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The Art and Science of Capacity Planning




Francisco Buitron, Vice President of Operations & Supply Chain at Qualcomm, discussed what makes capacity planning both an art and science in an episode of Oceanside Chat with host Helen Wang, Professor at the UC San Diego Rady School of Management on February 16, 2022.

Data-driven forecasts combined with transparent, frequent, and solidified feedback with contracts and agreements among partners along the supply chain make for the ideal formula for capacity planning. It is also most effective when the science behind the data and the forecast incorporates the art of building relationships with their suppliers and customers. The audience also agrees that capacity planning is both an art and science. A quick poll during the discussion showed that 56% of the audience see capacity planning as both a science and an art, 38% believe it's more of a science, and 6% think it's mostly art. To better understand this perception of capacity planning, Buitron discusses the semiconductor industry, its cycle, the current situation, and what to expect moving forward.

All eyes are on the semiconductor industry as the global chip shortage continues to prevail, impacting supply chains worldwide. On the other hand, these challenges have encouraged companies to communicate with each other and develop partnerships to help resolve the crisis. The shortage may be distressing, but there is hope, and the semiconductor industry's future is still promising. The Semiconductor Industry Association forecasted in 2021 that the capital expenditures of the semiconductor industry will go over $150 billion in 2022. A noteworthy forecast may also indicate the growth of career opportunities in the industry. According to reports, capital expenditures in the semiconductor industry were at $59 billion. In addition, they also noted that from 2000 to 2020, the R&D expenditures of the semiconductor industry grew at a compound annual growth rate of about 7.2%.

Capacity Planning: Is it Science? Or is it Art?

Simply speaking, the quantitative aspects and the delineated procedures behind capacity planning make it a science. For example, there is always a need to determine the lead time in a manufacturing process, quantify how much investment will be required, identify the cycles and patterns, and establish a target utilization rate. In addition, there is a science as to why capacity cannot be 100%. For example, if a firm decides to be at full capacity, balancing that with idle time for maintenance, unexpected incidents, and flexibility for upside is inevitable.

On the other hand, capacity planning cannot be successful without establishing good relationships within the supply chain network. With trust and transparency as the foundation connecting upstream to downstream supply chain partners, the art of capacity planning can allow for better forecasting and ease in adjusting to updates in the data and the forecast. You can anticipate more timely and meaningful feedback when the firms and their customers have reliable relationships. Incorporating this with data-driven capacity planning can make for a resilient and successful supply chain.

The Semiconductor Industry Cycle

In the past 30 years, demand for semiconductors has significantly increased, driven by the development of consumer devices that become more intelligent. One thing that remains constant is the length of lead time for the semiconductor manufacturing process. This complicated process can take anywhere from 2 to 7 months, wherein the wafers are designed, processed, and assembled in various parts of the globe. Buitron says he has also seen a cycle of about 5 to 8 years wherein demand would drastically grow, and shortage would occur. Then to keep up with the request, the industry ends with excess supply at the end of the cycle. There is no doubt that we are in a similar cycle with the current challenges that the semiconductor industry is facing. However, Buitron emphasizes that this time around, the gap between supply and demand has been the largest to date, making it the “perfect storm.” It has significantly impacted everyone, as seen in the continuous discussion about how much more the government is getting involved.

Unprecedented Global Chip Shortages

The most recent shortage is nothing like we have seen before. It is evident in the wide gap between demand and supply, greatly impacting not only those along the supply chain but also the government and the consumers. In a Request for Information (RFI) on the semiconductor supply chain conducted by the Department of Commerce, they found that the median inventory has dropped from 40 days to less than 5 days for semiconductor parts. The RFI also determined that buyers do not see increases in the supply they receive, confirming the gap between supply and demand, especially with a 17% increase in median demand for chips seen in 2021 compared to 2019. Causing the bottleneck seems to be the wafer production, challenging the industry to find a sustainable and long-term solution, especially with the current scale of global semiconductor shortage. One would think that expanding capacities would resolve it. Unfortunately, a solution is easier said than done when wafer fabs require hundreds of millions of dollars in capital, if not billions depending on the technology, and around 2 to 3 years to build. Though businesses like Intel design and manufacture their own semiconductors, there are significantly more fabless firms that rely on foundries as their manufacturing partners, many of which are in Asia. In addition to reliance on foreign firms, we are facing an unprecedented global semiconductor shortage due to the gap between supply and demand, mismanagement of forecast, limitation of capacity, trade policies, and force majeure events such as the Covid-19 pandemic.

Capacity Planning Challenges

Improving capacity planning is a collaborative effort. To avoid over-adjusting or reacting, Buitron advises getting faster feedback from your supplier and customer base and working together to understand the actual demand and trend.

Some companies started increasing their capacity 2 years ago when they foresee shortages. However, due to the long lead times, the market has yet to feel the effect of the increased capacity which may start later this year and in the succeeding 2 years. As a result, Buitron predicts that demand and supply will balance in the next 12 to 18 months, and inventory correction will occur.

In designing fabs, firms set different capacity utilization targets ranging from 75% to 85% to maximize the investment and meet customer commitments. With the current shortages, many fabs are running at around 95% capacity or even more to meet urgent demands. There is no doubt that capacity planning is essential; however, no one fixed formula fits all. Many factors affect capacity planning that could make or break firms' investments into fabs. In Buitron's experience with a previous company, they had to cancel orders, stop shipments of tools they ordered, and step on the brakes for an internal capacity expansion they had initially planned due to an increased demand that their forecast showed. While the development was happening, an economic downturn occurred, and they saw a massive demand decline, forcing them to cease the expansion. Therefore, he firmly believes in establishing trustworthy relationships with your suppliers and customers and having an agreement that will protect all parties involved during capacity planning. In other words, forecasts are not enough without validation through timely and transparent feedback from your customers and suppliers.

Changing Times: Rethinking Strategies and Government Solution

The current global shortage also highlighted how just-in-time might no longer be the most effective inventory management for the semiconductor industry. As a result, firms are rethinking their strategies and having conversations with their suppliers and customers to assess how much inventory buffer they should hold to serve as a contingency to better respond to the unpredictable supply and demand in the industry. Meanwhile, supply chain expansion has also been a common theme, as the pandemic has exacerbated the semiconductor industry's misalignment of supply and demand in the past 2 years. Reshoring has been a resounding strategy, but there is still potential for expansion in other areas worldwide, such as Asia, to help fight the shortage in the US.

To further expand capacity and help fight the shortage, the U.S. government promotes reshoring manufacturing domestically or in nearby countries. Mexico is a great candidate for the back end needs of semiconductor manufacturing. In particular, Mexico has the potential to provide the required labor in the packaging process. However, Buitron notes areas for improvement. For example, there are no fabs in Mexico yet, and there is a need to improve infrastructure before moving forward. One among the many factors that firms must consider when reshoring manufacturing, assembly, and packaging.

The semiconductor industry plays a critical role in the future of our country's competitiveness in terms of economic and technological leadership. Therefore, American companies in the semiconductor industry can strategically benefit from the government's support, similar to how the Chinese government supported the domestic growth and development of the semiconductor industry in their country by investing billions of dollars in building new fabs to create the needed capacity. One example is the passing bill of the CHIPS Act of 2022 with $52 billion in subsidies on July 28, 2022. “Specifically, the bill provides an income tax credit for semiconductor equipment or manufacturing facility investment through 2026. The bill also establishes a trust fund to be allocated upon reaching an agreement with foreign government partners to promote (1) consistency in policies related to microelectronics, (2) transparency in microelectronic supply chains, and (3) alignment in policies towards nonmarket economies.”

Mastering The Art and Science of Capacity Planning

Editor's Analogy for A New Perspectives The Supply Chain Network is similar to transportation systems. Both are primarily governed and determined by laws of human behavior. Traffic evolves because of decisions made by people to move from one location to another. Supply chain flows because of decisions made by businesses to transform economic value from upstream to downstream. On the one hand, the uncertainties of human behavior made capacity planning an art form. On the other hand, certainties of finite investment and physical limitations of people, time, speed, and cost formulate the science. Like air traffic controllers, capacity planning prevents collisions, organizes and optimizes the system flow, and provides information to optimize the supply chain network.

With the current rate of how things are moving, it is difficult to say when the cycle, as Buitron mentioned earlier, will end and the supply and demand for semiconductors will stabilize. Firms will try to continue to keep up with demand, expanding capacity the best way they possibly can. However, without immediate and transparent feedback from suppliers and customers, they may end up with a costly over-adjustment. Everything has a pattern, as seen in the semiconductor industry cycle. Once we can determine that pattern, we can leverage that to resolve the underlying issue. Forecasts are essential tools in capacity planning, but it takes more than what the numbers represent to fully comprehend how demand will behave and how to respond to it.

As demand for semiconductors continues to grow, so does the need for talent and skilled labor. Buitron is passionate about encouraging people, especially the younger generations, to pursue careers in the industry. He believes that electrical and mechanical engineers, software developers, data scientists as well as economists and business professionals will be needed in the growing semiconductor industry.

Professional Bio

Podcast Creator & Article Editor: Helen Wang

Helen's professional career working on disruptive innovations has brought her passion, joy, and self-fulfillment. Her career in multinational technology companies, from Apple's first iPhone to Google's self-driving car, has shaped her transformational leadership style. She advises and coaches companies worldwide while serving as the Chairwomen of the Institute for Supply Chain Excellence and Innovation at the University of California San Diego and teaches at the Rady School of Management. In addition, Helen founded the non-profit organization Oceanside Perspective to build an intellectual bridge between the current and future generations of thought Leaders, Innovators, Technologists, and Entrepreneurs.

Guest: Francisco Buitron

Francisco has been working in supply chain and operation roles in the Semiconductor industry for over 30 years, working for industry leaders including International Rectifier/Infineon, Skyworks Solutions, and now Qualcomm. Having been through many supply and demand cycles in his career, he has worked with customers and suppliers worldwide to resolve the always challenging supply chain situations and develop innovative solutions for Planning, Logistics, and Sourcing with the top industry vendors. Francisco is originally from Mexico City, where he earned his Bachelor of Science in Industrial Engineering and Systems from the ITESM-Tecnologico de Monterrey school.

Contributor: Angela Cariño Garais

Angela has 8 years of experience in innovative program development in both e-learning and traditional library settings. She is currently the Makerspace Coordinator for the Marine Corps Air Station Miramar Library and led the establishment of one of the first Makerspaces among all USMC libraries, from procurement to programming development, advocating for the Marines to learn and use additive manufacturing in support of their mission. She strongly believes in the value of harnessing information towards transparency and supporting problem-solving and decision-making tasks.

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