Reimagining the Semiconductor Supply Chain to Prevent the Next Chip Shortage

Article By : Patrick Maroney and Jeff Howell

A look at better collaboration and more efficient semiconductor supply chains.

The consensus that emerged from an April 2021 meeting of high-level corporate executives at The White House to discuss fixes to the ongoing semiconductor shortage echoed what observers have been saying for months: that relieving the current shortfall and preventing similar occurrences in the future would require “improved supply chain resilience and agility.”

It also left a pressing question to linger: How to make that happen operationally? More specifically, what can participants in the semiconductor supply chain do to improve transparency, bolster U.S. chip manufacturing capacity, improve demand forecasting, and react more nimbly to fluctuations in demand, supply, and capacity?

Even as chip manufacturers mobilize to bring additional capacity online — Intel, in March 2021, announced plans to invest $20 billion to do so — and as the Biden administration brings members of the supply chain together in search of a collective way forward, the shortage persists. Semiconductor production lead times reportedly remaining high, disrupting chip-dependent markets from automobiles to consumer electronics. With the growing demand for chips exceeding current semiconductor fabrication capacity, semiconductor-dependent companies like Ford and General Motors are being forced to temporarily idle plants. The Alliance for Auto Innovation estimates that vehicle production in the U.S. could drop by 1.28 million vehicles this year, resulting in billions of dollars in lost automaker revenue, layoffs and other collateral damage.

Here’s a look at what it might take to prevent a recurrence of this widespread disruption.

Move to a supply ecosystem. As much as the headlines have been about a “chip shortage,” the real story here is about the pressing need for more timely access to data across the chip supply chain. Some industries canceled their semiconductor orders early on in the pandemic, assuming it would still be there when they wanted it again. But instead, other industries consumed that capacity, leaving those who canceled their orders short when demand once again picked up. Suddenly, semiconductor-reliant manufacturers realized they could no longer depend on a linear supply chain plagued by data and communications latency.

If there is a silver lining to all this, it’s that participants in the semiconductor supply chain have recognized they need to collaborate better with more timely, accurate data. Best-run businesses can replace buffer inventory with information without risking disruption. In short, better collaboration means more efficient supply chains.

Moving to a network-focused supply ecosystem in which multiple tiers of suppliers — including fabs, OSAT (outsourced semiconductor assembly and test), distributors as well as their OEM customers and their OEM customers’ customers — are connected digitally in real time, would support such an approach. With manufacturers now laser-focused on supply chain resilience, reliability, and risk-reduction, they have a golden opportunity to abandon antiquated methods of processing information among outsource partners and suppliers, in favor of networks in which all the relevant players have real-time visibility into supplier capacity and inventory, distribution logistics, etc. This allows them to collaboratively make better-informed decisions on the fly, applying predictive modeling and analytics tools to the data flowing across the network to show them the most efficient pathways for supply under various contingencies, during a disruption and otherwise.

For automakers, this approach could have provided a clearer picture of the additional risks they would assume by suspending semiconductor orders, as some of them did early in the pandemic, ultimately enabling them to avert the production stoppages they’re experiencing today.

Viewing competitiveness through a value chain lens. For a supply ecosystem to be viable, manufacturers and the various other members of the ecosystem must realize their fates are intertwined in terms of their ability to provide positive outcomes to customers. This entails a fundamental mindset shift, whereby it’s not just them versus the competition, but them and their entire value chain versus competing value chains.

This focus on aligning business interests along the value chain not only fits the complex competitive realities of today’s semiconductor market, it also may promote more partnership-like relationships and risk-sharing among members of the value chain, including between OEMs and chip makers. That in turn could set the stage for new business models around which OEMs and chip makers partner to gain competitive differentiation and develop new revenue streams (more about that in a moment).

Making more versatile computer chips. Those partnership-based forays into new revenue streams and business models could start with ventures between OEMs and their chip suppliers to make semiconductors designed and engineered for versatility, so they could be adapted during the later stages of the production process to different products and applications. Instead of being hard-coded in the factory for very specific uses, chips instead could be built to serve more as a programmable appliance, with their ultimate purpose determined by prevailing supply and demand signals. So if signals suggest a dearth of chips destined for automotive applications, more chips would be specifically programmed for automakers’ needs. The availability of these more versatile chips, on shorter lead times, would bolster the flexibility and responsiveness of the semiconductor supply chain.

Exploring the DIY fabless route. What if, instead of depending on an IDM (integrated device manufacturer), more chip-reliant OEMs decided to design their own chips and outsource their production to contract fabricators? The chip shortage could well provide the impetus for more and more OEMs to explore this option, especially if semiconductor providers do not increase their offering of value-based services that help their supply chain partners lower risk and improve their effectiveness.

Whether it’s bringing chip design and production in-house or some other fundamental shift, the semiconductor supply chain is ripe for a reimagining.

Click here to watch a short panel featuring experts from Intel and Verizon as they explore how companies can become more resilient.

This article was originally published on EE Times.

Patrick Maroney is a principal within SAP’s High-Tech Industry Executive Advisory, working closely with customers to help architect digital solutions. He has a background in industrial and systems engineering as well as business strategy and transformation consulting. 

Jeff Howell is an SAP vice president and global head of the High-Tech Industry Business Unit (IBU). Jeff leads the company’s overall strategy for the High Tech industry with oversight of the global business, directing product and solution roadmaps, and leading go-to-market strategies across key regions: North America, Europe, and Asia.

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