Texas Instruments Tackles Supplier Risk, Widens Analog Market Share

Feb. 10, 2012
Chipmaker shows resiliency with enhanced supplier strategy and National Semiconductor acquisition.

The semiconductor industry has taken quite a beating over the past three years. First, the "great recession" hit, followed by an earthquake and tsunami in Japan, then flooding in Thailand. These Asian markets represent a significant amount of global chip production, putting supply chains at risk and dealing an unexpected blow to the rebounding industry.

But Texas Instruments Inc. has emerged from the storm with a refocused market strategy and stronger hold on the industrial electronics semiconductor market, bolstered by its $6.5 billion acquisition of National Semiconductor Corp. in September. The company reported Jan. 23 better-than-expected results in the fourth quarter with revenue of $3.42 billion, down 3% from the year-ago period. The National Semiconductor acquisition positioned the company as a leader in the analog chip market. Analog chips convert signals, such as voice and temperature, into digital data used in applications ranging from video surveillance to down-hole drilling.

Looking ahead, Texas Instruments President and CEO Rich Templeton remarked in the company's latest earnings release he believes the company has reached "the bottom of this downturn." Meanwhile, Texas Instruments is targeting the energy management and medical equipment sectors as growth drivers. It also has adopted a supplier evaluation strategy to mitigate future risk potential, says Kevin Ritchie, senior vice president of Texas Instruments' technology and manufacturing group.

Ritchie discussed the company's growth and supply chain strategy in a recent conversation with IndustryWeek.

IW: In 2010, TI opened its first fab in China. What is the company's fastest growing global market and what is driving growth in this particular region?

A Texas Instruments technician holds a 300-millimeter copper wafer that contains hundreds of tiny semiconductor chips. The company strengthened its position in the analog chip market with its September purchase of National Semiconductor Inc. KR: Almost 90% of TI's revenue is from shipments to regions outside of the U.S, so regional diversity in all areas of the world is very important to us. TI sees a tremendous amount of opportunity for growth in China as a growing number of people in this important region continue to require more and more electronics. TI has been doing business in China for more than 25 years, and over the last five years has doubled its salesforce, established more than 16 sales offices across the country and added research and development teams. In addition to opening its first manufacturing facility in China, TI's first product distribution center in China was put into operation in Shanghai in April 2010.

IW: What are some emerging technologies that you feel hold significant growth potential for TI?

KR: Both energy management and medical equipment are two areas that are driving new markets in the next decade, and TI is delivering innovation to address these areas with its analog, embedded processing and wireless connectivity semiconductor products. Energy harvesting and energy conversion -- as well as enabling more energy-efficient end equipment such as LED lighting, are areas we are researching in our labs to further extend our long history of low-power innovation.

Medical and health care also provide a wide range of opportunities for TI. Our products have played a significant role in advancing medical equipment such as MRIs, digital X-rays and ultrasound. Semiconductor technology is also helping to address critical problems in areas such as patient care, intelligent medicine and wellness management.

Two additional areas that will drive new markets and technologies are cloud computing and the infrastructure to support it and safety and security.

IW: In 2010, TI rolled out an evaluation process to scrutinize the financial health of its key suppliers. How does the program work?

KR: TI's supplier evaluation process was developed to deliver a simple, effective and scalable methodology to segment our supply base into categories based on their financial health. These safe, caution or distressed categories are determined based on an ordinal score that we determine from each company's financials on a quarterly basis. A special database gives us the ability to report the information in various ways to thoroughly analyze the supply base. If a report indicates any issues, we can watch that supplier more closely and put supply risk mitigation plans in place if necessary so that we avoid any disruptions to our business and the business of our customers.

IW: Did natural disasters, such as the Japan earthquake and flooding in Thailand, factor into the company's decision to establish the supplier evaluation process? Did the program help TI mitigate some of those disruptions?

Texas Instruments Inc.
(TXN, NYS) At a Glance
Headquarters: Dallas, Texas
Primary Industry: Computers
& Other Electronic Products
2010 in Review
Number of Employees: 28,412
Revenue: 13.97 billion
Profit Margin: 23.1%
Sales Turnover: 1.04
Inventory Turnover: 4.76
Revenue Growth: 33.9%
Return on Assets: 26.6%
Return on Equity: 33.2%
KR: Our supply chain is an important aspect of any contingency planning, and having ongoing supplier evaluation processes in place was certainly beneficial this past year. TI has a flexible manufacturing strategy, leveraging TI's internal worldwide semiconductor fabrication sites along with manufacturing capabilities of suppliers. Because of this flexibility, after the earthquake hit in Japan we were able to identify alternate manufacturing sites for the majority of our work in the region within a few days. Our collaborative supplier relationships allowed us to work closely to quickly define and address any potential supply chain disruptions, and in parallel we worked to ensure an independent supply of raw materials where necessary. We learned that it is critical to have multiple supply sources and regional diversity. Our evaluation processes continue to play a role toward that end.

IW: How do you measure and track key suppliers globally?

KR: Our suppliers play an important role in support of our business, and we expect them to deliver the highest levels of quality and performance. We measure and track suppliers globally through an enterprisewide scorecard tool called CETRAQ, the acronym for cost, environmental, technology, responsiveness, assurance of supply and quality. We evaluate supplier service and support across all these areas.

Those in TI who use that supplier's product or service evaluate the supplier based on objective and subjective CETRAQ criteria every six months. The data is aggregated by TI's procurement organization and formally presented to the supplier's management team, and the results form the basis for mutual continuous-improvement projects. The process has been very successful. It has been employed at TI for the past 14 years and is an important aspect in how we strive toward excellence across our supply chain.

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About the Author

Jonathan Katz | Former Managing Editor

Former Managing Editor Jon Katz covered leadership and strategy, tackling subjects such as lean manufacturing leadership, strategy development and deployment, corporate culture, corporate social responsibility, and growth strategies. As well, he provided news and analysis of successful companies in the chemical and energy industries, including oil and gas, renewable and alternative.

Jon worked as an intern for IndustryWeek before serving as a reporter for The Morning Journal and then as an associate editor for Penton Media’s Supply Chain Technology News.

Jon received his bachelor’s degree in Journalism from Kent State University and is a die-hard Cleveland sports fan.

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