US Semiconductor Company

A Very Large Semi-Conductor  Manufacturer

The finance team at one US plant of a very large manufacturer in the semi-conductor industry of power analog and power discrete components began to question why logical operational decisions were not leading to improved financial outcomes. 

Manufacturing included the following areas: Diffusion, Photo, Etch, Metal, Backgrind and Probe.  Each departments has direct expenses assigned to it including depreciation, maintenance, payroll and general materials.  Indirect departments (indirect labor, bulk gasses, etc.) are aligned with manufacturing areas, although there are a few that represent generic factory spending.  The finance team had improved the costing system by using some elements of activity based costing but still fully absorbed all costs to product costs, still used the general ledger as the primary source of financial data, did not rigorously apply the causality principle, did not identify fixed and proportional costs throughout the production process, and did not track idle capacity.

As a result, the plant continued to experience several problems with its cost and operational information:

  • Short term product costs varied every period with product volume and mix and were out of line with estimated life cycle product cost/pricing plans.

  • Continuing debates and arguments over the allocation of overhead to products and market segments.

  • Debates continued over the impact of smaller batches on production costs.

  • The plant had difficulty understanding the movement of bottlenecks with production volume and mix.

The team looking at this problem decided to build a causal operational model of the plant that included tracking fixed and proportional consumption of resources, tracking capacity use, and identifying idle resource capacity.  This operational model helped them identify where bottlenecks would occur based on various product volume and mix scenarios.  It also made the resource impact of smaller batches obvious.  The model also helped them focus on the causal nature of how resources were consumed/used, and just as importantly, where very weak or no causal relationships to products existed.  Applying costs to this model resolved debates regarding overhead assignment as they now logically follow the operational model.  The greater understanding of fixed and proportional consumption/cost relationships and identification (and proper assignment) of idle capacity eliminated the dramatic swings in period to period product costs.   Finally, the use of replacement cost depreciation rather than depreciation based on tax law brought costing for equipment and machinery in line with life cycle estimates.

Using the new model, the plant was able to better simulate and forecast its operational and cost performance and was also able to more accurately identify cost elements that had cash flow impacts.


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