Strains in the supply chain have been weighing on the electronics industry since late 2020. The sector has been hit by severe supply shortages, particularly of semiconductors, with supply struggling to accommodate the surge in demand for electronic products and equipment.
Supply chain bottlenecks stem from the interplay of several factors. Pandemic-related pressures coupled with a strong rebound in global demand for consumer electronics and cars sparked the initial supply chain shocks. This was followed by a much larger and wider shock from the semiconductor crisis. The current political situation between Russia and Ukraine, including many countries’ sanctions and bans on the import of Russian products, is likely to exacerbate the supply bottlenecks further.
Before you continue reading this article, take a look at the different ways to build a more resilient supply chain.
Given the multifaceted nature of supply bottlenecks, having contingency plans in place is the best way to prepare for unforeseen shocks. As a short-term solution, many companies resort to stockpiling just in case the shortage worsens over time.
However, stocking up components presents a significant risk for manufacturers. Holding extra inventory requires a huge investment to buy the stock in the first place. This often leaves too much capital tied in excess stock. Furthermore, this additional volume of inventory places additional pressure on transportation, handling, and storage costs. Consequently, if the components are not sold in time, they may become a waste quickly, putting even more pressure on companies to find buyers.
Another short-term move companies make during extreme times involves chartering ships/containers to secure supply. With shipping capacity limited and demand high, firms seek to exert control over their supply chains by chartering their own ships or booking available capacity for longer. However, the problem with this move is that it attracts a spike in charter rates, increasing costs for manufacturers. Besides, dedicated charters aren't immune to challenges presented by the COVID-19 pandemic, such as delays and lockdowns.
The supply chain bottlenecks in the electronics industry may push organizations to re-think and establish a supply chain closer to home. This is called regionalization. For instance, U.S. companies are likely to shift some of the manufacturing production back to North America.
In an effort to regionalize or localize manufacturing for sectors and products considered strategically important, governments are increasingly making interventions to ensure local supply. For example, a 2020 Gartner report revealed that Japan released a multi-billion-dollar stimulus package to help their companies bring manufacturing back to the country.
When companies break down a complex supply chain into smaller regional locations, they can streamline processes with ease. Other benefits of regionalization include:
While a regional supply chain is more responsive and resilient, moving manufacturing closer to home takes time. Semiconductor facilities, for example, take an average of three years to build. Also, manufacturers have to bring the entire supply chain to their applicable region in order to execute proper regionalization.
Nearshoring involves moving manufacturing operations nearer to home to stem the flow of supply chain problems. A key benefit to nearshoring is gaining control of production under local control – allowing manufacturers to reduce dependency overseas. Other benefits of nearshoring include:
But nearshoring has its limitations. Reproducing capacity and re-creating clusters of suppliers under a nearshoring strategy might take years to accomplish. Manufacturers often face challenges finding the right raw materials, production quality, and networks that have been established in manufacturing hubs like China and Southeast Asia. Higher prices for raw materials and components closer to home, for instance, increases the cost of production – thus defeating the whole purpose of nearshoring.
Reshoring - or onshoring - aims at bringing manufacturing back to Europe. Over the years, manufacturers shifted production of electronics and cars primarily eastwards to China, in an attempt to cut labor costs and protect margins. But supply chain snarl-ups in Asia have forced companies to consider bringing supply chain back from China and finding suppliers within Europe.
The European Union is even offering incentives through the NextGeneration fund for companies to have “greener” supply chains by bringing production closer to home. Another advantage of reshoring is that it makes localized “just-in-time” production more attractive. Firms can respond faster to market developments and eliminate supply chain delays and disruptions.
But just like nearshoring, there are significant challenges. Skilled labour is needed to populate high-tech factories, and Europe’s electronics industry has a continuing problem with a brain drain to the U.S. So, manufacturers might struggle to find experienced hands to make their components. Furthermore, the Russia-Ukraine crisis will likely make Europe a weak link in the electronic supply chain.
Relocation, nearshoring, and reshoring may help fix supply chain bottlenecks by boosting domestic production but aren’t likely to be effective. Diversifying sourcing is the better solution.
By doubling down on domestic production, manufacturers may have their own domestic suppliers disappear in a crisis, whereas if they had diverse international suppliers, they would have a fallback option.
That is precisely what AIRENC provides. AIRENC simplifies components purchasing and procurement processes, thereby enabling OEMs and EMS to source products from a diverse community of sellers. Through our peer-to-peer transaction platform, we are a partner for innovation. As a member of AIRENC, you can source and buy critical components in shortage and build your inventory capacity during a crisis. The AIRENC platform gives companies a greater deal of flexibility and thus makes it easier to prepare for future events and make their supply chains more resilient.