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Slides_for_class_8 - Buyer Option Portfolio Composition of...

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G-Number ISSM 2005 1 Buyer Option Portfolio Composition: # of options, lead time, pricing / risk sharing Utilization: Over time, across demand outcomes Demand Time 8 5 3 Option exercise 3 month LT 5 month LT 8 month LT
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G-Number ISSM 2005 2 Buyer Portfolio Optimization Match supply availability and lead time to demand variability Tailor performance to operational and financial objectives High margin OEM Test house
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G-Number ISSM 2005 3 Supplier Execution Operating Decisions Defined Option Portfolio Characteristic Composition Number and lead time of options Capacity Long lead time materials Utilization Buyer exercise decisions Production Remaining materials Buyer perspective: Control supply chain decisions that define tool cost, lead time and availability
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G-Number ISSM 2005 4 Supplier Option Pricing Holding cost Financing cost of capacity and inventory Obsolescence cost Risk that capacity and inventory never used Holding cost Obsolescence cost Stage in tool lifecycle X XXX Var. of individual customer demand X XX # of customers and relative size X X Correlation of customer demands X X
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Sample tool procurement option structure 5
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Performance impact: Inventory and shortages With options Without options 6
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Relevant reading -    Intel’s description of its use of tool procurement options:     Vaidyanathan, V., D. Metcalf, and D. Martin, “Using  Capacity Options to Better Enable Our Factory Ramps,”  Intel Technology Journal , Vol. 9, Issue 3, pp. 185-191. Professor Johnson’s description of optimal utilization and  business impact of tool procurement options on buyers and  suppliers:       Johnson, B., “ Optimizing Tool Availability and Lead Time  with Procurement Options ”, Proceedings of the  Thirteenth Annual International Symposium on  Semiconductor Manufacturing , San Jose, California,  September 2005. Copyright, Blake Johnson
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Contract options: Summary Major costs: To purchase (up-front cost) To exercise (place “firm” order, or make a purchase commitment) Lead time: Between purchase of option and time when it can be exercised (“preparation  period, or time required to complete “lead time buy-down”) Between exercise of option and product delivery (how distant is the target buyer  must shoot at?) Exercise window: Time window during which option can be exercised “Adjustment” costs: To “buy down” the exercise lead time To extend, or keep open, the exercise window To “buy out” of a firm order or purchase commitment Other terms: Per period vs. cumulative constraints on exercise (“swing”) “Sell-through” rights Interdependencies between options  “Price” and “quantity” terms (e.g. fixed vs. flex quantity, fixed vs. index price) Multiple ways to accomplish the same thing (e.g. buy out and sell through)
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