VIRTUAL FAB AND CUSTOMER RELATIONSHIP
MANAGEMENT – A CASE STUDY OF TSMC
NENG-PAI LIN and YI-CHING HSIEH
Department of Business Administration, National Taiwan University 50, Lane 144, Sec. 4, Keelung Road, Taipei, Taiwan, R.O.C. E-mail: [email protected] [email protected] ABSTRACT
As the global competition in the semiconductor industry grows, customer service in addition to manufacturing capability becomes an important way to success. As such, virtual fab (VF) has been proposed by companies in this industry. Taiwan Semiconductor Manufacturing Company (TSMC), one of the world’s largest dedicated IC foundry, constructed its VF to strengthen bond with customers. Customers can make inquiries directly to TSMC's information system and receive immediate status reports of their orders. In this paper, the framework of TSMC’s VF is introduced, and the competitive advantages resulted from VF are investigated. Implications of TSMC’s experience are then discussed.
Keyword: virtual fab, virtual factory, electronic commerce
INTRODUCTION
In today’s business-to-business markets, many companies face the intense pressure caused by fast changes in technology, short product life cycle, and fierce global competition. In this situation, much attention has been paid to timely and customized services, which contribute to customer satisfaction. In the past decade, new thinking about the buyer-seller relationships is so evident that experts asserted that relationship marketing (RM) is a new marketing paradigm. It focuses on approaches to build, develop and maintain all successful relational exchanges (Morgan & Hunt, 1994), and as a result, partners can achieve higher financial performance (Kalwani &Narayandas, 1995), mutual trust, commitment (Morgan &Hunt, 1994) and satisfaction (Cannon & Perreault, 1999).
marketing approach from traditional ones (Ducan &Moriarty, 1998), and it is crucial to understand the nature of the media employed to integrate interorganizational systems. Internet’s open standards and the function of information broker have made it become the most powerful media to integrate partners’ operations (Upton &McAfee, 1996). According to a survey from Advanced Manufacturing Research, 71% of manufacturers already use the Internet to communicate with customers, and 11% plan to so in the near future (Allnoch, 1997). Despite the perceived importance of Internet, there are still limited empirical studies about Internet-enabled relationships (Davis et al., 1999).
During the past decades, foundry has become one of the fastest growing businesses in the world and the importance and competition in this industry will keep growing in the near future. Customer service is the new strategy for foundry companies in addition to manufacturing capabilities. Virtual fab (VF) concept proposed by the industry has become one of the critical aspects for achieving competitiveness (Korczynski, 1997). Upton & McAfee (1996) defined the virtual factory, “a community of …. factories, each focused on what it does best, all linked by an electronic network that would enable them to operate as one- flexibly and inexpensively- regardless their locations.” The world’s largest integrated circuit (IC) manufacturer, Taiwan Semiconductor Manufacturing Company (TSMC), is constructing its VF to improve customer relationships and operational efficiency.
The purpose of this paper is to contribute to the understanding of Internet as an enabler of strengthening the relationships between buyer and seller. More specifically, the contributions of this study are to: (1) introduce the framework of TSMC’s VF; (2) Explore the influence of important Internet capabilities on customer relationships; (3) investigate the relationship between the VF and the efficiency improvement and customer satisfaction. LITERATURE REVIEW
Relationship marketing
Transaction cost analysis (TCA) is a framework for analyzing the governance structure between buyers and sellers. It views the governance structure falling on either end of a bipolar continuum, vertical integration or discrete market transactions, depending on the transaction cost (Rindfleisch and Heide, 1997). Relationship marketing, however, offers the third option: achieving lower transaction cost through a closer relationship with external suppliers (Gummesson, 1996). In addition to great products, effective and efficient communications are also necessary when building and maintaining long-term customer
relationships. When there is certain communication channels built between organizations and the proprietary information owned by each other, it means that there exist customer relationships (Evans & Wurster, 1997). How to improve the efficiency of communications has become a major concern of companies (Cunningham & Tynan, 1993).
Capabilities of Internet technology
For the superior capabilities of Internet, it should be considered an enabler of mutually beneficial relationships with customer which were characterized by interdependence, resources sharing, and cooperation (Angelides, 1997; Richard, 1994). Some capabilities of the Internet discussed in literatures are as follows
! Interactivity: Deighton (1996) interpreted interactivities as: the ability to address an individual and to gather and remember the response of that individual, and to address that individual in a way that takes into account his or her unique response. Sullivan (1999) defined interactivity as the degree to which the dialogue can be generated between corporate and the visitors to the site.
! Connectivity: the open and global nature of Internet makes communication and co-ordination between corporate and customers or within groups of customers become cost- and time-efficient (Dutta & Segev, 1999). Connectivity can be assessed by counting the number of hypertext links beyond and within the corporate Web pages (Sullivan, 1999).
! Information quality: it is an inexpensive way to search, organize, and disseminate vast amounts of information. The more valuable and deeper information provided on the Web site, the more likely to gain and retain customers (Honeycutt, Flaherty & Benassi, 1998). CASE METHODOLOGY
Case studies are typically used to: (1) describe a heretofore unstudied situation; (2) explore current theory more thoroughly; (3) support, expand or raise questions about existing theories (McCutcheon & Meredith, 1993). The purpose of our case study is to explore situations and problems when VF concept is implemented.
In this study, data was collected by the following steps. First, we gathered information about the background and VF of the focal firm from its homepage (http://www.tsmc.com.tw/) and other publications. Then, we conducted several in-depth interviews with senior system
engineers of TSMC. Each interview lasted about an hour. The engineers were asked to describe the framework of VF, the pro and cons they have faced so far, and the changes having happened to TSMC since it adopted VF.
STUDY PROFILE
The focal firm, TSMC is the world’s largest and fastest growing dedicated IC foundry company. Since founded in 1987, this company has been dedicated to providing manufacturing services for advanced ICs and had a reputation for excellent product quality.
Before 1990s, the vertical integrated companies leaded IC industry. For the high capital investment and dynamic environment, the industry responded to the high risk by disintegration. TSMC is the one who dedicated in IC manufacturing. Since it was founded, TSMC has been committed to developing advanced manufacturing technology, expanding capacity at wafer fabs, and achieving customer satisfaction.
In order to differentiate its service quality with competitors, TSMC announced its VF concept and organized a dedicated team to fulfill it. Its strategy was to develop long-term competitive advantages by building and strengthening bonds with customers.
THE FRAMEWORK OF TSMC’S VF
TSMC defines itself as a customers’ VF. It means that, through interactions with TSMC, customers can have all the benefits of in-house fabs, and gain increased control on TSMC’s fabs to meet their product requirements. Through three sub-systems, TSMC-Online, TSMC-Direct and TSMC-YES, all aspects of communications and procedures are automated and easily accessible to them, keeping them constantly informed up-to-date reports on shipments, technology, inventory, etc.
TSMC-Online
In July 1999, TSMC begins a new web site, TSMC-Online. The capabilities provided by this system are as follows:
! Review technical documents, brochures, and manuals during chip design.
! Submit mask tooling information, enter foundry service request forms, and place orders.
shipments, backlog, and delivery schedules through the production cycle.
! Read the quality and reliability data, and news or information shared with customers, such as product yield forecast, R&D project status, and technical marketing information.
Each TSMC’s customer has its own password, and is able to access to these services anytime. This system makes TSMC’s fabs more transparent to customers because they can get all information in different stages, such as fab selection, product design, order placement, production cycle, and shipment, which lowers the entry barrier for customers.
TSMC- Direct
In addition to the Web solution, TSMC construct its VF by the system-to-system connection. Using the Extricity software Inc.’s Alliance as the backbone, TSMC-direct allows customers to participate in off-site manufacturing. Customers can place orders, track WIP directly, and do the collaborative planning and information sharing with TSMC.
It reduced customers’ cycle time if connected with TSMC by Alliance software. Also, customers of Adaptec are more satisfied because they can receive products faster than before. This system also connects TSMC and other supply chain members such as independent test-and-assembly houses. With TSMC-direct, customers can “see through” TSMC’s VF into the whole virtual processes. (Electronic Buyers’ News, 1998).
TSMC- YES
TSMC-YES (Yield Enhancement System) helps customers to perform engineering analysis in their own sites. This system uses the Internet to establish a direct real-time connection between IC designers and TSMC's fabs during process development. Before, customers had to download raw data into spreadsheets when performing in-depth engineering analysis. It delayed the feedback to TSMC. With TSMC-YES, customers then gain access to the data and responses timely, resulting to more accurate and efficient analysis and troubleshooting. It shortens process development cycle time and improves product yields. TSMC-YES also maintains complete histories that correlate the yield of every lot with its process history. Using this system, customers can work with TSMC to quickly identify major yield limitations while ramping up a new product introduction.
The hierarchy of TSMC’s VF is illustrated by figure 1. The information transmission between TSMC and customers is primarily through Internet, and all the data will be collected
in a centralized data warehouse.
FAX
Server ServerMail ServerFTP TSMC -Online TSMC -Direct TSMC -YES EDI
Internet VAN
N
CustomersInterface (Extranet)
Centralized data warehouse
Fig 1: The hierarchy of TSMC VF
CONCEPTUAL FRAMEWORK OF THE IMPLEMENTATION OF VF
From the experiences of TSMC, we can see some competitive advantages from the implementation of VF. The following paragraphs are some propositions and analyses from the viewpoint of transaction cost analysis and relationship marketing.
VF Environment uncertainty Customer satisfaction Manufacturing agility Operational flexibility
Fig 2: Conceptual model of the competitive advantage of VF VF and relationship performance
With VF, customers receive value-added services directly through Internet. Because of the connectivity of Internet, customers can keep in touch with TSMC or its strategic
alliance partners at any time and any place. Therefore, transaction cost is minimized for VF enhances the efficiency of client booking procedures and monitoring efforts. For example, TSMC’s VF provides customers manuals and documents for fab selection and product design, and engineers passes CAD drawings among customers instead of sending them by fax (Electronic Buyers’ News, 1998). Also, it provides the function for customers to track order status and shipping schedules, so customers can easily monitor the processes within production cycle. Because of the lowest transaction cost consideration, companies who provide VF arrangement are preferred to customers.
Relationship marketing researchers placed great emphasis on the interactive aspect of transactional processes. Whenever a customer keyins an authorized password, the customized information appears on customer’s screen and some real-time interactions happen between the customer and TSMC. Also, Information has become so important that companies transmitting, storing and processing information effectively could fulfill the competitive advantage. As such, the capability of providing high-quality information of Internet-based VF is very important. Based on the above discussion, we propose:
Proposition 1: Customer satisfaction is higher when the VF is implemented. VF and manufacturing agility
As markets become more unpredictable and more diversified, companies now have to be able to not only predict but also be able to adapt in accordance with variations and changes within the market. The need for rapidly and cost-effectively providing customized products has led to the concept of agile manufacturing. Agile manufacturing can be defined as the capability to compete by reacting quickly and effectively to changing markets, driven by customer-designed products and services (Gunasekaran, 1998).
Since close interactions between customers and suppliers are essential for the agile manufacturing (Gunasekaran, 1998), the Internet-based VF is obviously an important enabler of manufacturing agility. It collects customers’ requirements from Web pages and responds them as quickly as possible. In addition, the real-time interactions in designing, producing and testing stages have shortened the time to market and have improved product quality. Based on the above discussion, we propose:
Proposition 2: manufacturing agility is higher when the VF was implemented. Environmental uncertainty
One of the major antecedents of transaction cost is environmental uncertainty. When the environment faced by the industry is highly uncertain, customers’ needs are changing, as a result, customers have to communicate with suppliers more often. However, this increases the transaction cost (Heide and Rindfleisch, 1997).
The primary goal of VF is to offer the control and flexibility benefits of vertical integration to those fabless customers. When customers have any different need, they can communicate with suppliers in an effective and efficient way. Compared to a static environment, customers can perceive the higher level of service and lower transaction cost provided by VF in a dynamic environment. Based on the above discussion, we propose:
Proposition 3: The greater the uncertainty of the environment facing the industry, the greater the relationship between VF and customer satisfaction or manufacturing agility. Manufacturing flexibility
VF is an environment open to customers to make requirements and order adjustments. However, customers’ intervention is viewed as a source of uncertainty in an operation system (Bowen & Jones, 1986). It is also a problem for manufacturing organizations to adjust the product mix, quantity and delivery time. Unstable of the production system may lead to higher cost and lower quality.
In operations management researches, flexibility is a solution for environment uncertainty problems (Swamidass & Newell, 1987). For example, product customization flexibility is the ability to accommodate customer’s unique requirements, and volume flexibility is the ability to quickly adjust the quantity of output to handle fluctuations in market demand (Krajewski &Ritzman, 1992). Therefore, an organization without the flexibility to deal with uncertainties caused by customers’ intervention will be harmed by the higher cost and lower product quality a. Based on the above discussion, we propose:
Proposition 4: The greater the operational flexibility, the greater the relationship between VF and customer satisfaction or manufacturing agility.
.
CONCLUSIONS
Over the past few years, TSMC has become one of the world’s largest and fastest growing dedicated IC foundry company. This article, therefore, attempted to describe the
contents of TSMC’s VF, which is one of the important factors that lead success. After the implementation of the VF of TSMC, customers can have all the benefits of in-house fab but without the risks of capital investments. For example, customers can track their orders and make requirements through Internet on real time to meet their specific needs. Moreover, customers can get all information in different stages such as fab selection, product design, order placement, WIP status, yield analysis, and shipping schedule, which lowers the entry barrier for customers and highers customer satisfaction .
From the experience of TSMC, VF tends to increase the possibility of exchange relationships building and helps to strengthen the bonds with customers. Under the uncertain environment, VF is more likely to be a source of competitive advantages, and leads to increasing market share and financial performance. Operational flexibility, however, could moderate the relationship between VF implementation and performance. Future research could examine the above propositions through empirical data.
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