No chips? No car for you!
Buying a car has become harder lately. Why is that? Car manufactures are shutting down plants because they don't have the electronics parts to put in their vehicles.
It will take another 2 years to fully recover the supply chain, according to Volkswagen. Governments see this as such a big problem that they are considering pouring subsidies towards microchip manufacturers, who will have to spend billions to increase output. However, it can take about 5 years to build these kinds of plants, so there’s no short-term fix for this.
How did it happen that we are suddenly short on something which seemed totally abundant? Actually, the supply chain of microchips is incredibly delicate. It has several weak points. The proverbial Black Swan event of COVID-19 has caused waves of disruption through the system.
It started in the spring of 2020 where lockdowns and overall uncertainty created a drop in a demand for new cars. As a response, car manufacturers stopped making cars. They also cancelled orders for the electronics parts. Unlike other parts (wheels, engines, mufflers) the electronic parts have uses in other products. As consumers started buying things for their households, manufacturers quickly redistributed the production elsewhere.
COVID wasn’t the sole cause of our global supply chain problems, either. The past U.S. administration regulated sales of computer chips to Chinese companies. In response, those Chinese companies bought as much as they could to prepare for the embargo. At the same time, the US firms were blocked from buying from blacklisted Chinese companies.
But wait, there’s more. On July 22nd, 2020 there was a fire at the Nittobo manufacturing plant that made ABF Substrate. Why is that important? ABF, also known as “Ajinomoto build-up film”, is a layer connecting components of a processor. If you are a microchip company on the scale of Intel or AMD, you can just buy the entire production of a factory to prevent your competition from making any product. That could be a longer-term strategy: What do you think will happen when you go to your supplier and cancel or significantly reduce your orders; and then half a year later you come back with a new order? You go back to the end of the line. But when there is a shortage of ABF, nobody is making anything.
It gets worse, if you can believe it. You see, it’s not just a supply problem. There’s an upsurge in a specific kind of demand for new lines of Electric Vehicles (EVs). These vehicles need more electronics and also use the same parts as everyone else. The result? More delays. More shortage, especially of new models arriving to show rooms of dealers near you.
How can companies start solving this problem and problems like this in the future? They could start with better mapping of the supply chain, understanding where the risks are, using new technologies that let them do that. I’m not just theorizing, here: I use this technology.
I've even built a demo to show a system which would help companies map all their suppliers (and of their suppliers’ suppliers).
What could a company do with this kind of technology? Answer questions like these:
“If I need to get this part as quickly as I can, which supplier and logistics partner should I use?”
“I need to cut costs. What is the lead time for this part and which suppliers can provide that?”
“If this part of my supply chain disappears, what are my options?”
Many people are calling for changing from the status quo ofJust-In-Time Deliveryof parts from suppliers to build more inventory. Having an extra buffer of parts might help, but it comes at a higher cost. it will also not solve the underlying problem of understanding where the potential problems are and how to build a resilient supply chain.
This should be part of the strategic planning. Those with the ability to adapt succeed. That is the recurrent pattern here.