Samsung and Globalfoundries just announced (see The Wall Street Journal-April 18, 2014) that they have agreed to adopt the same production process as they upgrade their chip-manufacturing services, an unusual alliance with implications for many designers of computer chips and other devices, notably Apple. With the agreement, chips produced by Samsung and Globalfoundries will be essentially identical; companies that design chips could have their products produced in factories operated by either company with no extra effort.  Companies generally prefer to reduce their reliance on a single supplier for components. In this case, the pact between Globalfoundries and Samsung provides a new selling point as the two companies try to woo customers away from Taiwan Semiconductor, the biggest chip maker.

The new pact could allow Apple in the future to shift chip orders between Samsung’s Austin plant and a Globalfoundries factory near Albany, N.Y.  “The idea of doing business with multiple suppliers is built right into Apple’s DNA,”  says one industry expert.

The pact also reflects the intense financial pressures associated with pursuing Moore’s Law, Silicon Valley’s shorthand for shrinking semiconductor circuitry to improve chips’ speed and data storage capability. With individual production tools priced at tens of millions of dollars—and complete chip factories costing $5 billion or more—fewer and fewer companies still develop new production processes. In response, companies are now working together to share costs of developing new production recipes.

But the deal goes much further. Globalfoundries agreed to abandon a technology it had been developing for creating chips with circuitry measured at 14 nanometers, or billionths of a meter. It will instead license Samsung’s 14 nanometer process, which has technical benefits, and uses common production tools and materials.

This post provided courtesy of Jay and Barry’s OM Blog at www.heizerrenderom.wordpress.com. Professors Jay Heizer and Barry Render are authors of Operations Management , the world’s top selling textbook in its field, published by Pearson.