Reason Reprint - 'A Chip in the Chain' - FM Global Touchpoints · A Chip In The Chain Outsourcing...

reasonproperty risk and insurance solutions for a complex world

reprinted from the march 2008 issue

A ChipIn The ChainOutsourcing increases opportunity (and risk) for electronic product producers

[ reprinted from the march 2008 issue of Reason magazine. ]

Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Special-SEMI-

CONDUCTOR


A Chip in the ChainOutsourcing increases opportunity (and risk) for electronic product producers

Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Specialized INDUSTRY • Special-

When it comes to high-challenge industries

with complex risk management issues,

the semiconductor industry is near or at

the top of the list. It’s also a leading industry when it

comes to capital costs. For instance, a semiconduc-

tor fabrication plant—known as a fab—can cost more

than US$4 billion to build and outfit.

Add another US$500 million for annual research

and development and US$100 million in payroll, and

it’s no wonder that only the largest electronic prod-

uct companies can afford to build their own dedi-

cated fabs. Instead, an increasing number of electron-

ics firms are specializing in what they do best—

the design, marketing and distribution of innovative

electronic products—and outsourcing most manufac-

turing processes to outside suppliers or producers.

This horizontal specialization has given rise

to a new business model whereby hundreds of new

integrated circuit (IC) design firms, without any semi-

conductor fabrication infrastructure to speak of, have

found success. These so-called “fabless” IC firms out-

source chip manufacturing to fabrication foundries—

large semiconductor manufacturers that produce chips

for many different fabless firms.

Growing up and outThe greatest growth in subcontracted semiconductor

manufacturing and electronic product assembly or test-

ing is taking place in Asia-Pacific countries—

outside of Japan and Korea—particularly Taiwan,

China, India, Malaysia and the Philippines. The grow-

ing sophistication of the manufacturing resources


CONDUCTOR

found in these countries has enabled U.S.

electronic-product firms to flourish by out-

sourcing costly manufacturing processes.

An efficiently managed, demand-

driven supply chain can clearly provide

a competitive advantage. Take the recent

introduction of the Apple iPhone, and the

many generations of the company’s iPod.

These powerful and popular consumer

electronic systems require a global sup-

ply chain. The iPhone alone requires chips,

components, and assembly and test ser-

vices from the United States, Singapore,

Taiwan and China. Apple has used its flex-

ible supply chain to meet wildly fluctuat-

ing (but mostly increasing) demand for its

innovative products. In fact, the firm was

ranked number two on AMR Research’s

2007 Top 25 Supply Chains, behind

Nokia and ahead of firms such as Proctor

& Gamble, IBM and Toyota. Contrast the

supply chain success of Apple with the

consumer angst generated by the Christ-

mas shortages, for the past two years, of

the Nintendo Wii gaming console.

It’s obvious that along with the bene-

fits of outsourcing—faster time to market,

lower capital costs,

capacity, competi-

tive advantage, flex-

ibility—come some

clear risks, including unanticipated supply

disruption, unknown or uncertain supplier

risk quality, poor communication chan-

nels, quality fluctuations, natural and man-

made disasters, and logistical challenges.

A costly mistakeAs supply chains become increas-

ingly stretched, both globally and in the

number of suppliers, the job of managing

their interdependencies grows exponen-

tially. With electronic-product lifecycles

often measured in months, a single misstep

along the supply chain can have disastrous

consequences. Just ask

Ericsson.

In March 2000,

a lightning-sparked fire

at the Royal Philips

NV semiconductor fab

in Albuquerque, N.M.,

USA, resulted incon-

tamination of two of the

four clean-rooms at the

facility. The 10-minute fire caused extensive

smoke and water damage that would take

several months in which to recover. Unfor-

tunately, the plant was the main supplier

of critical chips needed for next-genera-

tion cell phones by both Nokia and Erics-

son. In its initial notification to Nokia and

Ericsson, Philips estimated that production

would resume after just a one-week delay.

It turned out to be an unduly optimistic

figure. Nokia soon discovered that it was

going to take much longer for the plant to

recover, and so took immediate steps to

secure alternative supplies of the chips.

By the time Ericsson realized the

extent of the supply disruption, it was

too late: Nokia had already locked up the

available backup supplies from locations

around the world. By the end of 2000,

Ericsson sustained a loss of more than

US$2 billion, which it blamed on a

number of factors, including a shortage of

critical components. Within a year after the

fire, Ericsson announced it was leaving the

mobile-handset market, and signed a joint-

venture deal with Sony.

An efficiently managed, demand-driven supply chain can provide a clear competitive advantage.

www.fmglobal.com[ reprinted from the march 2008 issue of Reason magazine. ]



Still a tough sellDespite the occurrence and widespread

knowledge of supply chain disasters

like Ericsson’s, managing supply chain

risk has not yet reached the top of most

organizational to-do lists, according to

Vincent DeGiorgio, FM Global’s princi-

pal engineer for the semiconductor and

telecommunications industries.

“With our electronics clients, we

deal most often with the risk manager—

and this person may or may not have had

significant interaction with the groups

responsible for establishing relationships

with fab foundries and other suppliers,”

he explains. “So, getting to the right peo-

ple within one of our client’s organizations

is the first step; from there, we can begin

reaching out to that client’s suppliers.”

According to DeGiorgio, the motiva-

tion to look more closely at distant sup-

pliers is increasing. “Clients often ask us

about increasing their contingent business

interruption coverage—we call it Depen-

dent Time Element, or DTE, coverage—

which covers them for loss of sales [minus

non-continuing expenses] that may result

from an interruption in supply or loss of a

major customer.”

DeGiorgio continues, “Our fabless

clients are increasingly interested in gain-

ing higher limits on DTE coverage, but

we can only do this if we are permitted to

assess the risk quality of their suppliers.

In the past, this was very hard to arrange,

but we’re making progress. There’s still

Putting the 10 in 4910A decade of FM Approvals’ groundbreaking Standard

One of the key ways that FM Approvals helps improve the overall loss experience for the semiconductor and electronic product industries is through the development and promotion of standards and guidelines. Recently, one of the most important and innovative material evaluation programs in the semiconductor industry—Approval Standard 4910, Cleanroom Materials Flammability Test Protocol—turned 10. The standard, introduced in 1997, details the performance requirements for material intended for use in semiconductor fabrication cleanrooms, including wall coverings, wet benches and other tools. FM Approval Standard 4910 is used to evaluate the ability of material to limit fire spread, smoke damage and damage from corrosive fire byproducts. To date, more than 180 materials and resins have passed the 4910 test protocol and been listed in the Approval Guide, a publication of FM Approvals. The availability of 4910 material has revolutionized the manufacture of tools and accessories for cleanrooms, dramatically reducing the incidence of fires and associated damages. According to Vincent DeGiorgio, FM Global semiconductor industry specialist, “It’s amazing how far FM Approvals has come with the 4910 standard in a fairly short time. Today, 4910 materials are the standard for wet benches and other cleanroom products. In fact, you have to special order a product to be made from non-4910 plastic.” “The advent of 4910 helped extend Takiron’s brand impact within the semiconductor industry and helped open doors for other business opportuni- ties,” explains Mikio Matsui, business market manager for Japan’s Takiron Co., Ltd., a top manufacturer of industrial material, including engineered plastics and products made from these plastics. “When we introduced our 4910-listed products, they were recognized as value-added products by the industry.”

www.fmglobal.com



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an attitude—a fear, I guess you could say—

that pushing too hard to gain access to

supplier facilities will somehow disturb these

very high-value relationships. Yet, the reality

is that it should only strengthen them.”

Two fab-ulous clientsMany FM Global fabless clients depend

on two of the world’s largest chip found-

ries, TSMC and UMC, both based in

Taiwan and ranked number one and two

in the world, respectively. About a year

ago, FM Global semiconductor specialists

spent three days at UMC facilities in Tai-

wan on behalf of a fabless client. UMC,

which had 2006 sales of US$3.67 billion,

employs more than 12,000 people in Tai-

wan, Japan, Singapore, Europe and the

United States.

“Both TSMC and UMC adhere to

the standards and requirements in the

FM Global Loss Prevention Data Sheet 7-7

[Semiconductor Fabrication Facilities], as

do many semiconductor fabs worldwide,”

DeGiorgio notes. “We found the level of

risk quality at UMC to be highly compa-

rable to some of the better protected fab

facilities we’ve worked with anywhere in

the world. We found a few issues, which

we almost always do, but many of those

concerns were addressed immediately,

while others have been budgeted for.

They valued our findings and have taken

action.”

Several factors contribute to a suc-

cessful risk assessment visit to a supplier

or foundry, including gaining cooperation

and coordination through client and sup-

plier contacts; providing a detailed agenda

and questions prior to the site visit; having

FM Global semiconductor specialists spend

several days on site discussing the findings

in an exit conference; and reporting the

findings to the client and the supplier.

But a risk assessment visit is just

one—albeit major—step in improving risk

management of the electronic product sup-

ply chain. Said DeGiorgio, the key strate-

gies for risk management are identifying

exposures (financial, natural hazards, prod-

uct lifecycle, resource availability, supplier

reliability), reducing exposures (through

improved supplier selection, business con-

tinuity planning, risk improvement), and

transferring risk (through adequate busi-

ness interruption coverage).

According to Mark McAdams,

FM Global assistant vice president and

underwriting specialist for the semicon-

ductor and mining industries, many of the

largest electronics and telecommunication

product manufacturers dig deeply into the

risk quality of those on their supply chain.

McAdams points to

FM Global customer

Cisco Systems, the

world’s leading sup-

plier of data-net-

working equipment

and software.

“Cisco analyzes not only the qual-

ity of its direct suppliers, but also the qual-

ity of companies that supply its suppliers,”

McAdams says. “By understanding the risk

quality at various points along its supply

chain, Cisco can either work to improve

the quality of those suppliers or develop an

appropriate contingency plan. Where we

help them is by providing our normal prop-

erty loss prevention assessment, custom-

tailored to go as deep as Cisco would like

to go. We can also assist Cisco’s suppliers

or customers with loss prevention recom-

mendations to help them improve their own

risk quality.”

Indeed, from on-site assessment visits

and recommendations to industry-leading

research and standards development (see

sidebar previous page: “Putting the 10 in

4910”) to global highly protected risk cov-

erage, FM Global helps businesses reduce

supply chain risk and prevent loss at their

facilities worldwide.

A Client’s Account


ON Semiconductor’s Dennis Ibarra on how the company’s Philippines facility was able to beat back a string of fierce typhoons and stay in business to meet customer demand

[ reprinted from the march 2008 issue of Reason magazine. ]www.fmglobal.com

O N Semiconductor’s test facility in Calamba, Laguna,

Philippines, is a just-in-time supplier of application-

specific integrated circuit (IC) chips to, among others,

BMW, Hewlett Packard, Boston Scientific and Rockwell Collins.

The company, formerly known as AMI Semiconductor, is head-

quartered in Pocatello, Idaho, USA, but, explained Dennis Ibarra,

president and manager of ON Semi Philippines, 80 percent of

ON Semi’s goods worldwide—approximately [US]$600 million

of business in 2007—eventually find their way through his criti-

cal post-processing operation.

When, in late 2005, the company occupied the facility—

a converted warehouse selected a year earlier on the strength of

FM Global’s evaluation of its and other potential sites’ expo-

sures—the building had already become the first location in the

Philippines to achieve highly protected risk (HPR) status. Said

Steve Shivley, account manager, FM Global, “ON Semi got us

involved with their general contractor right away, so we were

able to review plans for sprinkler system upgrades and additional

roof bracing before construction began. And our field engineer

visited the plant on a regular basis to make sure our guidelines were

being followed.”

According to that field engineer, Jessie Esconde, one of those

guidelines—that only FM Approved sprinkler heads would be

installed throughout the facility—was very nearly overlooked. “We

discovered that, contrary to what the client reviewed, the contractor

had installed dozens of heads that were not FM Approved,” he said.

“All were replaced with the correct heads—at no cost to the client.

In addition, because the plant is exposed to earthquake, adequate

seismic protection was installed for all sprinklers. I’ve worked

with ON Semi for seven years, and the company has always been

extremely proactive in completing our recommendations.”

“When a client brings us into its plans early on,” said

Shivley, “we can add a lot of value. At that point, it typically costs

no more to install FM Approved products, whereas retrofitting

after operations have begun can be both expensive and time-

consuming for the client.”

Not a year after ON Semi began operations at the Calamba

facility, the highly protected location was put to the test by a

series of intense typhoons. The largest, the Category 4 Xangsane

(local name: Milenyo), hit on Sept. 28, 2006; it was the strongest

storm to hit the area in over a decade. Yet the facility continued

filling orders for its customers almost as if nothing had happened.

Dennis Ibarra, for one, was not surprised. Here, he comments on

how his facility’s commitment to risk mitigation helped the com-

pany avoid a major disaster.

On becoming HPR “First, we had every square meter [foot]

of our facility covered by sprinklers. Second, we made sure

FM Global was involved not only in the review of the sprinkler

design, but in all aspects of building construction. Before we

began operations, for example, we improved the spacing of the

fasteners on the original roof, especially at the perimeter and cor-

ners, so that it would resist wind uplift. Finally, with regard to

flood protection, we selected this site in part because it’s located

next to a deep ravine into which water can be discharged. If we

have a flood here, everyone better get Noah’s Ark ready.”



CONDUCTOR

On preparing for the storm “Three days before Milenyo arrived,

we activated our emergency response team and reviewed each per-

son’s function. Areas of the facility that were prone to a full-blast

hit were boarded up, and many of our multimillion-dollar testers—

of which we have 150—were covered with plastic, in case water

were to leak into the facility. We also did some common-sense

preparations, like cleaning out rain gutters and roof drains.”

On weathering Typhoon Milenyo “In the office park next to ours,

one semiconductor facility lost an entire roof; another had its roof

cave in, damaging a couple of testers. Because our building is

high-integrity, we had no such damage. For us, as a just-in-time

facility, the main concern was closely monitoring our incom-

ing and outgoing shipments. Thanks to our contingency planning,

we were able to receive incoming shipments from our suppliers

early, and, although a few outgoing shipments were delayed, we

missed only one flight in three days. A serious business interrup-

tion was avoided.”

On lessons learned “Our business continuity plan is not a

stagnate document, and, following Milenyo, we revisited the plan

and adjusted it for future emergencies. Regarding physical pro-

tection, we bought additional emergency rain protection for our

critical equipment, and modified the gutters to better handle over-

flow during excessive rainfall. Our testers are a huge investment,

and we can’t afford for them to get wet. What’s more, we visited

our neighbors in the office park, and talked to them about how their

buildings performed during the storm. If they can better prevent

wind damage in the future, it reduces the risk that debris flying off

from their buildings will affect our operations.”

On the future “We started building an expansion in May 2007,

and it’s been outfitted with FM Approved windows and doors.

In addition, we’ve installed steel shutters; an all-weather loading

dock large enough for two 18-wheelers, so even in heavy rain-

fall we can send and receive shipments without boxes getting wet;

and FM Approved cyclonic washers on the roof, which will

allow it to survive winds of 200 km/h [124 mph]. An added

benefit of protecting our property to this extent is that it’s enabled

us to focus our risk management efforts elsewhere—for example,

on human element concerns.”

On collaborative risk management “Our relationship with

FM Global is not transaction-based; it goes beyond concerns

about premium. Both sides are actively involved in preventing

loss at this facility, which promotes proactive sharing. We let

FM Global know what we’re planning to do—such as build an

expansion—and FM Global doesn’t wait until a disaster strikes

before it begins the risk mitigation process. Our philosophy is that

nothing should risk our customers’ satisfaction in terms of timely

delivery and quality. That’s why collaborating with FM Global

works so well—it continually informs us what measures we can

take to further mitigate risk at this facility, and in turn continue

delivering to our customers.”

A STEELY RESOLVEThe retractable steel shutters of ON Semiconductor’s Philippines facility afford an extra measure of protection to the building’s envelope, while rows of cyclonic washers help secure the roof. Said Dennis Ibarra, president and manager at the location, “We’ve overdone it to make sure that, in a typhoon, our roof stays on and our windows survive.”


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