Blog Post
Supply Chain

How can OEMs turn the components crisis to supply chain efficiency?

Tuesday, March 8, 2022

The global chip shortage has brought fundamental changes in how companies manage their supply chains and rethink strategies to avoid falling into another crisis

Over the past year or so, a change in the industry dynamics has been about breaking the bullwhip effect through global teamwork and coordination.

Working in silos

When looking at components’ life cycle, most manufacturers have a very siloed approach to design and development, not only in terms of how the supply chain stakeholders interact but also when considering the software and tools they use.

This leads directly to one of the core challenges in a fast, efficient supply chain — overly complex and delayed feedback communication loops. There is often a disconnection between manufacturers and stakeholders at each tier in the supply chain, which often leads to amplifying the demand signals received at every stage of the supply chain.

Industry players operate in distinct silos when they should be working in tandem. Enabling collaboration between components manufacturers, distributors, and customers is critical to expediting this process and making up some of the lost ground caused by the chip shortage.

The “toilet paper” effect

What the electronics industry has experienced in the past couple of years is similar to what happens when demand for household staples like toilet paper goes up, causing panic. Many will remember that toilet paper was sold out in several countries during the first few months of the pandemic. If excess was available, people often bought more than they actually needed. The result was that manufacturers were unable to produce enough to satisfy demand.

The shortage of semiconductors started towards the end of 2020. The pandemic hit production just as demand surged for new laptops, tablets, and PCs as people were forced to work and study from home. Because the demand has skyrocketed, manufacturers have been forced to increase their production capacity. This chain of circumstances has led to the “toilet paper” effect” taking hold of the electronics supply chain.

Supply bottlenecks are causing companies to buy more than they need just to be on the safe side. They want to protect themselves from production stoppages and buy before prices shoot up again.

While it is prudent to stockpile chips if the shortage worsens over time, it is not always the case. Long lead times are required to build capacity and significantly increase output, and in a pandemic-stricken world, this may take even longer. When companies reach peak capacity, demand may have stabilized at lower levels, leaving OEMs scrambling with excess inventory.

Turning crisis to supply chain efficiency

Companies can take three possible actions to adjust their supply chain and more resilience to their operations. No single one of these solutions is a panacea, but all are important to improve efficiency in the electronics supply chain and mitigate the next crisis.

Collaborate with foundries

Successful enterprises can no longer win solely on operational efficiencies. Better collaboration across the business network between the OEMs and the foundries is needed to reduce supply chain risks. This is making some companies move to strategic alliances with chips makers to help secure future supplies of a critical component.

One notable example is the new partnership between Ford and chipmaker GlobalFoundries. The two organisations struck a deal to develop and build advanced chips. Ford will use the partnership to boost access to chips by providing funding to reserve capacity at any of GlobalFoundries' current or future factories.

GM also announced plans to co-design semiconductors with several producers such as TSMC, Qualcomm, Renesas Electronics, among others. Another automaker, BMW, signed a deal with INOVA Semiconductors and GlobalFoundries late last year to secure a long-term supply of chips.

Enhance involvement in chip design

Longer-term structural adjustments, like restoring supplies and redesigning products to use more standardized parts, take extra time and money. For this reason, companies should engage in beneficial collaborative future product development relationships to be more and more adaptive to future supply disruptions.

For example, one way to reduce a single point of failure within the supply chain is to use more multi-purpose chips instead of special chips for a single application. Restrictive design rules (RDRs) are typically implemented to ensure chips are designed in ways that could be successfully manufactured. But if the current crisis is to go by, RDRs increase OEM's exposure to supply chain risks. That negatively impacts supply chain efficiency and resilience.

Part of the reason why GM is co-designing chips with several chipmakers is to make chips that can handle more electronic features in its vehicles - just three families of semiconductors. This is a revamp of its strategy, which involved a wide assortment of semiconductors in its cars. The goal is to lessen the firm’s exposure to shortages by 95%, making it easier for foundries to fulfill the GM’s needs at all times.

A similar move was made by Stellantis last year, with the carmaker striking a deal with Foxconn to co-design chips that will cover over 80% of the firm’s semiconductor needs.

Building a redundant supply chain with AIRENC

As it currently exists, the electronics supply chain is inherently vulnerable to disruptions. To improve supply efficiency, OEMs and EMS companies need to create redundancies across the entire supply chain. A chain is only as strong as its weakest link. If you have an extremely efficient but thin and fragile supply chain, one small disruption can upend the entire system.

Organisations should consider using multiple partners and suppliers simultaneously — even in good times. That way, a company establishes solid relationships with multiple vendors. If one fails or suddenly becomes unreliable, the other is there to pick up the slack quickly.

AIRENC is a peer-to-peer transaction platform that enables OEMs and EMS to build business networks and strengthen their collaboration. The platform allows OEMs and EMS to buy and sell components and enhance collaboration with the electronics business community.

Our platform makes it possible to collaborate and share data transparently and securely with every member within your supply chain network. This allows you to mitigate supply chain risks and limit the financial impact of the bullwhip effect.

Join AIRENC today to drive efficiency in your supply chain.

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