The Supply Chain Matters blog provides a follow-on industry supply commentary focusing on the likely reality that the global-wide semiconductor chip shortage is not going away anytime soon.
High-tech, consumer electronics, automotive and equipment supply chain management teams are likely assessing the short and longer-term sense of the ongoing global semiconductor chip shortage. With production and new product introduction schedules all impacted, having a coherent supply plan is of paramount importance. As whacky as it might sound, a coherent supply plan at this junction might amount to inflated safety stocks or outright hoarding. That is if businesses can get away with such a strategy.
As Supply Chain Matters noted in a recent blog, President Biden’s Initial White House Summit on Semiconductor Supply Resilience, the product demand and supply dynamics call for more transparency. That implies fab and chip manufacturers advocating for more succinct product demand requirements from customers while industry manufacturers argue for more transparent perspectives on available supply.
A further part of this supply challenge rests in the two-tiered aspects of semiconductor needs. Large, sophisticated computer servers, personal computers and now 5G enabled smartphones require complex microprocessors, increasingly having customized designs by manufacturers themselves. Such sophisticated chips require complex production processes, long lead times, and come with a premium margins. The other supply need revolves around the general-purpose microprocessors used more widely in automobiles, general equipment, appliances and other industrial needs. The latter, while not as sophisticated, provide lower margins for fab producers, but sometimes far higher production volume needs.
The shortage problem exacerbated when manufacturing needs for general purpose micro-controllers were cut back during the height on the pandemic last year and are now bouncing back with renewed customer demand for new cars, appliances and the like. A further brute reality is not only semiconductor customers are equal. Some like Apple, HP, Samsung or others have considerable influence built over years of long-term supply agreements.
A hint of transparency was evident last week when the globe’s largest semiconductor chip manufacturer Taiwan Semiconductor Manufacturing (TSMC) reported its latest quarterly financial performance. According to a report from The Wall Street Journal, responding to a question relative to the current global shortage, TSMC executives indicated: “. they expect supplies to be strained well into next year as demand remains strong and customers stockpile chips amid concerns about rising geopolitical tensions and the continuing pandemic.”
In addition to that assessment, industry reports indicate that an ongoing drought occurring across Taiwan threatens to further disrupt production levels because water is used extensively in the chip fabrication process. Plans among semiconductor producers to build more capacity over the next 2-3 years has a dependency on the availability of rather sophisticated production and chip inspection equipment. Reports indicate lead times for this capital equipment are doubling or more for such equipment. Thus, the risk is that needed supplemental industry semiconductor chip capacity remains several years away.
An Ongoing Challenge
The ongoing challenge for various multi-industry supply chain and integrated business planning teams is to navigate this supply challenge. If there is one candidate for supply network resiliency, this is the area.
While boosting safety stocks or outright hoarding may seem to be the option, that is not going to be effective in this highly constrained supply environment. In reality, it may compound the problem further introducing inflated demand into the overall picture.
Semiconductor producers and their various parts distributors are already adopting practices to avoid a demand bullwhip effect and discourage hoarding. High tech and telecommunications manufacturers resident in China have already attempted hoarding strategies after the prior imposed U.S. export restrictions by the Trump Administration targeting Huawei Technologies.
Instead, resolving this supply network shortage will require high levels of collaboration and ingenuity.
Ingenuity in working closely with design engineers to come up alternative semiconductor chip selection criteria that would allow manufacturers to source a micro-processors from multiple potential global-based suppliers. Collaboration in working directly with semiconductor manufacturers and their distributors to provide them the true picture of overall monthly demand and with a carrot of longer-term supply agreements as well as collaboration on alternative designs that could leverage available capacity. Semiconductor producers themselves need to re-think their ongoing production strategies in allocating capacity for commodity micro-processors vs, more sophisticated custom designed chips. By our lens, South Korea and Japan will both play a critical kingpin roles in this effort.
With a vast majority of chip production currently sourced in Taiwan, a longer-term plan has to indeed factor more balanced regionally based fab production in Europe, and the U.S.
For the short-term, Semiconductor producers themselves are reportedly working on means to speed-up production levels by deferring regularly scheduled production maintenance periods to squeeze out additional production capacity.
The bottom line is that the needs for semiconductor supply can no longer be viewed as just another component in inventory replenishment planning. They are indeed strategic components and will required dedicated supply plans and specialty buyers and supply teams.
Relationships with semiconductor suppliers will indeed be the most important element of an overall supply network resiliency strategy going forward.
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