Second Wave of Supply Chain Woes Looms

Article By : Gary Hilson

Those who heeded old warnings that supply chain management is critical are doing well now. It's not too late to learn the lesson.

The pandemic has made supply chain woes mainstream news, but there’s far more to it than simply ships waiting to get into ports to be unloaded. Many shortages, including those within the intertwined semiconductor and automotive sectors, had their beginnings long before products were shipped.

“It’s not just about them being loaded off the docks. It’s not just about getting to the stores. It goes further back from that,” said Raymond Kerins, CEO of The Next Solutions Group, who moderated a panel on supply chain security at last week’s SemiCon West. Getting the raw materials to create product is the real concern because if you can’t invent or manufacture your product, it’s a much bigger problem.

Ray Kerins

As different and extreme as the current environment is, it’s just another environment, and the health of the company going into the supply chain shortage will be a big determinant of how well it does in the future, James Gellert, chairman and CEO of RapidRatings. “If you are strong, if you are resilient, if you have good financial health, you have the ability to weather a shock. But if you go into it weakened in one way or another, you are more likely to be negatively affected by adverse conditions.” Going into the pandemic, he said, there’s been multiple layers of challenges that have been thrown at companies.

Bindiya Vakil, CEO and co-founder of Resilinc, has seen many disruptions to supply chains having begun her career in procurement 20 years ago, and it prompted to start her own company to provide more transparency in supply chains by tapping into more data.

Both Gellert and Vakil noted that being tasked to manage risk in the supply chain as a job title is relatively new; the latter took classes from Yossi Sheffi, author of “The Resilient Enterprise,” which talked about supply chain risk in the aftermath 9/11 crisis. One case study in the book included the Philips fab fire caused a massive disruption that led to the exit of Nokia Ericsson from the handset market.  “It was $300 million in revenue impact. It changed the competitive landscape, and it was one fire.”

Resilinc is essentially a LinkedIn for the supply chain and recognizes that you can’t just throw darts and hope something sticks if you’re hoping to mitigate risk, said Vakil. The supply chain must be mapped so that there’s a clear and detailed understanding of what facilities are involved and what a disruption might mean for, whether it’s a hurricane, earthquake or other challenge affecting its ability to contribute products, materials, and labor. After more than a decade, Resilinc has mapped more than half a million suppliers. “It’s not easy, but it’s possible.”

Gellert has seen risk management in supply chain evolve and get more visibility in the same period. “Companies are designing their infrastructures and their personnel to be able to look at risks of suppliers in a coordinated way, as opposed to in a siloed way.”

Bindiya Vikal

He said many companies will look at compliance risks within a supplier, including infosec and cybersecurity risks, as well as traditional things such as delivery, quality, and pricing. A broad set of domains must inform risk management today. “A company that is weakening in financial health is going to cut corners somewhere and it may be cutting corners in delivery and in health and safety or in research and development and so forth. So risks need to be combined in a way that allows for an understanding of the broad risks and how they may affect the company.”

Vakil said some companies don’t realize that even if a supplier is transparent about their woes, such as bankruptcy, it’s far too late for them to do anything — they can only react, rather than proactively mitigate risk. A company’s financial health doesn’t matter if they suddenly have no parts because they can’t see anything and have no revenue. “There’s no profit or anything to maximize.”

She said even without the challenges of the pandemic, Resilinc monitors 300 to 350 factory fires in high tech or automotive in a given year. “That is a factory fire a day.” For the supply chain procurement professional, it means two months after that original factory fire, the supplier decommits, and they’re tracing a part.

But eliminating risk isn’t the goal, said Gellert. “It’s about managing. most companies don’t want to stop working with a supplier. They want to continue to work with a supplier.” Finding them, vetting them, and onboarding them to begin with was costly. Most of RapidRatings’ clients are looking for better ways to engage with a supplier who may have some risks rather than simply move away from any that have a weakness.

This is true for any sector, but chip shortages have affected many industries and consumer products, but the shortage of cars on dealer lots has been making headlines for a while for the simple reason that today’s vehicles have a lot more electronics in them. In his SemiCon West presentation, Bernard Swiecki, director of research for the Center for Automotive Research and Director of Automotive Communities Partnership, said the semiconductor shortage’s impact on the automotive industry is somewhat doubled compared with other sectors, and it couldn’t have come at worse time.

Pre-pandemic, it typically took about 65 days for dealer to sell a car; if all manufacturing suddenly comes to halt, then the inventory runs out in about two months. However, automakers were already seeing faster sales before the pandemic hit, and that’s why inventory ran out so quickly. “Before those inventories could recover back to any kind of a normal level, the semiconductor shortage struck,” he said. “The impact is felt double because of the buffer system.”

By end of April 2021, auto sales were fantastically robust, but that’s when the semiconductor shortage, so the drop in sales automakers are seeing since isn’t caused by a lack of demand from consumers, said Swiecki. “This is purely a supply-based hit that we’re taking.” It’s not getting better, and it’s a new problem for the industry in that it’s never had a problem keeping up with demand for new vehicles—the assumption has always been that the industry could supply any vehicle anybody is going to buy. “This is the first time that we have to throw that whole methodology out the window.”

But there’s even more at stake because the product has fundamentally changed, said Swiecki, as consumers increasingly become more accepting of electric vehicles. “The technology has matured. The little foundational elements that we need are now in place, and we’re seeing it all really have impact.” With that segment of the market growing, it’s place pressure on the semiconductor supply—not just for the vehicles themselves, but infrastructure to support these vehicles such charging stations. And the more purely electric the vehicles, the more processors are required in the power train. “They demand more semiconductors for us to build one of these vehicles.”

Compounding the semiconductor supply challenge new methodologies including a push by the federal government incentives we incentivize these vehicles, said Swiecki. “It won’t happen unless we’ve got the chips.”

Bernard Swiecki

By 2028, forecasts predict 7 million units of electric vehicles in production in the United States, which means massive demand for chips. “In terms of the automotive development cycle, which is years, 2028 might as well be tomorrow,” Swiecki said. And that’s just the electric vehicle market, he said. There’s also the automated vehicle content. “We are transforming this industry to start making vehicles that drive themselves.”

The chip shortage could have long-term implications if supply chains can’t adapt and catch up. “Automotive is a huge part of the US economy just because of the deep supply chains that it has,” Swiecki added.

In his own keynote, RapidRatings’ Gellert was back on stage to talk about the longer-term challenges — what he calls a second wave. His company uses an algorithmic approach to evaluate corporate financial statements, to gain insight into both the short- and long-term risks of those businesses. “In many cases, they’re managing their supply chain risks. They’re managing their suppliers.”

He noted SemiCon attendees are all contending with their own supply chain challenges, and in general, companies spanning a lot of industries find themselves upstream and downstream from semiconductors. “Regardless of where you are in the chain, the dynamics that are affecting it affect your businesses on both sides.”

Gellert said what’s notable about the first wave of supply chain shortages is that it’s mainstream news, even if it’s a wine bottle shortage in Poughkeepsie, and this raised visibility is excellent for the supply chain and risk management. “It is allowing companies to design better and better supply chain risk programs because there’s more visibility inside their companies for them to do so.” He said they’re getting more budget to do so, but there’s still be a lot of triage firefighting over the past 18 months. Some supply chain professionals are well-prepared for another disruptions, but others are not.

Shareholders and board members are also talking about supply chain now, too, said Gellert. “That means the microscope is on, and it is looking at how each business is managing its supply chain and looking at how each business is managing.” How well companies learn from this first wave will determine in part how well they handle the second wave, including their finances. He said one thing to be wary of is that are a lot of companies in many industries that have degraded from an operational perspective while being able to maintain and stay afloat from a short-term liquidity perspective. “Therein lies the rub for the second wave.”

James H. Gellert

Being able to raise money can help fund innovation, but when it is replaced by a need to survive because of business interruption, it creates a completely different scenario. And if the supply chain professionals in the company have been in the role less than a decade, they haven’t experienced a down credit cycle, said Gellert. “They’ve never managed the risks of suppliers who can’t get capital.”

Coming out first wave of the supply chain crisis, there needs to be a focus on understanding how companies, including those in the semiconductor and automotive business, are handling their cash to current liabilities, short-term and long-term debt, reduced profitability and reduced sales.

Overall, he said, the semiconductor industry has done reasonably well compared to other industries in that it rates well in financial health and core health for the next three years. Only a third of the companies in the sector have seen core health drop in the last 18 months. Access to capital, especially for private companies, could pose a challenge for the second wave.

Gellert said there will be three kinds of companies as we move into the next wave. “There are going be the companies that have thrived and are growing. There are going to be companies that just outright fail. And then there are going to be companies that survive, but with problems. And that is what wave two really needs to be about from a risk management perspective.”

Access to capital and credit is just one of many issues, however. Environmental, social and governance (ESG) standards, compliance risks, traditional financial risk, and quality delivery pricing, among others, are all intertwined. “Financial health of a company is foundational to how well the companies are able to invest in all of these other areas and to comply with all of these other areas,” said Gellert. “A company in a down market, a company that is in weakening financial health is, has to cut corners.” That means transparency and collaboration with supply chain partners are critical to managing risk in the next weave.

The silver lining of the first wave, he said, is that by knowing what’s coming, you can manage it. “Supply chain risk management has been improving a lot.” The pandemic has focused budget dollars on creating better supply chain risk inside of companies. There will be a greater period of supply chain risk, productivity, and power. And that’s a great silver lining.”

This article was originally published on EE Times.

Gary Hilson is a general contributing editor with a focus on memory and flash technologies for EE Times.

 

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