As the programmable logic market begins a slow recovery, the top two suppliers -- Altera and Xilinx -- are working on ways to avoid repeating past mistakes.
At the heart of their multilevel, and strikingly similar, strategies are efforts to make more efficient use of the EMS and distribution channels by forging closer ties with key supply chain partners and adopting new inventory practices.
One facet involves building relationships with EMS providers to recognize them as more than just a shipping address on the way to the customer. Both suppliers, meanwhile, have adopted build-to-order models to keep inventories leaner and force customers to take more responsibility for volume purchases.
The shifts were set in motion earlier this year after a massive inventory correction in networking and telecommunications left both vendors under an avalanche of excess components.
"The pain the industry experienced [this year] is the mirror image of the pain experienced a year and a half ago, which was perhaps felt more at customers," said Nathan Sarkisian, chief financial officer at Altera Corp., San Jose. "A big reason the inventory overhang was so large was that the scarcity was so great on the way up."
Inventory is still high but closer to normal levels after a series of write-downs and several quarters of burnoff, analysts said.
Earnings announcements in recent weeks revealed that Altera has 6.5 months of inventory, down from as much as a year's worth, while its distributors have about 2.5 months on hand.
Xilinx Inc., before a $93 million write-down of excess inventory in the September quarter, had whittled its inventory to 149 days, but was still overstocked. After the write-down, the company reported 99 days of inventory on its books. Both suppliers reported marginally stronger orders in September.
"We're not talking about things rushing forward, but they're going in the right direction," said Eric Ross, an analyst at Thomas W eisel Partners LLP, New York.
Altera and Xilinx together represent the bulk of programmable logic market revenue, so it's not surprising that they appear to be leading changes in the way PLDs are procured.
The EMS factor
A significant part of the forecasting error stemmed from the fast rise to prominence of EMS providers, which happened without much thought to the new layer of complexity they added to the process of forecasting demand, Sarkisian said.
To make inventory levels transparent to customers and suppliers, all parties along the supply chain must act in concert, he said. "If we can achieve that model, it will reduce, but not eliminate, the volatility of the semiconductor cycle," he said. "To get to that level, we need to change the nature of the business relationship."
That entails a major commitment of IT resources to create a Web-based system to provide supply and demand data in real time, he said. Altera hopes to leverage standards such as RosettaNet and other XML -based data-exchange methods, he said.
Xilinx's efforts to improve forecasting and inventory control are taking a similar direction, with a focus on deeper ties in the EMS community and an investment in online tools, said Kris Chellam, chief financial officer of the San Jose company.
Beyond its relationships, Xilinx is working on a new way of forecasting and has hired a consultant to develop a methodology that looks both at macroeconomic leading indicators and data that is more specific to the PLD industry, Chellam said. In tandem, the company is developing internal metrics on its top 15 customers to track activity in their end markets and get a reality check on demand forecasts.
Additionally, Xilinx plans to reduce its inventory to 100 to 120 days, about 30% to 40% lower than the historical average, Chellam said.
To maintain this level, the company is working with its foundry partners to compress the manufacturing cycle by transitioning next quarter to 300mm-wafer production. 300mm wafers yield about twice as many die in an eight- to 10-week cycle, compared with the 14-week cycle of 200mm wafers, Chellam said.
More efficient yields will in turn support a BTO model, under which Xilinx intends to hold a certain amount of prototype inventory, with the rest in wafer form to be packaged and shipped only when the customer places a volume order.
A similar model was also recently advanced by Altera, signaling an end to the off-the-shelf convenience they've come to expect from PLDs.
"Through time we will have different lead times than we've had in the past, which will affect the forward thinking of most of the end customers," Sarkisian said.