Chip Shortages: Lessons on Supply Chain Resiliency

Article By : Syed Alam

Businesses have limited options to solve the current chip shortages, but they can prepare for the next crisis.

No one could have predicted that the ongoing COVID-19 crisis would have such an impact on semiconductor manufacturing. The semiconductor industry is adapting in response, but it hasn’t been easy, and there are still chip shortages. There are measures everyone could take to avoid having to go through this ever again.

When the pandemic first hit, there was a cascade of unanticipated events. It all started with market sectors such as automotive anticipating a drop in demand for their products, prompting them to reduce their demand for chips accordingly. Immediately, their freed-up capacity was claimed by markets that anticipated spikes in demand, such as PCs and electronics.

However, both the drop in demand and following recovery happened much quicker than anticipated. Soon enough, due to reporting delays in supply and demand across the entire value chain and capacity being already reallocated, many businesses ended up facing a chip shortage that halted their entire manufacturing process.

supply chain chip shortagesSemiconductor manufacturing can take anywhere between 13 to 18 weeks to complete and building additional capacity for manufacturing requires significant time and capital. Adding the time required for installation and qualifications, as well as current shortages in substrate and diminished air cargo capacity, many industry sectors found themselves with a complex problem at hand.

The crunch at older nodes

Over the past decade, foundries have focused their investments in leading nodes such as 5nm and 7nm due to their profitability and high demand from high tech companies. This resulted in a lack of investment in the older nodes that sectors such as automotive typically rely on, further aggravating the shortage by making it even more difficult to find capacity for older nodes somewhere else.

Moreover, the automotive industry has some of the most stringent requirements in their qualification process. Once chips are qualified, it’s not easy to move them to another fab due to the many processes involved and the longer time required to get to a steady state of production.

There is also the well-known impact of quality vs quantity. Unlike other industries, quality for semiconductors improves with higher volumes as the process gets refined over time. Lower volumes result in lower quality semiconductors, due to less data and fewer dedicated resources; automotive businesses cannot afford lower quality products.

Moving forward

Due to capacity being already allocated, businesses have limited options to solve the current situation but can prepare for the next crisis. They can diversify their manufacturing partners for alternative sourcing strategies and take a broader, more proactive stance when watching the supply landscape to better anticipate delays.

Long-term, companies should strive to build supply chain resiliency into their manufacturing process so that they are better prepared in the future.

Supply competition

Businesses can no longer afford to forecast solely based on their customers’ needs. The recent shortage has highlighted that they need to look at other sectors relying on similar chips as their supply competition. When looking at capacity, they should ask themselves which sectors might have similar needs in the same time span.

Technologies such as 5G, autonomous driving, cloud computing and electronics are all areas considered “hot” that will inevitably put more stress on the semiconductor supply. Expanding your definition of competitors through a clear understanding of these market trends will be essential in determining capacity requirements and avoiding shortages. The competition ought to include those who might compete for resources your business relies on.

The end of ‘just-in time’

The time of supply chains built on the just-in-time principle of optimizing metrics under the assumption that things will always run in sync is clearly over. The recent shortage has clearly proven that semiconductor supply chain disruptions can have an impact far more devastating than having a few chips left unused.

When the shortage of a $30 chip can potentially halt the entire production line of cars sometimes worth over $30,000 and with demand for semiconductors ever increasing, it isn’t difficult to see why the threat of chip shortages far outweigh the benefits achieved by just-in-time supply chains.

The importance of semiconductor expertise

The recent shortage has brought attention to the fact that all industries now rely heavily on semiconductors. Prior to this moment, few realized the impact that a semiconductor shortage would have on their entire manufacturing process.

From an industry perspective, it is a unique opportunity for all industries to better understand the chips they rely on and where they are being used. To get a more accurate picture of semiconductor supply and demand, businesses need to increase their knowledge of semiconductor procurement by hiring procurement experts who really understand semiconductors, their supply chain and sourcing strategy.

This current shortage is a good lesson for any company that relies on chips for their products. It is vitally important to understand that the whole value chain goes six to seven layers deep and companies need insight into the whole process from the fab, assembly and packaging all the way to the substrate factory. As we’re seeing today, challenges arise when dealing with short term capacity changes, but businesses can take steps to be better prepared for the next crisis.

This article was originally published on EE Times.

Syed Alam is global semiconductor lead at Accenture.

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