Karl Kempf, Intel's Money-Saving Mathematician

Intel (INTC) is the largest chip company that still designs and manufactures its own products. Semiconductor plants cost about $5 billion each, and some of the equipment has to be ordered three years in advance. Guessing wrong about future demand is very expensive: Being overly optimistic can lead to hundreds of millions of dollars in idle machinery, while underestimating means billions in lost revenue. The chipmaker’s in-house mathematician, Karl Kempf, realized that trying to improve predictive models was no use. Forecasting is “the hardest problem in math,” he says.

So Kempf started writing equations. He designed a financial contract giving Intel the option to buy a specific piece of machinery at a specific time. The company pays its suppliers a modest amount of money upfront for the contract. If it ends up not needing the machine, the chipmaker loses the money or the supplier can find another buyer. But the contract ensures Intel has access to the equipment it needs when it’s needed.

Options contracts are nothing new—they’re used to buy and sell oil, wheat, and other commodities all the time—but high-tech chipmaking equipment is not a liquid market, so there’s no easy way to figure out a fair price for the contracts. Kempf partnered with fellow mathematicians at Stanford University to build a computer model of an Intel production line. It simulated 142 different pieces of equipment; by varying the prices and delivery times for each machine and factoring in how much delays would cost, Intel and its suppliers figured out fair contract prices. Kempf says the resulting options have saved Intel an estimated $125 million since 2008, when the program began in earnest. The options allow Intel to “minimize their obligation and maximizes the available equipment supply,” says Gus Richard, an analyst at Piper Jaffray (PJC).

For Kempf, getting the most out of Intel’s $12.5 billion annual plant and equipment budget is just the latest way of applying advanced mathematics to unusual problems. After earning his Ph.D. in applied math at the University of Akron, he worked on robotic assembly lines in Scotland. In the 1970s, Kempf paired up with Ferrari’s Formula 1 team and helped pioneer the use of computer chips in race cars. His algorithms calculated the position of the wheels relative to the road and adjusted the suspension up to 60 times a second, letting the racers go faster by hugging curves tighter.

Kempf was a consultant for Pinewood Studios in England when Christopher Reeve arrived to film the first Superman in 1978. To give the actor the appearance of flight in the pre-computer graphics era, Kempf wrote computer models that precisely adjusted Reeve’s position while he was strapped into a full-body rig 30 feet off the ground.

Kempf says his varied career shows that knowing advanced math can help improve just about any product or process. “That’s true whether it’s a Formula 1 car or a movie special effect, a space station or an Intel factory,” he says.

Wrote programs to help Christopher Reeve fly as Superman

Modeling chip plants saved Intel $125 million

Applied math can improve just about any product or process

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Intel's Help Brings the Web to In-Store Shoppers

About five years ago, Intel (INTC) needed only retailers’ attention when it tried to sell chips for use in machines at checkout counters.

Now the opportunity for Intel to sell technology to stores has grown threefold to fivefold, says Chris O’Malley, the company’s director of retail marketing. Since retailers and food companies started adding digital signage and kiosks, O’Malley has been attending such events as last week’s vending-machine trade show in Las Vegas, wooing companies that might use Intel processors or intelligence.

“We used to always just be chips and chipsets,” O’Malley says. “Now there’s just been an explosion of this digital experience and we really need to help architect it.”

Intel has contributed to products such as a touch-screen cooking game for HSN’s (HSNI) Wolfgang Puck and a machine for Kraft Foods (KFT) that gives out Jell-O taste tests (only to adults). They’re joining technologists from Cisco (CSCO) to Cantaloupe Systems in signing companies that want to bring the benefits of the Internet into live shopping outlets.

Retailers have been forced to cut down on the number and size of their stores as shoppers migrate to e-commerce, says Eric Mauriello, senior vice president of touch technology at New York-based Possible Worldwide, which works with Intel on devices. One example is the so-called endless-aisle screen, which lets in-store shoppers search online for items. Such interactive technology can help ensure that customers find the items they need at the store, rather than giving up to search the Web from home.

Possible Worldwide designs software and hardware for interactive in-store technology, often in partnership with Intel. The two collaborated on the Wolfgang Puck screen, which prompts customers to work on a pizza—tapping tomatoes to smash into a sauce as they hear encouraging one-liners from Puck. The game—still just a prototype—involves Puck’s products, giving users an opportunity to buy them after they play. Intel also helped department store Macy’s (M) create touch-screen kiosks known as Beauty Spots, at which customers can shop for makeup and beauty-care products without a salesperson.

“Intel understands more than anyone else that this is the next frontier,” Mauriello says. “Retail is just starting to commit to these things.”

Intel’s interest in retail is part of a broader push to get its microprocessors into new markets, lessening its dependence on the personal computer market, which provides more than 90 percent of its revenue. To demonstrate how Intel’s chip technology would work in new industries and thereby speed its adoption, the company’s engineers build reference designs and contribute software to device makers working in these new markets.

O’Malley switched from another position at Santa Clara (Calif.)-based Intel about three years ago, when the company began moving people to its retail team. This was O’Malley’s first year at the vending show and he likes what he saw: a Coca-Cola (KO) machine with an interactive touch screen and more than 100 soda selections, as well as a Red Bull energy-drink machine that lets consumers pay via smartphone.

Most vending machines run on systems that can’t be networked or connected to USB ports, says Michael Kasavana, a Michigan State University hospitality-business professor endowed by the National Automatic Merchandising Association. Retailers will look to companies such as Intel for tech support in the vending machine of the future, which will accept money after an order, instead of before one, he says.

“It doesn’t make sense right now that you pay and maybe don’t get what you want—and then have to shake the machine,” Kasavana says. “With digital screens, customers will be able to put items in a shopping cart and pay for them all at once.”

They’ll also be able to play games, send food to others, or get personalized service, he says. Companies will make an upfront investment in the technology with advertising budgets because over time, it can engage more people than a coupon campaign, O’Malley says.

Beyond processors, Intel has been employed for technology that remotely manages digital machines or software that monitor a user’s gender, age, and length of time they have view digital sign.

“People don’t think of Intel like this, but this trend is exploding right now,” O’Malley says. “At the vending show, people were saying: ‘Now it makes sense for you to be here.”‘

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Intel’s Otellini Says Quarterly Forecasts Remain ‘Right On’

May 17, 2011, 6:31 PM EDT By Ian King

(Updates share price in last paragraph.)

May 17 (Bloomberg) -- Intel Corp. Chief Executive Officer Paul Otellini said the company’s forecast for this quarter remains “right on,” as emerging economies and surging demand for data centers help make up for a personal-computer slowdown.

The popularity of smartphones and tablets is spurring the need for more servers, which run on Intel processors, Otellini said today in a presentation to analysts at the company’s Santa Clara, California, headquarters. Brazil, China and other developing countries also are fueling sales, he said.

Hewlett-Packard Co., the biggest computer maker, cut a billion dollars from its annual sales forecast today, deepening concerns that the PC industry is suffering from a slump. A windfall from tablets and smartphones is helping Intel maintain its growth, Otellini said. The company is making more money from the explosion of such products than anyone else, he said, even though Intel doesn’t produce chips directly for the devices.

The industry devotes one server to every 600 smartphones in use, and one to every 122 tablets, he said. That’s helping push Intel’s data-center sales to $10 billion this year, and they’ll double to $20 billion within five years, he predicted.

Otellini affirmed a second-quarter forecast that Intel made on April 19. Revenue will be $12.8 billion, plus or minus $500 million, the company said at the time.

“Our guidance for the quarter is still right on,” Otellini said today.

New Designs

Even so, Intel’s road map of future products is inadequate, he said. The company is reworking its designs to make chips that consume less power. Its Atom processor, aimed at getting the company into mobile phones, tablets and consumer electronics, will be produced using a more advanced manufacturing technology -- known as 14 nanometer -- within three years.

Global PC shipments unexpectedly fell 3.2 percent in the first quarter, IDC reported in April. The rise of tablet computers, along with the Japanese earthquake and unrest in the Middle East, affected sales.

Otellini is trying to lessen his company’s dependence on the PC market and have it profit more directly from demand for tablets and phones, a market where Intel’s chips have lost out to rival designs.

About 35 tablets based on Intel’s chips should come out this year, the bulk of them based on Google Inc.’s Android operating system. The company has also said that there will be at least one mobile phone on sale that uses its processors by the end of the year.

Intel shares fell 9 cents to $23.55 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares have climbed 12 percent this year.

--Editors: Nick Turner, Jillian Ward

To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles@bloomberg.net

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