Crisis Planning and Preparation Speeding Japan Semiconductor Recovery
Advance crisis planning, global supply chain management, and effective customer communications has helped ON Semiconductor substantially recover from the devastating earthquake and its after-effects. How ON Semiconductor responded to the March event provides insights into how other companies have responded to the crisis, and demonstrates the resiliency of the Japan semiconductor industry.
ON Semiconductor (Nasdaq: ONNN) is a multi-billion dollar chip manufacturer and a leader in silicon solutions for energy efficient electronics. The company has five major facilities and employs over 6,000 people in Japan. Over 35% of the company’s revenues flow through its extensive Japan operations. According to Keenan Evans, ON’s senior vice president of Quality, Reliability and EHS, the company’s Crisis Prevention and Management Plan, with established procedures, protocols and processes, helped the company respond swiftly and effectively to the earthquake and subsequent tsunami and power crisis. ON’s Crisis Management Plan is representative of the standard practices used throughout the semiconductor industry, where over 60% of world’s chip manufacturing capacity takes place in seismically-active regions.
Speaking before an audience at The ConFab in Las Vegas on May 16, Evans provided an overview of the planning principals and execution details that were effective in minimizing the earthquake’s impact and quickly getting operations up to full production status. Bill McClean, president of IC Insights, also commented on the Japan chip industry’s rapid response to the crisis (see below), predicting a substantially recovered industry in the next few months. According to Evans, the keys to their effective response can be summarized in the alpha-numeric term, P2R2: Prevention, Preparation, Response and Recovery.
Prevention and Preparation
The foundation for effective crisis management in the semiconductor and other industries is the creation of a comprehensive Crisis Management Plan. Good plans develop response teams, identify and secure resources, and establish protocols. A key part of ON’s success was the commitment to the regular exercises and drills to ensure the plan’s effectiveness and identify areas of need and improvement. ON’s Crisis Management Plan benefitted from the lessons learned from the 2004 magnitude 6.9 Chuetsu Earthquake in Niigata. Specific and actionable learnings from that earthquake were developed on structural, process, and procedural areas. Management of seismic cutoff valves, bracings, equipment anchors, and other areas were optimized after Chuetsu. Of particular value during the March 11 event was the ability protect valuable wafer and work-in-progress inventories with rolling racks.
Response and Recovery
Evans described a three-tiered response to the earthquake/tsunami. First, an Emergency Response Team was immediately activated to address personal safety through building evacuations and critical risk assessments. Then, the Crisis Management Team worked to accurately assess the impact of the emergency. Finally, Business Continuity Planning actions were put into place to address short-term needs and begin to meet longer-term needs.
The speed with which these multi-faceted and complex steps were initiated is remarkable, but common in the industry. Within the first hour, all global operations were notified of the events through established messaging and Sharepoint alerts. In the next 10 hours, confirmations that all ON fab personnel were safe, as were all ON personnel traveling in Japan. Initial customer inquiries were received in these first hours and status messages were sent to all employees, and posted on the company website.
Between 10-24 hours after the event, the ON Business Continuity Team convened and began to execute pre-established actions plans addressing global supply chains, planning, logistics, security, HR, EHS, facilities, customer service, and insurance. Within the first 24 hours, the BCT began assessment of local infrastructure stability, impact on materials and chemical suppliers, and alternate sourcing opportunities identified. While only one of ON’s facility sustained major damage, power outages and radiation leaks began to be growing concerns.
Despite rolling blackouts, in one week, three of ON’s five sites returned to production. The major immediate issue for ON was the availability of bulk chemicals needed for water and waste water treatment. With damaged roads and mass transit, logistics were impaired and several key suppliers had sustained production stoppages. ON dispatched a Global Sourcing Team to identify and qualify additional suppliers in areas considered at risk. To plan for ongoing power outages, rental generators and co-generators were pursued.
While ON was rapidly restoring their production lines, ongoing news coverage of the nuclear event, electric power shortages and radiation leaks initiated widespread customer inquiries and demands for delivery guarantees, special labeling assuring radiation-free parts, and other requirements flooded ON operations. Many of the demands would be impossible to meet even under less-pressing time constraints, but diligent communications and customer service were able to restore customer confidence and order schedules.
By week two, chemical supply issues were solved and alternative sourcing of key supplies were put in place. Power stability was addressed with the purchase of several power generators and the implementation of a co-generation system began. Local transportation and logistics began to normalize and radiation levels were confirmed at normal levels at all ON sites.
As April came, all of ON’s sites returned to production and the power situation further stabilized. Customers received daily delivery schedules and even insurance carriers visited ON sites to begin the financial processes. By end of month, the new generator sets were dispatched on site (see photo at right) and the co-generation system was connected. In addition, alternate supplies of specialty substrate materials were secured and alternative BGA substrate sources were in qualification.
The company announced on May 4, “Of ON Semiconductor’s six manufacturing facilities in Japan, five came back to full production capacity and the sixth factory is ramping towards full production.”
The impact on ON Semiconductor is similar to other companies operating in Japan: after an immediate impact due to the earthquake and power outrages, production has ramped to normal capacity during April and May, and expected to be complete later in the year (see 2011 Earthquake Outlook chart below). Like many economists, Bill McClean, president of IC Insights, has improved his outlook for Japan. After originally predicting a slight 2% reduction in chip production this year in Japan following the March 11 tragedy, he now believes the industry has responded quickly and will close the early with chip output equaling last year. His overall forecast for the industry hasn’t changed. “Japan chip demand has been delayed, but it hasn’t has been destroyed. We expect a strong return for both system sales and ICs in Q3 and Q4 of this year.”
In summary, Evans confirmed that ON Semiconductor’s P2R2 approach worked successfully. ON’s inter-site and global production network contributed to restoring production capacities and solid relations with a global supplier base helped assure a rapid recovery. Many of these tactics are in place at other fabs and key suppliers, confirming the ability of the Japan industry to respond effectively to an extreme and unprecedented event.