Building resilient semiconductor supply chains

Recovering from semiconductor shortage requires a strategic, agile, and collaborative supply chain response, finds Dr Jas Kalra.

Companies worldwide have been struggling with a shortage of semiconductors (chips) over the past couple of months. This shortage has been caused by the disruption of global semiconductor supply chains. The microelectronics-based industries are highly vulnerable to this disruption. The future of mobility, in particular, relies on the availability and adoption of electric vehicles, the Internet of Things, and robotics, which are all powered by semiconductors.

There are calls for developing shorter, more resilient supply chains. Some organisations, such as Ford and General Motors, have also proposed vertical integration of chip production as a possible solution. Although these calls appear to be obvious solutions at the outset, executing them is more complicated than it seems. Years of offshore outsourcing has resulted in the depletion of manufacturing capabilities and knowledge. Addressing this issue would require a long-term, strategic supply chain response.

Recent causes of semiconductor shortage:

1. Uneven demand patterns: A drop in the demand for vehicles in the early 2020s led to car manufacturers cancelling their orders. By the time the demand increased, and the manufacturers started reordering (in higher than before volumes), the semiconductor fabricators had already assigned their capacities to other industries.


2. Longer lead times: A related issue is the long lead times of semiconductors, which is upwards of four months. Attempts to increase capacity by moving some of the demand to another manufacturer with an active line would add six months to the lead time. Switching to a new supplier would add a minimum of 12 months to the lead time. The long lead times make this commodity a bottleneck item, which has taken it longer to recover from the challenges posed by Covid-19.


3. Geopolitical issues: The recent crisis in Ukraine has played a significant role in this disruption. Ukraine is a prime supplier of Neon gas, which is fundamental to semiconductor fabrication. Current events have created a considerable shortage of this and other rare gases, exacerbating the semiconductor production issues. Before this, the US trade sanctions on China resulted in manufacturers stockpiling as much as six months of semiconductor inventory, which put further pressure on the semiconductor supply chain.

Solutions

1. Supply chain strategy overhaul: When it comes to bottleneck and critical items such as chips, organisations need to move away from a just-in-time/lean ordering strategy and develop more agile supply chains. Investment in relational mechanisms and digital technologies is required to drive end-to-end supply chain visibility and transparency, share point-of-sale data through the supply chain, and maintain strategic inventory at bottleneck nodes through collaborative planning. These mechanisms would bring more agility in supply chains.


2. Adoption of Collaborative Strategy: In the short-to-medium term, organisations in the automotive sector could pursue Collaborative Strategy by forming buying consortia/alliances. This approach requires buyers to integrate their requirements to increase the volume of their orders, which would signal an increased commitment to semiconductor manufacturers. This would fuel long-term investments in manufacturing capacity to satisfy the increased demand. Sustained, long-term demand will also bring economies of scale to buyers and suppliers and reduce manufacturing and delivery costs over time.


3. More investment in research & development: In the long term, investment in more innovative technologies would result in the development of manufacturing processes with shorter lead times. Again, adopting a collaborative strategy by making joint, relationship-specific investments in capability building would help offset some of the risks and prevent supply chain failure. Pursuing open innovation projects would also help identify more areas that require semiconductor application, further increasing the demand and stabilising the demand patterns. The increased and stable demand would drive the suppliers to further invest in their manufacturing capacities, creating economies of scale and, in time, reducing costs.

The semiconductor shortage is only the latest manifestation of supply chain disruptions faced by organisations worldwide. Organisations have long treated supply chain management, and particularly JIT, as a mechanism for cost reduction. These disruptions have revealed that this operational and transactional approach focused on cost minimisation has rendered our supply systems vulnerable. Organisations need to start thinking about their supply chains strategically and consider them a source of sustained competitive advantage. Considering the recent issue of the chip shortage, I have outlined three mechanisms; agility, collaboration, and R&D investments, by which organisations can respond to the current crisis and bring long-term resilience into their supply systems. However, all three mechanisms would require time and cost investment in short- to medium-term, which means the semiconductor crisis will get worse before it really gets better.