Chip Shortages are Here to Stay - Be Ready to Respond Part 1

Every day, chip shortages are substantially affecting industries from automobile manufacturers to heavy industrial equipment to medical diagnostics equipment and electronics manufacturers. This presents serious challenges to many enterprises. Here we examine the issues and how a smart response can be implemented.

Chip Shortages Are a Fact of Life Now

A recent article in The Wall Street Journal took a hard look at the chip shortages. One passage neatly summed up the drastic effect of the shortage on the industry. “In December, the parts flow from Continental, Robert Bosch GmbH and other suppliers had so dried up that VW announced it would stop production of bestselling brands such as Audi and its namesake VW brand at plants in Europe, China, and North America. Audi, citing a chip shortage, furloughed 10,000 factory workers for the first time since the spring lockdowns. Ford Motor Co., Honda Motor Co., and others soon reduced output of vehicles from big pickups to compact sedans.”

The damage to automobile manufacturers has gotten much of the coverage, but the chip shortage is just as severe elsewhere. Many large industrial and medical equipment manufacturers are feeling the pinch, too. A very expensive piece of machinery can be idled for the want of a few dollars’ worth of electronic components. The chip shortage has widespread effects and a deep economic impact. Any enterprise that relies on a complex supply chain should completely examine the current state of their business models and be prepared to restructure them if they intend to survive.

The crucial questions to be answered are: how did it happen and what can be done?

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What caused the chip shortage?

• Overall Industry Demand
  Software controls more and more things. Chips make software run. Many industries including automotive, heavy machinery, and medical equipment are experiencing a rapid transformation to software-driven architectures and adding more and more electronic components.
• Increased Electronic Components
  Chips control seemingly everything, not just cars. The insatiable hunger for them will mean scarcity for the foreseeable future.
• Supply Chain Planning
  An important nuance to the situation has been the focus of supply chain managers on optimizing around Tier-1 suppliers. This has contributed to the chip bottleneck. Most of the electronic component manufacturers are still Tier-2 and Tier-3 suppliers to industrial equipment manufacturers and issues will remain until this mindset is addressed.
• COVID-19
  The component shortage was easing early in 2020, but was then exacerbated by the emergence and spread of the COVID-19 pandemic. Supply of and demand for new equipment and components became an unpredictable roller coaster ride.
• US/China Relations
  The changeable and complicated trade relationship with Chinese chip manufacturers has also made this problem more severe. Many electronics components have been acquired by OEMs through distributors located in China. Often, those distributors have learned from the pandemic (PPE availability issues are a perfect example) that they can get away with overcharging for their inventory. This is especially true since they have weak or non-existent relationships with US OEMs.

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Solution to the Chip Shortages

At TADA, we have proven solutions to these supply chain issues. Our experience has led us to recommend a phased response. The process consists of three phases designed to deal with customers' immediate needs and a longer-term plan that will last into the future.

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Emergency Corrective Action Plan

Our experience in the supply chain business coupled with our unique technology enables us to offer an Emergency Corrective Action Plan with the following components:

• Part taxonomy to ascertain chip revision levels
• Identification of critical chips and their multi-tier suppliers
• Capacity availability of alternative chip revisions
• Alternative supply sources
• Monitoring of demand flow and coverage
• Creation of a build capacity allocation model

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Interim actions for OEMs

• Leverage TADA Supplier exchange network to identify additional sources for critical chips
• Connect OEM and Tier 1 suppliers to the source to bridge supply gap
• Repeat to ensure supply is covered in short term

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Long term actions

• Establish a digital control tower with aggregated demand, variability, and flexibility needed across the nodes
• Improve the visibility into the supply chain through a multi-tier assessment and establish strategic buffers on critical parts at critical nodes across the supply chain
• Develop a commercial framework to serve as a roadmap for implementing strategic buffers and other levers

Conclusion

Chip shortage is real and will continue to hound automobile and industrial equipment manufacturers for some time to come. Post-COVID pandemic, supply chain issues experienced by chips are now extending to many other parts and raw materials. At TADA, we have helped many customers with these and other supply chain issues with our Multi-Tier Collaboration system.

If you are interested in learning more, we’d love to talk!

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