Samsung is one of the biggest conglomerates in the world with businesses established in shipbuilding, contracting, and electronics. Global revenues in 2005 alone reach over 56.7 billion (Secrets of Samsung's innovation success, 2006) and brand tracking firm Interband ranked Samsung as the 20th most valuable brand in the world (As Sony gets a tune-up, Samsung Zooms Ahead, 2005). Samsung was not really recognized as an international powerhouse until the 1990s where before it was largely considered only a household name in Korea.
So what lead to the success of Samsung in the 1990s? While there is no one deciding factor or event that lead to Samsung's success, many would agree that their entrance and their efficiency in to the semiconductor market and innovative adaptation of the six sigma supply chain management has lead them to be one of the best managed firms in the world.
Samsung's semiconductor business accounted for nearly a third of the 56.7 billions dollars of revenue generated in 2005 (Secrets of Samsung's innovation success, 2006). Despite entering the semiconductor business late in 1983, Samsung is now the world's 2nd largest semiconductor distributor behind Intel. The turning point in the company's history was in February of 1983 when Lee Byung Chul, the CEO of Samsung Group made a push towards a large investment in memory chips and was determined to break into the semiconductor market (Kim, 1998).
Lee Byung Chul recognized that there would be a need in the future for more memory chips and he identified that this was going to be the trend. I believe that Samsung realized that the semiconductor business was only in its initial stage of Foster's S-curve and that with careful planning and the right product, they can still capture market share from established companies.
The only question now is what kind of memory chip did they want to investment in? Memory chips like SRAM were considered but quickly dropped mostly due to their small market size (Kim, 1998). They finally decided to go with DRAM as their main memory chip. Factors that lead to the decision were the relatively large market for DRAM chips at the time and they also saw how newcomers like the Japanese firms had successfully caught up with well-established firms in a short amount of time (Kim, 1998).
Another important factor was the simple design structure of the DRAM chips compared to the design-intensive structure of microprocessors and application specific Ics (Kim, 1998). Samsung realize with the simple design structure of the DRAM chip, they had a competitive advantage because they could just concentrate on the manufacturing process and they have had lots of experience with incremental process innovation so they knew they could be very efficient.
Samsung knew they were not yet capable of making design-intensive structures yet, but they knew they could take advantage of their efficient manufacturing process. Lee Byung Chul and his management group made a great strategic choice of product because Samsung is now the largest distributor of DRAM chips in the world for the 11th consecutive year (Samsung Austin Semiconductor, 2004).
While there are many imitators trying to enter the DRAM market in the 1980s, Samsung was able to outlast them because they had the resources and were able to fund the R & D portion and support the capital-intensive structure of the semiconductor industry. Even though Samsung experience large losses in the first 5 years of existence, other profitable sectors of the Samsung group funded the semiconductor sector.
This was one of the major advantages Samsung had over other competitors, even if their semiconductor sector is failing, they have other establishments elsewhere that can keep them going. Samsung's first big break came in 1987 when the U.S. restricted the Japanese 256KB DRAM because they accused them of price dumping (Kim, 1998). As such, the increasing demand in the U.S. for the 256KB DRAM chip and the shortage caused by the restriction on Japanese DRAM chips gave Samsung a window of opportunity to break into the world market (Kim, 1998). The following few years, Samsung saw record profits for their 1MB DRAM and 4MB DRAM.
Samsung was then recognized as a major player in the semiconductor industry, but they realized they had to continually get better and more efficient at what they do to try to get a competitive advantage over their competitors who still had a big lead in market share. They realize that the semiconductor environment is very dynamic and their competitors could come up with something innovative and new that could instead give them a great advantage.
In December of 1995, they invited a group called the Competitive Semiconductor Manufacturing program to their plant to do a survey on them. The Competitive Semiconductor Manufacturing program was based out of the University of California and they specialized in benchmarking semiconductor plants around the world and analyzing their management practices (Leachman, Kang, and Lin, 2002). Their findings were astonishing to the Samsung Group, they had many strong points like have excellent yields and productivity of equipment and labour, but the weak point was their high manufacturing time (Leachman et al, 2002).
The average number of days for production of the DRAM chip was 80 days, well above the industry average. The market was quickly changing from a seller's market to a buyers market in 1996 due to a price collapsed. Samsung realized that with their long manufacturing times and large work in progress inventory, its inventory will quickly become devalued while sitting in the factory and that customers will simply switch to another product that offers a slower lead time (Leachman et al, 2002). They acknowledged that they had to change their manufacturing process quickly or risk being phased out by the competition with considerably lower manufacturing times.
Samsung then hired CSM for a year to consult them on how to lower their cycle time.
Immediately CSM found that some of the inefficiencies were due to the way they schedule their productions. Samsung used a "lot-dispatching paradigm" which means that each set of wafers that goes into production is assigned a due date, then during production, the wafer closest to the due date is produced first.
A problem with that is when the wafer were in fabrication, it may get out of order and they may have to spend time consuming inspections to get them back into order. In addition to that, disruption at one end of the assembly line could disturb the whole assembly process, thus extending the manufacturing cycle. Also constant changing of the machinery to produce different kinds of wafers wasted a lot of time and productivity.
To fix all these problems, CSM changed their schedule to a "target fab-out schedule" where it sets a target for the quantity for each hour rather than which due dates it wants to finish for the day. This helps avoid the problem of getting the wafers mixed up because as long as they meet the goal for the quantity of wafers, they remain in good standing and on schedule. CSM also realized that Samsung needed a buffer system at each bottleneck point of work in progress because this way the production will not be stopped as a result of one machine malfunctioning. I merely only mentioned some of the changes that Leachman et al. suggested to them.
As a result of these suggestions, Samsung lowered their cycle time from 80 days to just 30 days in 4 years time. This is critical to Samsung's success in the semiconductor business because a lower cycle time meant that customers would buy their products first while the competitors are still in their manufacturing cycle.
Getting your product into the market faster also meant that they got customer feedback earlier and get their products modified and back into the market sooner. Furthermore, because of the rapid obsolescence of new semiconductor, its prices could drop really fast within months. Subsequently getting your semiconductor out first is essential because Samsung can make more sales at the higher price than it could have if it had a longer manufacturing cycle. As a result, it is estimated that the new-implemented program created an extra 1 billion in revenue for Samsung (Leachman et al). Samsung's ability to recognize their own weaknesses before it hurt them financially is a great asset.
They acknowledged that their long manufacturing time has put them at a great disadvantage and their quick response to this has earned them an extra billion dollars in revenue. Also to put into perspective the magnitude of their quick response, over the same period during the program implementation, other DRAM competitors reported large losses ( Leachman et al, 2002).
Samsung's vision to be number one in their industry and their goal to continually adapt and get better has made them one of the most successful companies in the world. Another great example of Samsung improving their efficiency is the case where they incorporate the famous six sigma methodology with their Supply Chain Management. According to Yang, Choi, Park, Suh, and Chae (2007), Samsung was already ranked seventh in the world in an analyst ranking of the global top 25 companies in supply chain management.
Despite already having an efficient and award wining system called Advanced Planning and Scheduling system in place, they knew there were still lots of room for improvement. I think Samsung is successful because they don't just want to be good at something. They want to be great. Some of the reasons for choosing the six sigma methodology was because it brought about "project discipline".
The defining, measuring, analyzing, improving, and controlling (DMAIC) ensured that the supply chain management project were defined rigorously and executed methodically ( Yang et al, 2007). Also the analytical approach of the six sigma would dig up root causes of the problem and not simply solve the symptoms of the original supply chain management. In addition, it would help develop people within the company to use and harness the full potential of its system, thus getting maximum return on investments.
Samsung also realized that with the amount of quantitative data they would get as a result of this project, they could use the new strategy to uncover flaws and improve their decision making. As always, Samsung being an innovative firm, they decided that the current six sigma system would not be the best fit for their company.
They decided to modify the strategy to fit their own business style. They studied other companies like GE, Honeywell, and Dupont, that had successfully implemented the six sigma methodology and developed their own version. These were also award winning companies for their execution of the six sigma methodology. Samsung eventually came up with DMAEV (define, measure, analyze, enable, and verify). The goal of define was to identify overall problems, goals, expected outcomes, and the project schedule (Yang et al, 2007).
They identified key issues through voice of the customer and voice of the business. The measure stage identifies key independent variables (x) and dependent variables (y). This is the stage where they hypothesize that a certain problem may lead to a certain result. The analyze stage test out the hypothesis set out in the measure stage. In this stage, they use both quantitative and qualitative analysis to accept and reject the hypothesis. At the end, their goal is to find a few key (x) variables that explains the (y).
The enable stage identified ways to correct the inefficiencies. This is where they think of a detailed plan to correct it and also present alternatives to the solution. They use the analytical hierarchy process and are further detailed in terms of the five design parameters (Yang et al, 2007). Then eventually a pilot plan is established in the verify stage of the plan. It tests out the solution presented in the enable stage and the results are continually monitored and shared throughout.
The results would then be measure by 2 Key Performance Indicators (KPI), the financial and operational results. The financial results would obviously include increase in sales, decrease in material, inventory and transportation as a result of redesign (Yang et al, 2007). Operational results would include cycle times, utilization rate, lead times, and forecasting accuracy. Finally, with the six sigma plan in place, the next challenge was to find an effective way to communicate this methodology to the rest of the company.
Samsung decided on a four month training program known as the Supply Chain Management Six Sigma Black Belt. What the course included was 1 week per month of full training also complimented by mentoring in their selected projects (Yang et al, 2007). In order to get full certification as a SCM Black Belt, they will have to complete 3 such projects. As a result, over 100 SCM Black Belts have been trained to date and Samsung is hoping this will make their overall supply chain more efficient now that they have a better understanding.
They are hoping now with a more efficient supply chain, they can minimize cost and avoid surpluses and low inventory. Although it is still to early in the program to grasp the results, Samsung's SCM will surely put themselves ahead of their competitors. I believe Samsung's ability to recognize weaknesses in there own operation is one of their greatest assets.
It is clearly evident that Samsung's success could be attributed to many great strategic decisions over their long history and I have only touched upon a few of them. Samsung has a great senior management team and their ability to respond to their own inefficiencies and vision for the future has contributed to their enormous growth over the last 20 years. As Samsung continually redefine itself, I am confident that they can only get better from this point on and it will not be premature to say that in another 20 years, they will become the top brand name in the world.
As Sony gets a Tune-up, Samsung Zooms Ahead. (2005). Retrieved October 7, 2007, http://knowledge.wharton.upenn.edu/article.cfm?articleid=1293 Kim, S. Ran. (1998). The Korean System of Innovation and the Semiconductor Industry: A Governance Perspective. Retrieved October 7, 2007, from Business Source Complete Leachman, Robert. Kang, Jeenyoung. Lin, Vincent. (2002). SLIM: Short cycle time and Low Inventory in Manufacturing at Samsung Electronics. Vol 32 No.1 Retrieved October 7, 2007, from Business Source Complete News Updates. (2004).
Retrieved October 7, 2007, from Samsung Austin Semiconductor Web Site: http://www.samsungaustin.com/news_update.asp?news=aug104 Secrets of Samsung's innovation success. (2006). Retrieved October 7, 2007, http://www.ferret.com.au/articles/5D/0C04245D.asp Yang, Hong. Choi, Byung. Park, Hyung. Suh, Min. & Chae Bongsug. (2007). Supply chain management six sigma: a management innovation methodology at the Samsung Group. Vol 12. No. 2 Retrieved October 7, 2007, from Business Source Complete.