract • Implementation of contract within company Schloss Dagstuhl, February 8-12 2016 9

Semiconductor SC Characteristics  Long cycle times  Capital intensive and long investment cycles  Utilization of tools needs to be high  High velocity low flow factors  Typically short product life-cycles  High product variety  Highly volatile  Low forecast accuracy Schloss Dagstuhl, February 8-12 2016

A Study of Semiconductor SC RHF Contracts Schloss Dagstuhl, February 8-12 2016

Literature Review • Tsay (1999) quantity flexibility in RHF – examined incentives for buyer and seller • Bassok and Anupindi (2008) studied heuristics and examined flexibility, showing order variability decreases • Walsh et al (2008) examined fill rate and bullwhip • Wang (2008) added delivery lead time flexibility • Kim (2011) examined flexibility for customer and supplier, benefit constant as flexibility increases Schloss Dagstuhl, February 8-12 2016 12

Focus of Work • Capture production and delivery lead time in case study company • Incorporate forecast error – linear regression • Unbiased • Over-planning • Under-planning • Model incorporates long-term forecasting 12 months in advance • Assume capacity provider has unlimited capacity Schloss Dagstuhl, February 8-12 2016 13

Customer Forecast Accuracy Use SMAPE3 (Symmetric Mean Absolute Percentage Error) Schloss Dagstuhl, February 8-12 2016

Over Planning Demand Schloss Dagstuhl, February 8-12 2016

Demand Generator Schloss Dagstuhl, February 8-12 2016

Analyzed Using Simulation Schloss Dagstuhl, February 8-12 2016 17

Performance Measures • Delivery Performance (DP) Performance index of customer satisfaction • Delivery Reliability Noting that: • Provides insights into a supplier’s capability to meet delivery schedules promised to the customer Schloss Dagstuhl, February 8-12 2016 18

Results Schloss Dagstuhl, February 8-12 2016

Quantitative Values Schloss Dagstuhl, February 8-12 2016

Comparison of Standard with Options Contract • Compare against RHF contract (standard contract) • Purchase options for window o at price p o • p e to exercise within window o • Two sources available:  Contract market ( p o +p e )  Spot market, cost p s  p o = a third p std =p o +p e ; p s = p std + p d + i (estimated from case study company)  Non exercised options transferred to spot market • If p e =0, then p o is the wholesaler price • if p o =0 - standard contract with non binding forecast • Analyzed using simulation Schloss Dagstuhl, February 8-12 2016

Description Options Contact • Assuming window o =1 week p s p e =0 Buys options p o Spot Market Schloss Dagstuhl, February 8-12 2016

Preliminary Results Options versus Standard Contract • Profit for case study company, based on unbiased demand • Risk moving from buyer to seller Schloss Dagstuhl, February 8-12 2016

Conclusions • A lot of literature on operational contracts – applicable to semiconductor? • Few results on semiconductor SC, some on semiconductor equipment • Important topic to examine • Embedding operational contracts is important • Examined RHF and option contracts, other types of contracts also possible Schloss Dagstuhl, February 8-12 2016 24

References • Knoblich, Konstanze, Cathal Heavey, and Peter Williams. "Quantitative analysis of semiconductor supply chain contracts with order flexibility under demand uncertainty: A case study." Computers & Industrial Engineering 87 (2015): 394-406. • Knoblich, Konstanze, Cathal Heavey, and Prince Williams. "An evaluation of an option contract in semiconductor supply chains." Simulation Conference (WSC), Proceedings of the 2012 Winter . IEEE, 2012. Schloss Dagstuhl, February 8-12 2016 25