Semiconductors, or computer chips, are the brains of modern electronics, enabling highly advanced technologies in healthcare, communications, computing, and transportation, among many other applications. There are 169 U.S. industries that use semiconductors in their products.
What is happening?
A global shortage of computer chips is having a ripple effect across many industries and analysts say the squeeze could last into 2022. The shortage began with automotive chips and is now impacting the supply of chips used for smartphones, laptops, washing machines, refrigerators, and other equipment. The issue highlights the disruptive effects of both the China-US tech war and the COVID-19 pandemic on a stretched global supply chain.
How did this occur?
The events leading to the current shortage began during the second quarter of 2020 and are multi-faceted. Major factors impacting computer chip availability include:
1) In response to pandemic reduced demand, automakers stopped buying so many chips, then when strong demand rebounded more quickly than expected, chip availability was constrained.
2) As auto industry orders dropped, semiconductor manufacturers switched production and order fulfillment to other, more profitable, business lines while at the same time, other pandemic-related products increased overall chip demand.
3) As a result of US sanctions, Chinese technology firms such as Huawei began suddenly boosting stockpiles of chips, which created a cycle – the bigger the stockpile, the tighter the supply, encouraging more companies to expand chip inventory purchases.
4) On March 1, China waived levies on imported semiconductor parts and materials until 2030, increasing their chip imports to all-time highs. China expects a strong rebound economic opportunity as vaccinations counter the global health risk and wants to ensure plentiful chip supply for domestic manufacturing.
5) Production is concentrated in Asia, primarily China, and it can take foundries a year or more to bring new capacity online. Making a semiconductor is one of the most complex manufacturing processes with lead times of up to 26 weeks to produce a finished chip.
What is the impact?
While price increases because of the chip shortage remain confined to the semiconductor sector for now; analysts say some products may see price pressure soon, in addition to shortages of finished goods. Change is also quickly coming to long-held practices such as “just-in-time” inventory, whereby minimum stocks are held based on the assumption that supplies are always secure and efficient.
How will this affect supply chain operations?
One of the main challenges now is that chip production cannot be easily ramped up, so it looks like this shortage will need active management through 2022. Though price increases are to be expected, that’s not the main issue. As we’ve seen in other crunches, the problem here isn’t how much it costs, it’s availability.
Production lag times and delivery schedules are expected to increase as manufacturers across sectors adapt to the loss of these key inputs. This crisis is spreading across industries as manufacturers respond, react, switch, scramble, and over-order, all of which could impact equipment purchases.
Here are some ideas as to how to prepare:
- Move now to identify chip-dependent products within your portfolio and monitor availability status.
- Increase order size to provide more inventory cushion and better prepare for delivery lag times.
- Examine maintenance and diagnostic protocols to stretch out replacement schedules.
- Review end of life disposal practices and consider retaining some equipment for short term ‘bone-yard’ replacement availability.
- Work with OEM suppliers to see what type of chips are being used in what products. This could offer insight as to where the tightness is building and possibly allow you to be a half-step ahead.
What’s next?
President Biden signed an executive order in February to address the global chip shortage. The order includes a 100-day review of key products including semiconductors and advanced batteries used in electric vehicles, followed by a broader, long-term review of six sectors of the economy. In April, President Biden, joined by top foreign and domestic policy advisers, met virtually with 19 Technology and Manufacturing CEOs to deal with the critical supply crunch.
As was seen during all of 2020, supply chain organizations are at the forefront in responding to even the most unique challenges and have earned new respect throughout the corporate and community environments. Supply chain and procurement teams routinely manage detailed coordination of complex purchasing and delivery operations involving many people, facilities, and supplies. With severe weather and other unexpected events becoming more commonplace, supply chain and procurement teams have a unique opportunity to build on those successes, leverage logistical experience, and lead their organizations to a new level of preparedness.
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