Now that the chip shortage has been with us for more than six months, some expert insights are emerging about ways manufacturers of vehicles (and other electronics products) as well as chip and component supply chain managers can fix things--or at least do a better job the next time a global pandemic or other major disaster hits.
Deloitte released a new study on the auto sector, while an Avnet executive shared perspectives from her decades in the supply business.
Here are several of their major ideas:
1. Look to software. Manufacturers of products, including cars, that heavily rely on electronics and chips need to recognize that software must take on a bigger role, reducing the reliance on hardware to make a device work. This requires a multi-year effort and a major mind-bending shift in design, but the software-defined networks that telecommunications carriers are installing show it can happen and will work.
2. Share forecasts. OEMs need to share supply data with top tier suppliers. In the case of vehicles, this means sharing production forecasts for up to two years with tier 1 suppliers twice a year. Sharing probably means beefing up IT networks and computers for real-time insights, at a cost.
3. Stockpile critical chips and even wafers, maybe up to as much as a six-month supply. Stockpiling might require setting up contracts with preferred suppliers or spreading the stockpile across multiple suppliers.
On that third point, Toyota is widely recognized as having done the best of the vehicle manufacturers in handling the chip shortage crisis, and one reason is that it set up a stockpile of chips. That stockpile philosophy runs counter to everything the elite IT analyst firms have advised manufacturers to do for years, which is to implement just-in-time manufacturing.
Toyota even resorted to sending its workers to the Renesas Naka chip plant in eastern Japan to help keep its supply chain alive. Renesas makes about 30% of all microcontroller chips used in cars globally. It suffered a fire at the Naka facility in March that has slowly been returning to 100% capacity.
But Toyota is an exception. IHS Markit recently said global vehicle loss attributed to the pandemic in first quarter 2021 was 1.3 million vehicles, with China, North America and Europe each dropping about 350,000 vehicles in that quarter.
Lack of supplier visibility
In a Deloitte study released on Monday, authors cited a lack of visibility into a complex vehicle supply chain at the center of the chip crisis in the vehicle industry. “Lack of visibility up and down the value chain prevented OEMs from identifying potential risks associated with their decision to shutter vehicle assembly operations in spring 2020,” the authors said.
Deloitte said some vehicle makers have had to form crisis response teams to work with tier 1 suppliers to secure supply commitments. They also have approached wafer and chip suppliers to establish direct commercial agreements and have shared forecasts farther in the future than before--up to 24 months shared twice a year.
One unusual idea has also emerged for setting up wafer banks and even “proxy panels,” a kind of six-layer wafer packaging technique that is being tested.
Deloitte advised carmakers to invest in third party data and analytics platforms to build visibility into various tiers of its supply chain, advice that would likely apply to manufacturers in any sector.
“Given the nature of this challenge, it may take a number of years for OEMs to drive fundamental change in the way they engage with their supply base,” Deloitte said. “However, the current crisis can act as a catalyst…to finally address long-standing supply chain issues.”
Deloitte’s advice is fairly long-term, but some companies in the electronics components field are trying to step up to help buyers find suppliers.
View from Avnet
Avnet, an online distributor of 5 million components based in Phoenix, sells a variety of components to just about anybody but also offers design consulting on new product development. Avnet competes with several big names including Arrow, Mouser and Digi-Key.
Avnet is 100 years old this year after being founded by Russian immigrant Charles Avnet in 1921. An example of adaptability, the company assembled military antennas during World War II, made guitars in the 1960s and provided components used on the Surveyor lunar spacecraft that decade. It sells a wide variety of semiconductors and had sold 15 million Raspberry Pi’s by 2020.
If an electronics product is being designed with a certain set of chips, Avnet can provide research on the suppliers and offer insights on their resiliency, even suggesting a backup supplier or two. Such insight has been prized during the chip shortage, said Peggy Carrieres, vice president of global sales enablement and supplier development at Avnet.
“The most important part is the one you can’t get,” she said in an interview. “Supply chain teams are worth their weight. We have a large influx of customers coming to us that have not solved supply chain challenges. It’s a business continuity issue.”
She said Avent can act as a command central for customers, including giving advice on how to optimize a design to get to market quickly. Customers also can get access to forecasts for components, from a few weeks to as far as 52 weeks out. In recent months, some desperate manufacturers have paid three times the normal cost of a chip just to keep assembly lines moving.
Carrieres has studied the components supply chain for decades and said the current chip shortage fits into a four-year cycle. She believes the current shortage will last 18 months to two years, putting her at the higher end of most estimates. Gartner recently said the chip supply will reach normal levels by second quarter 2022, basically just another year.
Supplies will improve in 2022 and 2023, but in 2024, production will grow at a lower rate, Carrieres said.
Like major economists she follows how inflation will come to bear on the price of chips, and inevitably the price of servers, laptops, and even cars. Vehicles of all types are increasingly similar to computers as electronics components become essential for electric vehicles and advance driver assistance systems. Electronic subassemblies in cars now make up about 40% of the cost of a vehicle, up from 18% in 2002, according to Deloitte and other sources.
“I don’t anticipate pricing going back to pre-Covid levels any time soon,” she said.
When the pandemic started sending workers home, there was a big spike in computing needs, but Carrieres wonders, “At what point does that wane?...Growth can’t continue at the same rate year over year.”
On one point Carrieres is sure: designers will need and want to move to greater reliance on software over hardware in developing applications.
“There’s hope in innovation,” she said. “A lot of goodness is coming out of this pandemic from an innovation standpoint. We figure out ways to make things work and how to get more function with less hardware and more software.”
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