There are a lot of product shortages these days, what’s causing the problem?
Demand-supply imbalances are a big challenge right now, in particular when it comes to semiconductors. The rise of the Internet of Things has driven high demand for smarter and connected products. Everything from cars, home appliances and even clothing now incorporate semiconductors. Once pandemic-related lockdowns began, there was also a big increase in the need for electronics like laptops, mobile phones and routers as people set up home offices.
Further compounding the problem, automotive companies scaled back expectations for car sales due to the pandemic but the opposite happened. Governments flowed cash into economies and consumer demand for cars increased. There were no forecasts for this surge, making it hard for semiconductor companies that serve automakers to keep up.
Another challenge has to do with increasingly complex logistics – or activities required to move materials, components and products from one location to another in freight in planes or ships. Dramatically-reduced commercial airline traffic lowered capacity to move goods and has resulted in increased freight prices. Now we are seeing major backups at shipping ports due to a number of factors and lack of access to shipping containers causing delays.
How is the pandemic impacting the supply chain?
As COVID-19 continues to cause outbreaks, temporary plant closures around the world are affecting suppliers and manufacturers that are dependent upon them for specific materials and components. The closures aren’t as massive or as long as they were compared to the beginning of the pandemic but they are still causing disruptions. Especially with the tight supply chain situation we are in.
When will the delays calm down? What happens then?
We suspect that demand is somewhat inflated right now. Some manufacturers may be trying to obtain extra supply from multiple suppliers, with the hopes that they will get enough safety stock to build their inventory. Nonetheless, demand is still quite strong all around with no immediate signs of lessening.
Many semiconductor manufacturers are concerned that we’ll see the reverse situation of oversupply down the road when this clears up. A number of semiconductor companies have made all of their orders for the next twelve to eighteen months that are non cancellable and non returnable so that they don’t get stuck in a trap where demand decreases, just as their capacity increases.
The big chipmakers are also investing in new wafer fabrication capacity that is closer to their locations in the US and Europe, so that they aren’t completely dependent on outsourcing to Asia. These fabs should begin to come online by end of summer 2022 to help alleviate the problem.
What can manufacturers do in the meantime to weather this perfect storm?
The organizations that are doing best right now are the ones that are looking at the big picture and are moving away from ‘just in time’ manufacturing and single sourcing to a more robust approach. This includes multi-sourcing as many components as possible, taking advantage of supplier-managed inventory programs and building up stock, either at the finished or semi-finished good level, to be prepared for disruptions.
I would add that keeping a fairly short supply chain when possible is another good strategy. Most semiconductors come from Asia in some form but the supply chain can be shortened for materials like metals and other mechanicals to reduce overall lead times in response to emergencies. Beefing up forecast management and risk analysis programs with more advanced planning and thoroughly analyzing the bill of materials for each product supply also makes it less likely that drastic and last minute changes will be needed.
Because we’ve been reliant on long, thin supply chains for years, we’re more exposed to risk, whether from a pandemic, material shortages, extreme weather or something else. One hiccup in the supply chain can end up impacting the entire world. What’s needed is a fundamental shift in thinking, as what worked for the market a few years ago is no longer effective. Every manufacturer needs to take into account what’s happened over the past few years and be prepared with multiple alternatives so that they can continue delivering products to their customers. A new way of thinking about the supply chain will be their competitive advantage.