As much havoc as the ongoing global semiconductor shortage has caused in automotive, consumer electronics and other high-profile markets, manufacturers were bound to draw extra scrutiny and second-guessing for how they manage their supply chains.
Even as chip manufacturers were mobilizing to add new production capacity and as the Biden Administration was contemplating government action to prevent future shortages, the shortcomings of the computer chip supply chain had already been exposed by a confluence of events, starting with the COVID-19 pandemic.
“No one likes to hear ‘I told you so,’ but organizations could have done a better job planning for these shortages. Instead, poor decision-making prevailed,” supply chain experts Bindiya Vakil and Tom Linton assert in a recent Harvard Business Review column, identifying automakers’ aggressive lean inventory practices and lack of visibility into broader supply-demand dynamics as among those shortcomings. As a result, they write, automakers “lost out to more nimble electronics manufacturers that had visibility into the bigger picture and longstanding relationships with semiconductor manufacturers.”
The relationships within a supply chain — and the collaboration that flows from them — may indeed be the key to preserving the integrity of a supply chain in the face of unexpected disruptions. Heightened collaboration among the various tiers of the semiconductor supply chain, enabled and supported by a range of digital capabilities, may well have produced better in-the-moment decision-making capabilities based on more rapid propagation of accurate demand, supply and capacity constraints across the semiconductor business network, resulting in a more resilient, flexible supply chain that could have averted or at least shortened the semiconductor shortage. Let’s take a closer look at how to get there.
Evolve from a traditional supply chain to a collaborative ecosystem that encompasses the entire value chain. The COVID-19 crisis, coupled with disruptions like the paralyzing February storms in Texas, exposed vulnerabilities in even the most rigorously stress-tested semiconductor supply chains. The potential silver lining to all this is that it could galvanize manufacturers whose products depend on computer chips to shift from the linear supply chain construct, to a network-focused supply ecosystem in which multiple tiers of suppliers, including semiconductor manufacturers (fabs), their OEM customers and their OEM customers’ customers, are connected digitally in real time, and making more rapid and better informed decisions collaboratively, on the fly.
With OEMs now hyper-focused on supply resilience, reliability and risk-reduction, they need the ability to quickly synthesize data from across their network to assess risk amid rapidly changing market signals, then respond accordingly, without the latency in communications that plagued so many supply chains during the pandemic. With digitally connected networks in which everyone in a supply network is working from a single, shared source of data truth, they all gain critical real-time visibility into customer demand, supplier capacity and inventory, and distribution logistics. From there, they can collaboratively work through potential disruptions and more quickly identify alternative supply sources and logistical pathways, using predictive tools to show them the most efficient pathways under various contingencies.
This level of visibility, in tandem with predictive modeling and analytics, could have given automakers a more thorough understanding of the additional risks they would assume by suspending semiconductor orders early in the pandemic, knowing that in doing so, they likely would be surrendering chip capacity that they would not easily be able to reclaim later.
The success of such a supply ecosystem is predicated not only on the parties trusting one another, but also trusting that their shared digital networks, data, and intellectual property is secure. It’s also predicated on a mindset shift, where manufacturers realize that it’s not just them versus the competition, but them and their entire value chain versus competing value chains. By aligning business interests, this construct also may promote more partnership-like relationships and even risk-sharing among members of the value chain, including between OEMs and chip makers.
The heightened insight flowing from the supply network also can have a profound impact internally across the manufacturer’s business, supporting better-informed, more timely decision-making and improved near- and long-term planning throughout the enterprise, from engineering and production, to sales and marketing, to finance, HR and IT. The entire business gains a new level of agility.
Embrace a collaborative approach to make more versatile computer chips. What if semiconductor fabs were producing chips designed and engineered for versatility, so they could be adapted late in the production process to different products and applications? What if, instead of being hard-coded in the factory for very specific uses, chips instead are designed and engineered to be ubiquitous, more of an appliance that the chip maker can program in the factory, later in the production process, based on the near-term demand signals it is receiving?
The availability of these more versatile chips, at shorter lead times, would create a much more flexible and responsive semiconductor supply chain, helping to avoid the shortages and frustratingly long lead times that consumer electronics companies, automakers and other OEMs are contending with today.
The stronger collaboration between OEMs and chip manufacturers that the aforementioned supply ecosystem likely would create could make producing these types of chips eminently possible. Indeed, it could lay the groundwork for new business models around which OEMs and chip makers partner to gain competitive differentiation and develop new revenue streams, while supporting the Biden Administration’s recent executive order seeking greater supply chain diversity, flexibility and resilience.
Ultimately, the end game of all this collaboration within semiconductor ecosystems is having the right inventory in the right place at the right time. More accurate information moving through the supply network faster enables OEMs and other network participants to better hedge supply variability and risk. In essence, information replaces inventory, enabling companies to shorten chip lead times, respond promptly and decisively to disruption, turn their data into a competitive advantage and quiet all those “I-told-you-so’s” about semiconductor supply chains.
Patrick Maroney is a principal within SAP’s High Tech Industry Executive Advisory, working closely with customers to help architect digital solutions to meet evolving organizational goals, address strategic challenges and create value. He has a background in industrial and systems engineering as well as business strategy and transformation consulting.