What the Computer Chip Shortage Could Mean for You
A computer chip shortage has crippled global manufacturing – what can your procurement team do to find new sources for vital components?
Semiconductor chips may be small, but they play an oversized role in the global economy. The effects of the pandemic have reduced supplies of computer chips, leaving companies scrambling to adapt.
The automotive industry has been hit hardest – a new car has an average of 1,500 semiconductors integrated into the infotainment and navigation system. They’re also essential for safety features like automatic braking and adaptive cruise control – put simply, today’s vehicles won’t function without these all-important chips.
The problem? Those chips are also the brains of almost every electronic device on the market.
What’s the situation?
In August, carmakers including Volkswagen and Toyota began reducing production due to the semiconductor shortage. The carmakers said they would cut output by up to 40% as chip makers in Asia struggle with production, and shipping delays add stress.
It’s important to note that about three-quarters of global chip manufacturing capacity is based in China, Japan, South Korea and Taiwan – when the pandemic shutdowns hit chip factories in Asia, and supply chain snarls rose their ugly heads, it became very difficult to move materials into the chip labs and move out finished products.
Semiconductor supplies were also increasingly stressed, as the work-and-live-from-home life became the new normal, and consumers binged on computers and TVs to work and entertain families during the pandemic.
It’s also hitting our pockets, with smartphone makers now reporting shortages – market leader Apple has even warned of reduced iPhone production in the coming months.
The shortages with the surprising impacts
Given the impact of COVID-19, semiconductors aren’t the only products in short supply. Here are just some of the commodities with the numbers flying against them.
- Computers
Deliveries of PCs worldwide will be lower than expected, due in part to the electronics industry relying on just-in-time shipments for memory and memory controllers, display panels sensors, power management chips, and other components.
- Air
Alarmingly, oxygen is in high demand for treating COVID-19 patients struggling with respiratory ailments: that’s why city officials in Orlando, Florida, asked residents to conserve water – because oxygen is used in water treatment plants. - Timber
Lumber reached record prices in May, and demand remains high. At the beginning of the pandemic, lumber producers cut production, guessing that demand would fall when, in fact, home construction and remodelling boomed causing prices to skyrocket.
The car problem in focus
Automakers in particular have struggled with the chip shortage. Production using other components continued for a time, leaving a backlog of partially finished vehicles. Now, companies are cutting production to ensure the most popular vehicles continue to roll off the assembly lines.
Across the U.S., UK, and Europe, the picture is the same – chip shortages and staffing issues have reduced production by up to 40% across the board, all caused by the impact of COVID-19.
How can your organisation respond?
This situation is a classic example of the need for supply chain resiliency. If your company requires semiconductors, your supply chain may be stretched to the limits, with revenues impacted, costs higher than budgeted, and unhappy customers.
While risk management and supply chain visibility are vital factors in managing the supply chain, basically the whole world was shocked by the chip shortages.
So don’t allow procurement to wholly bear responsibility in your company.
Like many crises, it’s not the problem that makes the difference – success or failure is revealed in how your organisation responds.
With delivery times for electronics two to four months longer than average, customers are placing large orders (despite higher prices) to ensure they receive the products they need.
Teams need to keep customers informed about estimated delivery times, communicating transparently to help avoid negative sentiment and frustration.
Our top tips for your chip shortage response
As your company deals with this crisis, consider some long-term strategies that could reduce your reliance on a single source and possibly lower costs overall.
- Standardise designs. Reduce the number of different components that must be sourced.
- Modify the bill of materials. Check with suppliers to find out which components may be available sooner and adjust configurations accordingly.
- Modify shipping plans. If critical components are delayed, there’s no need to pay premium shipping for other parts, so shift from air cargo to ocean or overland freight.
- Explore alternatives. Identify additional component sources and transportation channels for buffer capacity.
- Examine inventory strategies. Lean and just-in-time manufacturing may not have enough flexibility for unforeseen issues.
- Risk management. Step up monitoring of risk management for better planning and forecasting.
WARNING!
Industry experts believe the chip shortage will continue into 2023. The only long-term remedy is building manufacturing capacity, which will take months to bring online. In the meantime, manufacturers may hoard inventory when they can get it.
Unfortunately, the only long-term fix is to build additional production capacity, which will take months, if not years. Also, we can’t forget that COVID-19 is still with us. Malaysia, home to about 7% of semiconductor production, suffered a recent outbreak, which could further tighten supplies.
Experts recommend that buyers “be flexible, improvisational, and patient.” Innovation in procurement is the best approach to acquire critical components amidst global shortages.
Have you been affected by the semiconductor shortage? Let us know in the comments how your supply chain is coping.
