How Semiconductor Shortages Have Taken A Chip Out Of The Global Supply Chain
The reality is that almost every company is a high-tech company.
What do I mean? Well, we as consumers are demanding smarter and smarter products in our everyday lives. And this requires the use of semiconductors and sensors to provide this intelligence.
Whether we know it or not, semiconductors are the foundation of the advanced technologies that we all rely on. From cell phones, laptops and washing machines to refrigerators, cars and airplanes. This is highlighted by global semiconductor sales increasing by 6.5 percent in 2020, according to the Semiconductor Industry Association.
And we are facing a shortage!
The global pandemic played a huge part in the current shortages. When the initial lockdowns triggered a collapse in car sales, automakers immediately slashed orders for parts. This including semiconductor chips—a typical new car can contain more than a thousand.
At the same time there was a huge surge in demand for consumer electronics. At the Howells household, with 3 people working full time from home, we were getting regular deliveries of laptops, screens, webcams, microphones, back lights and more. Within weeks, our on-line sales expanded to a new TV, a washing machine and other household devices.
So, like any good business would, chip manufacturers saw the change in demand from consumers like me and shifted their output to serve that demand.
But when car sales rebounded in late 2020, and the automotive industry started placing new orders, they couldn’t get enough chips to meet the demand.
While news reports on the semiconductor shortage has focused on the automotive industry, most consumer electronics and hi-tech companies will be feeling the exact same pressures.
The Pandemic Exposed Risks
For cost-reduction purposes, overt the past decade or more, the production of semiconductors and microelectronics has moved offshore, and supply chains have become more global. In 1990, 37% of chips were made in American factories. By 2020 that number had declined to just 12% with manufacturing now concentrated in Taiwan, South Korea and China.
Again, during the pandemic the risks associated with these global supply chains has been exposed due to plant shutdowns, port and border closures and long lead times.
No short term fix
Restoring the supply and demand balance will take time because semiconductor manufacturing is not suited to rapid and large shifts in demand. And as the overall demand for chips increases, the manufacturers simply don’t have the capacity to meet the demand in the time required. Making a semiconductor is one of the most complex manufacturing processes. Lead times of up to 26 weeks are the norm to produce a finished chip. And as manufacturing has consolidated to a small collection of big chip makers, predominantly in Asia, demand far exceeds the available supply.
When the chips are down – how do we fix the problem?
All these challenges have led business leaders to demand more resilient supply chains to avoid future hardship.
Areas of focus include:
- Improved visibility – The companies in the best position are those that predicted the change in demand for their products early and placed orders for critical components (such as semiconductors) before the competition. This requires visibility across the entire supply chain from chip fabrication to testing and packaging through to customer delivery.
- Identifying alternate sources of supply – To reduce risk it is important to have a diverse set of suppliers in multiple regions and even on-shore that have contracts in place. An example of this is Intel’s pledge of a $20 billion investment in Arizona to open new semiconductor fabrication plants.
- Improve collaboration with business network – Visibility and cooperation with suppliers, contract manufacturers, logistics service provides, and other trading partners can help build relationships with key provides such as chip manufacturers and help ensure supply.
- Integrated Business Planning Processes – The ability to track leading indicators, sense changes in supply and demand and rapidly, simulate, re-plan and execute alternate strategies can be a major difference in responding to a supply chain risk or an opportunity.
To learn more about enabling a resilient, customer centric, sustainable supply chain download the recent Oxford Economics study.