I talked to Brent Wilson, SVP of Global Supply Chain Operations at ON Semiconductor, about their supply chain risk management program. ON Semiconductor is a premier supplier of energy efficient innovations in the semiconductor industry. The public company, headquartered in Phoenix, has a truly global supply chain with over 90 locations globally. Brent believes their capabilities in supply chain risk management are a competitive differentiator for them, that they can recover from disasters more quickly than their key competitors.
Another benefit, a benefit I’d never before heard discussed by a supply chain professional, is that Brent believes that their risk program has also lowered the costs involved in risk mitigation for their company, particularly the insurance premiums they pay to insure against critical risks.
ON Semiconductor’s insurer is FM Global. FM Global’s philosophy is that most risks are preventable which allows them to identify, avoid, and transfer risk. They rely on a host of specialties, including engineering and Business Risk Consulting to do that, even in the area of supply chain management.
Brent described how the relationship with FM Global developed and matured. “We started slow. We had them look at one of our North America wafer fabs. This involved significant effort.” FM Global also undertook significant research on global risks in the semiconductor supply chain. Business Risk Consulting (BRC) then visited the factory and asked many questions. Answering those questions required real effort to discover and provide the data that ON Semiconductor needed. A menu of potential risk avoidance and risk mitigation strategies were developed. ON Semiconductor told their insurance provider which options they felt they could/wanted to address. Once those tasks were completed, their insurance rates went down.
As a result of the success at the first site, ON Semiconductor had FM Global analyze their other global fabs. Once that was done, they went on to look at their Assembly and Test sites. Each phase actually began with BRC leveraging existing FM Global Engineering information from prior site visits to understand the physical nature and threats well.
One example of the kind of tangible advice provided by FM Global BRC and Engineering occurred at one of ON Semiconductor’s Asian sites which had grown very rapidly. The business continuity plan required two power lines into the fab, with the second power line in existence to provide backup power if the first line went down. At this site, because of the growth, the second power line was being used to provide primary power. That mistake was corrected as quickly as possible.
But FM Global and ON Semiconductor were also jointly examining the more global aspects to their supply chain risk management program. Eric Jones, an Operations Vice President and Global Manager of Business Risk Consulting at FM Global, described their approach to this kind of analysis. “We figure out what makes an organization money. What are the critical products? Then we look backward, what supports that product? We look back to specific production processes, materials, the IT systems, even the Intellectual Capital tied up in key personnel.”
Eric told me that when they go through this exercise, they generally find that there was more risk than their clients were aware of. It is not uncommon “for (key) vendors to over represent their business continuity” capabilities and many companies “have little understanding of supplier networks – how goods ship from facility to facility” before reaching their customer.
ON Semiconductor and FM Global did look at how much variable margin was created in each region of the world by a particular factory. ON Semiconductor had done this analysis internally in the past, but when they reexamined their global supply chain with FM Global, Brent remarked that they became “uncomfortable with revenue from factories located close together. One natural disaster could have taken down a significant stream of revenues.”
When it comes to identifying supply chain risks, Brent of ON Semiconductor pointed out that it is not always possible to apply a quantitative dollar amount to a risk. You might be able to quantify the dollars at risk if an earthquake occurs in a given location, but you can’t really calculate the probability of an earthquake occurring in the first place. ON Semiconductor has a ranking and prioritization system where risks are ranked more qualitatively based on “where we as a company feel uncomfortable.” As a result of working with FM Global, “we changed some of our levers. Some risks went up in priority in the existing list.”
Brent pointed out that working with suppliers and customers is an important risk mitigation strategy. For a critical component, they might work with a supplier to qualify multiple plants to produce that part and require that the supplier be capable of producing that part at more than one factory before agreeing to do business. ON Semiconductor’s collaboration with FM Global resulted in stronger mitigation planning to support their business continuity teams.
The same logic goes into collaborating with customers. In many instances, customers don’t want to commit the resources of qualifying a particular part at more than one ON Semiconductor plant. But “communication is key.” Once a customer understands the risks, they may find that the additional up front work is worth the return in risk mitigation of a down production line.
While working with FM Global has improved the ON Semiconductor’s supply chain risk management program, ON Semiconductor already had a robust program in place. They have done many acquisitions, and a supply chain risk assessment has to be part of those acquisitions. They have integrated business continuity planning and supply chain risk management. They have applied continuous improvement processes to supply chain risk management. They have more tightly integrated supply chain risk management with strategic planning. And, critically important, they practice reacting to unexpected events at least once a quarter.
But for me, what was most interesting about the conversations with Brent and Eric is that I never viewed an insurance company as a key consulting partner that could be tapped to improve a company’s risk management program. Further, while ON Semiconductor did have to devote time and resources to these engagements, there were no consulting fees paid to FM Global by ON Semiconductor. It is part of FM Global’s approach to insurance that they integrate engineering, underwriting and claims.