After years of selling parts almost exclusively through distributors, top PLD suppliers Altera Corp. and Xilinx Inc. are reversing strategy and trying the direct approach.
The semiconductor market collapse that left Altera and Xilinx with the chore of digging out from a year's worth of excess inventory highlighted the need to take the supply chain into their own hands, both companies said.
EBN has learned that in February, Xilinx will launch two six-month pilot vendor-managed-inventory (VMI) programs with one global OEM using fee-based supply chain service providers iSuppli Corp. and Titan Logistics. Xilinx declined to identify the OEM, but named Celestica Inc., Jabil Circuit Inc., and Solectron Corp. as EMS partners.
Under the program, known as Virtual Direct, the supply chain service providers will manage the flow of information and inventory in a way that's transparent to Xilinx's supply chain partners, allowing Xilinx to have a direct customer interface, said Jane Vaillancourt, senior director of sales and distribution at Xilinx, San Jose, in an exclusive interview with EBN.
iSuppli and Titan -- a unit of Xilinx distributor Nu Horizons Electronics Corp. -- will each have geographic responsibilities, which Xilinx didn't specify.
Altera Corp., meanwhile, quietly began deploying a global fee-for-service model last July, working with distributor Arrow Electronics Inc. and at least two of Altera's top six customers, said John Sakamoto, director of North America customer marketing at the San Jose company.
"With this kind of arrangement, we can negotiate terms directly with the OEM and the [contract manufacturer] and have more control over the supply chain, where before we were essentially just working off of orders from distribution," he said.
One of the objectives of the programs is to gain better visibility into the largest PLD users' actual consumption to smooth out supply and demand imbalances. Another is to reduce procurement costs for production-level devices, eliminating the typical 15% to 17% distributor markup.
"The assumption was if we could separate the value of our products from the logistics side it would be less expensive [for the customer]. We're testing that model," Vaillancourt said.
For lower volume and new business, Altera and Xilinx are sticking with traditional distribution strategies, which emphasize demand-creation and value-added-fulfillment services. However, analysts note that taking even a few top accounts direct will initially cost distributors a meaningful volume of business.
Indeed, the Virtual Direct model will represent about 75% of Xilinx's business with the unnamed OEM that is piloting the new program, according to Vaillancourt.
"It's a two-sided coin," said Matthew Sheerin, an analyst at Thomas Weisel Partners LLC, New York. "There is potential for distributors to lose significant revenue on the top line. On the other hand, Arrow, Avnet, Memec, and Nu Horizons have logistics businesses they believe can compete effectively with third-party logistics (3PLs) companies."
Sheerin believes this is an opportunity for the distributors to prove the value of their new services, and in the long run, they will contribute to profitability.
At the same time, he said, "it'll be interesting to see whether the iSuppli model, using UPS as a shipping partner, can work on a global scale."
Time for change
Historically, Altera and Xilinx moved 90% or more of their product through the channel to keep operations lean. But a few years ago, global accounts began clamoring for a distributor-less model that would not layer on cost for unwanted services.
The indirect channel became a liability for the suppliers as well, since the distributor controlled the supply chain and the customer relationship.
"The problem with that model is visibility," Vaillancourt said. "We could never tell as a supplier what caused a certain action the distributor put on us. We were so far removed from the actual customer's requirements."
Another supply chain kink was the EMS channel's inflexibility to share inventory between manufacturing sites, Vaillancourt said.
Xilinx's Virtual Direct model will work off of a centralized inventory hub, from which EMS providers can electronically pull product as needed, with a 24-hour delivery guarantee from Xilinx, she said.
In Altera's model, Arrow still holds the inventory, but Altera plays a more active roll in comparing forecasts and monitoring inventory levels throughout the supply chain, according to Sakamoto.
Programs like these represent a major shift from the EMS practice of stockpiling parts, said Andrew Gort, senior vice president of global supply chain management at Celestica, Toronto. But he said all supply chain partners must be equally committed to change if they are to reduce the whipsaw effect of bad forecasts and lax inventory controls.
"People have to look at it as an advantage to all players," Gort said. "There is definitely pressure on us for the buffers to disappear. Some of that [buffering] will probably still go on during shortages, but the liability [for custom parts] doesn't go away."
While Altera chose to leverage its longstanding relationship with Arrow -- its only global distributor -- Xilinx said it sought fee-for-service bids from its distribution partners and independent supply chain service companies in order to find the most cost-effective approach for individual customer needs.
The aim of the side-by-side VMI trials is not to choose one supply chain service company over another, but to cultivate an assortment of back-end service offerings, Vaillancourt said.
"The intent here, I think, is that this is going to become a way of doing business," said Jan Sanchez, who oversees Titan as vice president of operations at Nu Horizons, Melville, N.Y.
The distributor has been providing supply chain services for four years as an adjunct to its traditional distribution operation, though Sanchez declined to name any of Titan's other customers.
iSuppli, El Segundo, Calif., also confirmed it is engaged with Xilinx on a VMI program, but declined to discuss details of its involvement.
The Xilinx program uses EDI links to send forecasts, build schedules, purchase orders, invoices, and other documentation between supply chain partners. iSuppli and Titan will aggregate forecasts from all EMS locations and send ship and replenishment signals to Xilinx based on EMS build schedules, according to Vaillancourt.
Xilinx will use a combination of the end-customer forecast and the EMS build forecast for its long-term wafer planning. "It's a fairly elegant, fairly simple process that breaks down the elements of the supply chain to a primary level," Vaillancourt said. "But when you layer on how many entities are involved, it becomes quite complex."