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Semiconductor shortage: Tiny chips are disrupting a range of manufacturing sectors

01/27/2021 By

The production of cars, Playstation 5’s or webcams to work from home is the next disrupted supply chain in a long line of disruptions. While separate, these three industries share the same minuscule component: semiconductors.

The chips hold a conductive property that helps electronics come to life. Semiconductors, while miniscule, pack a big punch — most recently being seen in a huge shortage and shutdown for the automotive industry.

Richard Barnett, the Chief Marketing Officer at Supplyframe — a provider of the Design-to-Source Intelligence (DSI) platform for the global electronics value chain and solutions to transform direct materials procurement and new product introduction — said about 80% of global automotive manufacturing businesses are expected to see production shortfalls as the supply chain for semiconductors is cut thin. Many of the biggest car producers have stopped production of their products because of these tiny chips. It’s the “perfect storm” of supply chain disruption woes that we’ve seen for nearly a year.

“We’re going to be hitting some very hard walls here, hard ceilings around the supply that they can make,” Barnett said. “There is no creative short-term answer other than trying to absorb the shortage.”

In the beginning of the coronavirus disruption, supply chain and demand shifted greatly as consumers relied on new or different products to get through the emergency. At first, car sales dropped drastically while no one left their houses. But as time has gone and the vaccine is on the horizon, Barnett said demand for cars almost reached normal levels again.

But without semiconductors, car manufacturers are shutting down production lines — likely disrupting the supply chain into April or as late as June, Barnett said.

“The problem is that a lot of the certain commodity groups within electronics are shared across multiple downstream industries,” Barnett said. “What you saw was key suppliers reallocating available capacity or supply to the demand that was the highest either near-term or medium-term growth.

“You had a significant amount of cannibalization happening specifically around integrated circuit semiconductors (IC), specifically MCUs and in some SoC, which means ‘system on a chip.’ Some of these components are relatively standard, meaning that the same semiconductor IC could go into an Xbox game console or a computer or into an automotive system. That cannibalization happened and consumed most of the available on-hand inventory that distributors and semiconductor (makers) were holding.”

Barnett said most suppliers had about four to six weeks worth of chips available. But that number fell to about two to three weeks with lead time increased to 30-40% as supply and demand shifted.

The impact of these production shortfalls will be significant. Barnett said any production shift in the automotive industry costs about $22,000 per minute. Meanwhile, a report found that subsequent price increases on products will likely last through 2022.

“It’s a wakeup call for sourcing, manufacturing and supply chain leaders in the automotive OEMs to look more holistically across the multi-tiered value chain that they have,” Barnett said. “To actually specialize organizationally their materials management, supply management and sourcing teams, which are typically siloed.

“They don’t work in collaboration. There may be a central team that’s doing one thing, and there’s material management teams at each plant location. They’re usually not super-coordinated on the long-term supply planning. They’re very tightly instrumented around near-term scheduling and sequencing. So there’s been this over-investment in that leaning out of the automotive supply chain and really trying to drive efficiencies, but the exposure is they’ve leaned out too far.”

Supply chain managers are in need of better market intelligence that can give a more holistic view of production lines — from semiconductors to metals. It’s not enough to look at Tier 1 or 2 suppliers. Managers need to be able to see into what their competitors are doing as well to better predict when these shortages will take place.

Barnett also suggested that better planning that focuses on supporting or operationalizing the supply would help too. His three biggest suggestions for manufacturers were:

  • Resiliency at the point of design — Designing alternate suppliers or components to fit the goals of your product to meet more cross-functional needs.
  • Renewed focus around flexible agreements — Having more flexibility if your suppliers can’t meet your demand so you can ramp up or down with inventory shortages or surpluses.
  • Rethinking sources of insight — Supplyframe research shows that 70% of enterprises use their own data, but it’s important to look at broader, dynamic sources of insight.

Barnett said that in the long term, these shortages can help place more importance on investing in strategic sourcing processes. Also, it could inspire many automotive manufacturers to begin an evolution of the organizational structure around sourcing supply management.

“We’re in a commodity manager system,” Barnett said. “It might be on a spreadsheet somewhere. It might be in a third-party market intelligence report that they have somewhere, but it’s not operationalized. So that’s a big issue, we need to really focus on that and bring together, integrate the supply management function and supply chain with finance, looking at risk and resiliency, not just cost budgets with the commodity management teams being integrated in.”

“So it’s scaling cross-functional alignment and potentially restructuring of the organization to really get at bringing more outside data and intelligence to making decisions.”

Alignment is as much about bringing together the right market intelligence, technologies and teams, Spend Matters suggests.

“The intersection of commodity market intelligence, supplier/supply/supply chain risk management and sourcing is a procurement maturity waypoint that very few companies have been able to navigate close to, let alone hit,” said Jason Busch, the Founder of Azul Partners and Spend Matters.

“Whether it is semiconductors, printed circuit boards, metals, resin, ingredients or other commodities, the future of direct materials procurement is integrally linked with proactive intelligence and planning, which can then tie to sourcing and contracting strategies. Recent supply shortages should be a wake-up call for all of us that investing in these areas is not optional.”