In addressing the current semiconductor shortage, Eric Breitbarth, researcher at 4flow, and Wendelin Gross, head of 4flow research, discuss how global supply chains can be made more resilient.
The current semiconductor chip shortage shows how a bullwhip effect can lead to significant and lasting turbulence in global production networks. Eric Breitbarth, researcher at 4flow, and Wendelin Gross, head of 4flow research, discuss how global supply chains can be made stronger.
The availability of semiconductor chips has affected production planning and output across several industries for months now. In the automotive industry, long delivery times for certain vehicle configurations and stops in production due to missing parts are commonplace. Tackling this issue requires strategies from decision-makers for both the short and long term.
The lack of computer chips – integrated circuits on semiconductor material that are the central building block of all digitized, computer-controlled processes – started making international headlines earlier this year. Many forecasts suggest that the effects of the shortage will last through the first quarter of 2022.*1
Tracing the origins of the crisis
The current scarcity is a natural consequence of the combination of demand volatility, insubstantial information and long delivery times along multi-level supply and production chains – characterized in a bullwhip effect. At the beginning of the pandemic, many OEMs including those in the automotive industry, significantly drove down production and thus their demand for chips. As a result, chip producers and suppliers responded by cutting back production. Owing to great uncertainty about the course of the pandemic, chip producers reduced their production capacity by more than a third and to a greater extent than demand in the first and second quarters of 2020.*2
Specific challenges for the automotive industry
It was not without the help of extensive government stimulus and support programs in all major markets that demand for consumer goods recovered well and faster than expected by the summer of 2020. Acquisitions that had been postponed were realized. It was at this time that complex production processes in the semiconductor industry resulted in a lead time of up to 26 weeks:*2 the expanding production capacity could not keep pace with the overwhelming demand.
Now, OEMs are facing the challenge of having to stop production in many plants again due to a lack of chips. The effect of these disruptions is staggering – it is currently estimated that 3.9 million fewer cars will be produced this year as a result of the semiconductor shortage, leading to revenue losses of up to € 91 billion*3 for the industry. And for an industry geared for a just-in-time philosophy, buffer stocks that might compensate for delivery bottlenecks are scarcely available.
Overlapping long-term approaches serve make the current situation even trickier. The number of chips built into in every vehicle is accelerating due to the speed at which the automotive industry is going electric and digital. The automotive industry, however, with a market share of less than 10%, is of secondary importance to chip producers. While political efforts are being made in both the USA and Europe to diversify chip supply sources and to create new production capacities in the process, businesses need to react to the shortages quickly. The length of time required for planning and setting up production facilities – or fabs – is at least 24 months.*4
Short and long-term solutions
In the short term, businesses need to focus on minimizing the negative effects of missing parts. Delays in shipping or dispatching and transshipment processes should be avoided and managed optimally for added value. Production batches unaffected by missing parts can be produced with higher priority. A task force comprised of experts and decision-makers across production, purchasing and logistics can ensure that all reasonable measures affecting production supply can be considered. The more sales and operations planning processes available transparently in the form of a "digital twin" and the greater the number of decisions based on data, the more flexibly production and logistics can be managed in a crisis situation.
In the long term, an end-to-end risk management strategy will be crucial to prepare for the future. This strategy should focus on creating transparency in the supply chain. Solutions that integrate real-time data into planning processes, such as the 4flow EMS, can also help businesses to prepare for unexpected disruptions and also lead to faster decision-making when a crisis strikes. In addition, businesses can focus on developing local and flexible sourcing strategies to mitigate the effects of unexpected bottlenecks and rethink traditional inventory strategies.
Considering the importance of electronic components, particularly where electromobility is concerned, the automotive industry is currently focused both on increasing the depth of added value as well as creating longer-term supply contracts with purchase obligations for critical chips. Both consider a market with a few big providers and increasing demand from a range of customer sectors. For automotive manufacturers acting as focal businesses in their supply chains, this means rethinking.
Authors:
Eric Breitbarth, researcher at 4flow
Wendelin Gross, head of 4flow research
Sources:
*1 Semiconductor Industry Association (February 4, 2021)
*2 Expense Reduction Analysts (August 4, 2021)
*3 Automotive News Europe (May 28, 2021)
*4 Handelsblatt (April 8, 2021)
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