Amazon Prime, Deliveroo, Quiqup—we want products, and we want them now. With everything else being available 'on demand' the lines between B2C and B2B have already become blurred with an expectation that complex electronic or electro-mechanical machines can be delivered the next day. Unfortunately, right here right now, supply chains across all sectors are under extreme pressure and items that you used to be able to buy and have delivered the next day, are being quoted with extended lead-times. Nothing is safe, not even chicken...
The problem is global
COVID-19, spiralling freight costs, a dearth of raw materials, a lack of containers used to ship products, and air freight capacity being stretched due to vaccination demands all mean this is an issue that is likely to outlive the pandemic and extend over the next few years.
Lead times for semiconductors have increased from roughly 12 weeks in mid-2019 to 17 weeks; however, this figure can sometimes be up to 50 weeks.
As semiconductors are essential for all types of electronics, the shortages have caused serious disruptions in many different sectors—from automotive to white goods manufacturers. Responsible Electronics Manufacturing Services (EMS) providers have been communicating supply chain updates on a regular basis and warning their customers of the situation for months, although it doesn't make the news easier to digest. And the problem is not just here in the UK—it’s global. Joe Biden, the US president, has called a summit because of the issue and Germany’s finance minister has written to the government of Taiwan where many semiconductor fabs are located.
What has led to global shortages?
The main reason for the long lead times we are seeing now with electronics products is the increased demand for consumer goods which is directly related to how our lives have changed over the past year-and-a-half.
- Our need to stay connected with electronic devices
- Our new home offices
- More time to spend shopping online
- More time spent on indoor fitness platforms / devices
- The larger demand for cloud-computing operators
As the supply of semiconducors cannot rapidly react to changes in demand, chipmaking is known as a pork-cycle business—named because of the regular swings between under- and over-supply first analysed in American pork markets in the 1920s.
Some companies have ramped up production but then burnt themselves out due to their inability to meet their own targets. Compounded to this situation is the current increased demand for 'intelligent' vehicles which, with each iteration, are ever-more dependent on software and electronic components. There is fierce competition sourcing vital parts just for companies to keep their lights on.
Ironically, the shortage of electronic components has not always been taken seriously—even by people who work in the industry. They have only come to realise the gravity of the situation when they experience shortages of other common items we consume on a daily basis—for example coffee—caused by a drought in Brazil and exacerbated by issues with shipping containers and backed-up ports.
The global shortage of semiconductor chips has only been noticed by people waking up and smelling the coffee—which they now can’t order.
Problems with the supply chain
Long lead times, and the subsequent shortages, centre around issues that make the supply chain more vulnerable than we previously imagined. Maybe you can’t get coffee for your morning brew, but it doesn’t matter as you won’t be able to buy a coffee machine to prepare it in anyway.
The coffee machine, a relatively simple electronic product, could have 20 parts that come from four different countries. But each country might not be able to produce the components, and if they are unable to deliver, production stalls.
When just one of these countries stops being able to produce, the whole chain shuts down. It only takes one missing component to completely halt production to a standstill.
If assembling a coffee machine is problematic, imagine the scale of the issue for a complex piece of electronic engineering, such as a car, which may require 10000+ parts. In the past, EMS providers would be in charge of getting the parts that had the longest lead time, but supply chain problems now mean that there is no such thing as a short lead time—there are only long and longer lead times.
Reasons for supply chain problems could be climatic (such as heavy rains in Taiwan), they could be geopolitical (Brexit), they could be medical (COVID-19), or they could just be due to bad luck (the Ever Given getting stuck in the Suez). The whole supply chain is a balancing act based on projections—it only takes one small part to be out of balance to tip the whole system.
Where do OEMs stand?
Despite certain global supply chain issues being outside the hands of the EMS providers, OEMs still want their product now because their customers wanted the product yesterday.
The problem is one of allocation—there only are a finite number of products that can be manufactured. This can lead to strained relationships between EMS and OEMs as it is often the case that whoever shouts loudest gets the attention while the quiet ones go unnoticed.
For this reason, like never before, it is paramount you are partnered with the right EMS, and have a relationship built on trust.
What is the electronics manufacturing industry’s problem?
While it is true that many issues lie out of the hands of the EMS providers, the electronics manufacturing industry’s problem is a lack of diversity and visibility. Globally, there are relatively few manufacturing centres, which tend to be centralised and cannot keep up with demand. The result of this situation is that smaller companies that rely on these components are also unable to keep up with their supply.
The intricate and delicately balanced web of electronics suppliers that provide the components manufacturers need to make their products is vulnerable. Any shock is likely to produce an extended lead time—problematic in a world of products with ever-shorter life-cycles.
Is anything being done to address the problem?
If we learnt anything in 2020 it was that diversity is essential—and this extends to the electronics manufacturing industry. The following companies are increasing capacity:
- Taiwan Semiconductor Manufacturing Company, the world’s biggest contract chipmaker, plans to spend $30bn on new capacity in 2021
- Samsung Electronics and Intel are planning to spend $28bn and $20bn, respectively
- Second-tier chipmakers are also increasing spending
More companies are also looking to Elon musk’s Tesla for inspiration. Since 2016, the carmaker has been designing its own chips, which allow it to quickly add software to its products. It is likely that more and more companies will align with this model.
Our advice: what can you do?
The cycle can and will turn once again—although it might take several years. But there are several ways that your company can weather the storm until then.
- Make forward orders to secure sufficient product for 2022 and beyond
- Make a complete order for an exact product—total commitment is key
- Make a commitment to long-term orders—no more forecasting
- Make sure your requirements are visibly in the manufacturing queue
- Make sure you increase your levels of stock—at your site and with your distributors
- Review demand on a more regular basis
COVID-19 may have changed everything, but it only speeded up the inevitable. We all have lessons to learn. EMS providers need to diversify their supply chains and make them more sustainable in the long-term. OEMs should consider their priorities with their EMS provider. The right partnership will mean that, united, you grow together and face whatever challenges are presented, with a desire to constantly improve.