Global Chip Shortage: A New Call for Supply Chain Resilience

The first article that I published on this platform was about the importance of building supply chain resilience. It was August 2020 and I thought that it was pertinent to write about the topic given the fact that we were navigating through the COVID-19 crisis. It is almost 2022 and here we are again, now dealing with new COVID variants, but also dealing with new challenges that are putting additional pressure on our supply chains and supply chain professionals.

Lately, we have heard a lot about the global semiconductor crisis. The world is experiencing a chip shortage that is affecting more than 100 industries, including the automotive, consumer electronics and other industries that require semiconductors. The fundamental cause is simple: the demand for integrated circuits is far greater than the supply.

Usually, when we refer to supply chain resilience, we list several potential causes for highly disruptive events that may impact the seamless flow of parts and materials throughout the supply chains. Some examples of these potential causes are natural disasters, trade wars and global health crises.

The global semiconductor shortage is caused by a perfect storm. It is a combination of the effects of the global COVID-19 pandemic, trade conflicts between China and the US, inclement weather in some regions of the world, fires at semiconductor facilities and general increases in prices of raw materials.

But the main cause of the global chip crisis is the lockdowns that have taken place during the pandemic. Several chip production companies closed their operations leading to the depletion of global inventories. Additionally, since more people started working from home, the demand for personal computers and other electronic devices significantly increased.

In 2020, the US imposed severe restrictions on the main chip manufacturer in China. This decision forced American companies to look for other alternatives to procure semiconductors in other countries in the Asia region, but those alternatives had no extra installed capacity to fulfill those orders.

On the other hand, early this year, inclement weather caused the closure of two semiconductor manufacturing sites in the US for several months, and also Taiwan experienced its worst drought in decades, affecting several chip manufacturers that used large amounts of water as part of the wafer production process. Considering that Taiwan represents more than 50 percent of the world’s wafer market, the global impact has been huge.

If that was not enough, two Japanese factories caught fire in 2020 and earlier this year, shrinking the chips offer even more.

Situations like these will continue to happen, and supply chain and sourcing professionals need to plan ahead with appropriate business contingency plans. They also need to create crisis management strategies that allow them to further develop business resilience.

In my opinion, this is another reminder of the importance of building resilience within our supply chains. As I always say, investing in supply chain resilience is like an insurance policy, it may come at a high cost, but it is better to have it and not need it, than need it and not have it, because usually when you need it, it is already too late.

Besides COVID, the semiconductor crisis has been the main topic this year. Next year, we may be experiencing a whole new game, so business resilience must be in our supply chain playbook.

Sourcing and supply chain professionals can start building business and supply chain resilience by considering the following aspects:

• Pay special attention to those commodities that are critical to your business operation, and that may have high market concentration. This increases your supply chain risk and could significantly impact revenue and business profitability.
• For those critical commodities, consider investing in vertical integration to reduce the dependency on third parties. This will help reduce your supply chain risk.
• Strengthen risk management practices within your business by creating and  developing risk simulation and scenario planning capabilities.
• Make sure you constantly review and test your business contingency plan. If you don’t have one, create one.
• Establish supply chain control towers to improve visibility across your supply chain by collecting suppliers’ data in real time. This will foster transparency and agile decision making to quickly respond to changes in the business context.
• Diversify your supplier portfolio and production footprint.
• Stop making “cost” the center of your universe. The key is to balance cost and resilience. The goal should be optimizing cost, not just cutting it out.
• Invest in innovation and technology. Digitalization will generate cost savings and improve operational efficiency.

As I mentioned before, we are navigating through a perfect storm, regardless of the industry that you participate in. The experiences of the past, and those we are living today, should prepare the supply chain and sourcing professionals to be better equipped to face adversity.  This is a new call to invest in supply chain resilience. This may be our last chance.