Supply chain resilience requires transparency, strengthening risk management capabilities, redundancy in supplier and transportation networks, and holding more inventory.
Covid-19 is the latest in a series of disruptions that are reshaping the electronics supply chain. In 2011, an earthquake and tsunami in Japan devastated its population and businesses. In 2018, the U.S. and China engaged in a tariff trade war that is still ongoing. In 2020, demand for semiconductors accelerated due to a spike in demand for laptops as corporate employees were forced to work from home. By early 2021, chip shortages shuttered automotive plants, and a massive container ship ran aground in the Suez Canal, delaying about a third of the world’s oceangoing cargo from reaching market.
The coronavirus delivered the biggest, broadest and most enduring supply shocks in recent memory, according to the McKinsey Global Institute. The consequences have forced manufacturers to question their lean, just-in-time inventory model built on minimizing inventory, rapid delivery cycles and short lead times. The supply chain simply wasn’t prepared for worldwide factory closures, paralyzed logistics and erratic, unexpected changes in demand.
The new goal is resilience — the ability to quickly adapt to disruption. Supply chains suffered an unprecedented amount of disturbance in 2021 — factory fires, supplier M&A, supply and labor shortages. Many of these upstream events negatively impacted downstream customers that didn’t have deep visibility into their supply chains.
Early in the pandemic, for example, global EMS provider Flex found it didn’t have contact information for some of its 16,000 global suppliers. Through team effort and its digital platform, Flex had the data in 48 hours.
Global OEMs have a pretty good sightline into their top-tier vendors; they share forecast, ERP, MRP and order data. But their suppliers’ suppliers data is less readily available. Factory closures impacted everyone: component makers, materials suppliers, substrate manufacturers and even mining operations. These vendors can have an outsized impact on the supply chain. A 2020 fire at Unimicron, a semiconductor substrate factory, delayed shipments into 2021. And a slowdown in graphite mining could stress the production of EV batteries.
The survival of small and midsized suppliers – many in the Asia-Pacific region – remains a concern. As global demand dropped during the pandemic, companies weren’t generating revenue. Sixty-five percent of small companies in China have just a two-month cash reserve, according to risk management consultancy Resilinc. By 2020, nearly half a million Chinese companies had closed. The Wall Street Journal found 200,000 U.S. companies were shuttered in the pandemic’s first year.
And even with forecast sharing, semiconductor demand was vastly miscalculated in Q4 2020.
By the time these distress signals reach the upper echelons of end-customer management, it’s too late to react. OEMs don’t necessarily know the identity of upstream suppliers and contracting with alternative sources and vetting new vendors could take months or even years. U.S.-China trade restrictions have made some options untenable.
Just-in-time (JIT), build-to-order (BTO) and lean practices have left very little buffer inventory in global supply lines. When automotive demand for chips suddenly spiked in the fourth quarter of 2020, semiconductor inventory and future fab capacity were already booked. Carmakers don’t typically deal with the electronics supply chain and were forced to suspend production for lack of chips.
“Companies are running so lean in their processes – which usually work very well – that if one or two things go wrong, there is a knock-on effect on everything else,” said Graham Maggs, vice president, EMEA marketing, at Mouser Electronics. “What we have been seeing is one disruption after another. No matter how hard we work to correct our processes, it still takes time to work through these things.”
Proposed solutions to supply risks are antithetical to current practices. Supply partners need to strike a balance between just-in-time and “just-in-case,” according to McKinsey. Inventory is widely viewed as capital that can be better used elsewhere, yet having a sufficient quantity of key parts and safety stock is a buffer that can minimize the financial impact of disrupted supplies. It also positions companies to meet sudden spikes in demand.
That balancing act will require a seamless flow of data between partners. Global manufacturing has only just begun to adopt a range of technologies – data analytics, artificial intelligence, IoT, advanced robotics, and digital platforms – that enhance supply chain visibility. Companies can run “what if” scenarios assessing trade-offs such as price versus proximity. These “nice to have” capabilities in the pre-Covid economy are becoming corporate priorities.
Centralized “control tower” systems, for example, provide a company-wide view across geographies and products. They integrate real-time data, from inventory levels to road delays and weather forecasts for manufacturing sites and supply-chain partners. When a problem occurs, the system can run scenarios to identify the most effective solution.
There’s also a trend toward customers having more skin in the supply game through more data-sharing and long-term commitments.
“Given the long-term nature of the supply demand imbalance here, the more information we have from a customer the better we can help them,” said Arrow Electronics Inc. CEO Mike Long on a recent earnings call. “So I’ll put two things out there first. This sort of contractual arrangement says to the supplier that you’re serious about getting supply over the next three years, let’s say. Then you’re going to share your forecast and the supplier is going to commit to a percentage production capacity that you think you need. They’re not going to allow you to stock it and put it on the shelves and not ship it or not manufacturer with it, but it opens a different type of dialog.”
OEMs and EMS providers are able to cancel or return orders due to inaccurate forecasts. With semiconductors at a premium, suppliers and distributors are looking for no-cancel no-return (NCNR) commitments from customers.
“If you’re sort of an old-line customer that are used to getting your shortages fixed by pounding your fist on the table or calling up and asking somebody for a favor and then yelling at them, those customers are not likely to get their products,” said Long. “It’s really come down to if you want to fix the supply chain it has to be better visibility; it has to be a longer-term commitment; and you can’t just continue to whipsaw the supply chain and think you’re going to get products.”
There is no single industry that wields the power to push around suppliers and distributors, he added. “So, it really is going to have to be more information, more visibility, and as a result there will be better results for everybody over the next couple of years because this is not really going to go away soon,” said Long.
Risk-management experts have suggested manufacturers take steps to help their smaller suppliers thrive. Monitoring the financial health of partners is essential, according to Resilinc, for calculating the revenue impact of a distressed supplier. OEMs can establish an emergency fund to prop up weak vendors or pay for future services in advance. Finally, OEMs can set aside budgets to secure lifetime buys of inventory where supplier failure is highly likely.
In spite of all the headwinds, the U.S. PMI, by November, had expanded for 18 consecutive months.
Supply chain resilience requires transparency, strengthening risk management capabilities, redundancy in supplier and transportation networks, and holding more inventory, according to McKinsey. Designers can reduce product complexity so projects can be easily transferred across manufacturing sites. OEMs can improve financial and operational capacity to respond to shocks and quickly recover.
Preparing for future disruptions has a present-day cost. But these investments pay dividends over time by not only minimizing losses but improving digital capabilities, boosting productivity and strengthening industry ecosystems, McKinsey noted. It’s a win-win for the supply chain and the customer.
This article was originally published on EPS News.