Forecasting ATE Sales at Teradyne, Inc.

Forecasting ATE sales at Teradyne, Inc. 1 Agenda • Teradyne’s business • Problem statement • Process comparison and analysis – Teradyne’s forecasting process – System Dynamics process • Conclusions and insights • Next steps 2 Teradyne • Manufactures and sells equipment that automatically tests semiconductors – Used in wafer sort operations and – Final testing after packaging • Major customers include Intel, Motorola, Texas Instruments, Analog Devices, TSMC Semiconductor Capex 2 1.5 1 0.5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 3 Problem Statement • Teradyne sees dramatic cyclicality in its orders and struggles to efficiently adjust production to meet demand. 4 Teradyne’s forecasting process • Size of ATE market correlated with total semiconductor market size • Historically, Constant buy rate – ATE market = 2.5% * semi market – Size of semiconductor market based on external forecasts • Recent data departs from historical trends • Sales team provides input for market share estimates and short term forecasting based on customer input 5 Hope Fear 1990 now 2020 Semiconductor Market • Growth in market size • Oscillation in market size • Increasing amplitude of oscillation in market size Semiconductor Market Reference Mode Breakdown Hope Fear 1990 now 2020 6 Momentum Policies • Internal – – – – – Temporary employment Expandable and contractable capacity Long customer lead times (order to receipt) Surge capacity Shorten component lead times • External – Talk to customers to forecast better Even with perfect forecasts, operational improvements will drive performance. However the effects of particular policies may not be obvious 7 Causal Loops – Process Insights • Quick way to improve understanding of the industry dynamics • Great way to capture causal relationships • Expands viewpoint to big picture • Valuable by themselves • Easy to understand and work with Consumer Electronics Demand Semiconductor Content of Devices + Electronic Manufacturers Semiconductor Demand + + B + Desired Semiconductor Production + Semiconductor Capacity Gap - Semiconductor + Prices - Semiconductor + Production Expected Future Capacity Utilization Target Capacity Utilization + Investments in Process Technology + B Semiconductor Capacity + + + + Additions to Semiconductor Capacity + Required Semiconductor Testing + Actual ATE Capacity utilization Desired ATE Capacity Utilization + ATE Capacity Utilization Gap Functionality of Semiconductors + - B ATE Obsolescence + + ATE Testing Capacity + B + + Semiconductor Revenue Semiconductor Design R&D + Total ATE + + Deliveries + Other ATE Deliveries Other ATE Orders + - Relative Machine Flexibility Relative Cost per Test Relative Expected Future Performance Demand for test equipment Teradyne's Installed Base + R + + Teradyne's Orders+ + + Teradyne's Relative Attractiveness + Teradyne's Deliveries + Desired Capacity + Production + + Forecasted Orders Teradyne's + Capacity Relative Lead Time + + B B Teradyne's Lead + Time + Teradyne Additions to Capacity + Teradyne's Capacity Gap 8 Causal Loops – System Insights • Growth in market size – Due to growth in consumer electronics demand – Due to growth in semiconductor content in electronics • Oscillation in market size – Due to forecasting methods and delays in capacity adjustment • Increasing amplitude of oscillation in market size Testing market volatility IDM's perception + of risk + IDM's desire to eliminate risk + IDM's desire for flexible capacity - + IDM's production capacity Subcontractor's share of testing market + Excess testing capacity + + risk aversion - excess capacity attractiveness of + outsourcing Value capturing + + IDM's demand for outsourcing + Go Fabless + Fabless companies IDM's demands for subcontractor to add capacity + market power - + Financial success of subcontractors - + Subcontractoring capacity + + + Money grubbing Attractiveness of subcontracting + Market power of IDM + Subcontractors' desire to get big + Land grabbing Competitiveness of subcontractors + Consolidation Number of subcontractors- + Consolidation Price wars – Due to change in industry structure – increasing use of subcontractors 9 Model Construction Testing Yield Rate Required Semiconductor Tests ATE Equipment Construction Starts ATE under Construction ATE Test Capacity Installed ATE Testing Capacity ATE Testing Capacity Obsolescence ATE Testing Capacity Gap Desired ATE Capacity Utilization Adjustment Time ATE Capacity ATE Contruction Time ATE Cap. under Const. Gap Average ATE Test Equipment Life Target ATE Capacity Under Construction Awareness of ATE under Construction Perceived ATE Cap. under Const. Gap Desired ATE Cap. Adjustments (additions) • Forces deep thought on each link of chain, hence detailed understanding of contributing factors • Leads to revision of dynamic hypotheses • Time consuming, hence costly 10 Conclusions and Insights 11 When to use small policy models? • Small system dynamics models are better suited to studying internal systems than forecasting external events • A forecasting model is really only useful if better than current forecasting approach – Numerical accuracy is important • A small forecasting model may lead to a better understanding of exogenous industry structure, but most firms have few high leverage policies available to influence industry structure. 12 Forecasting drives oscillations • Oscillations are largely driven by the individual players in the industry trying to predict demand – Production decisions throughout the industry are based on demand forecasts due to long production lead times • Reducing oscillations in the industry will require more accurate forecasting among all players – Decreasing forecast horizon improves accuracy and reduces oscillation – Decreasing time of historical trend increases responsiveness, but increases magnification – Sharing information between firms may also improve forecasting • Responding quickly to changes in required capacity does not significantly affect oscillation magnitude unless forecast horizons are changed 13 Setting Customer Lead Times • Longer delivery lead times increase volatility in customer orders – Requires customers to make longer term forecasts about equipment requirements – Results in less accurate ordering - cancelled orders and pushbacks may become more common • Balance increased risks from volatility against reduced inventory risks from forcing customers to commit early prior to inventory investments 14 Oscillations Aren’t All Bad • Industry cyclicality is good for total sales. • Oscillating demand for ATE results in more ATE sales • Testing capacity is driven by peak demand 15 Forecasting Isn’t Everything • Even a perfect forecast won't solve Teradyne’s problems • Problems stem from the rapid oscillations of demand relative to speed Teradyne can adjust inventory and capacity • Competitive pressure makes reduction in production hard despite knowing that current growth is not sustainable – Customer lock-in increases the risks associated with limiting capacity – Large percentage of total sales are made during booms 16 Bullwhip effect is severe and worsening • Disaggregation of industry leads to increased volatility • Increasing numbers of firms in supply chain increases forecasting errors – Less information sharing – More steps in the value chain with forecasts at each step • IDMs and subcontractors respond to different market signals and probably set ATE capacity targets differently – Forecasting may improve by considering IDM and subcontractor purchase decisions differently 17 Next steps • Integrate insights into forecasting efforts – Investigate regression model including growth and size of the semiconductor market – Consider time delays in systems – use regression models with time lags • Choose how to use System Dynamics in the future – Continue with current forecasting approach without System Dynamics – Continue policy model level efforts internally to improve system level understanding and improve current methodology – Consider value of investing in fully calibrated System Dynamics model for forecasting 18