Not with a bang, but with a whimper: Understanding delays in semiconductor supply chain dynamics

The semiconductor industry is characterized by high volatility: rapid increases in market demand are followed by sharp downturns. Therefore, one would expect its supply chains to be very fast in adjusting to changes in demand. However, empirical data from one leading semiconductor firm suggest that delays in adjusting to the latest downturn of the market in 2001 have been considerable. For instance, inventory levels have taken two years to come back in line. Generally, these delays and the dynamics that are causing them are not well understood within the industry. This paper presents research that explains these delays by means of a system dynamics simulation model that captures the overall supply chain structure, the generic decision-making processes and the associated supply chain dynamics typical for this industry. The model is based upon pre-existing and well-tested generic supply chain models from the literature. It has been tailored and validated with representatives from a major European IC manufacturer. Its dynamic performance has been calibrated using four years of data on key performance aspects such as inventory levels, cycle times, demand flexibility and delivery quality. With this model, several SCM policies are explored that are effective in improving both sales and supply chain performance, such as more aggressive capacity build-up, lower capacity utilization targets and higher end product buffer stocks.