The COVID-19 pandemic has significantly impacted global supply chains across various industries. We all remember the early stages of the pandemic when anxious customers began hoarding toilet paper, leading to a widespread shortage and empty shelves. This is a classic example of the bullwhip effect, where sudden fluctuations in demand at the consumer level amplify further up the supply chain, resulting in inefficiencies like stock imbalances, poor customer service, and production delays.
This effect has also been prominent in the semiconductor industry. Here, however, the stakes are much higher, as an astounding range of products rely on semiconductor chips. Due to chip shortages, the global automotive industry, for instance, may produce five million fewer cars this year, and the price of a large SUV has surged by at least 20%. Apple may lose up to $4 billion in quarterly sales due to supply constraints on iPads and Macs, while Samsung has warned of potential delays in launching its next phone due to an imbalance between chip supply and demand.
Initially, the pandemic caused a decrease in consumer demand due to reduced spending. However, a few months later, demand for chip-dependent devices surged as people set up home offices or looked for new electronic entertainment options. Companies manufacturing these devices sent a wave of semiconductor orders upstream, overwhelming the limited number of fabrication plants that produce most of the world’s chips. Shortages quickly followed, and companies responded by stockpiling chips to weather the crisis. However, this hoarding further distorts demand signals, creating the illusion of greater need than there truly is.
The War in Ukraine Disrupting Supply Chains
The semiconductor supply chain has been further strained by the conflict between Russia and Ukraine. Neon gas, essential for chip production, plays a critical role in operating the precise lasers used to etch miniature circuits onto silicon wafers. This gas, mostly purified by two companies in Ukraine, became scarce after the Russian invasion disrupted production.
Neon shortages are only the beginning of the semiconductor industry’s challenges. Even if new neon sources are found, the war threatens other key supplies. Russia controls a large portion of the US’s palladium supply, a metal essential for chip manufacturing, and much of the world’s nickel, which is used to create C4F6, another vital gas for chipmaking. Additionally, helium, another noble gas crucial to semiconductor production, is in short supply globally.
Current Challenge/Position
The reality is that manufacturing a single chip is a time-intensive process, and building more semiconductor plants requires years of planning, construction, and billions of dollars in investment. Suppliers must plan expansions carefully to avoid creating a semiconductor surplus in the future, which could ultimately lead to another shortage.
What Can Companies Do to Mitigate the Crisis?
To address the bullwhip effect and alleviate current supply chain challenges, companies can consider these strategies:
1. Improve Communication Flow: Increasing the flow of information within the company, both top-to-bottom and bottom-to-top, ensures that stock fluctuations are reported and managed in real-time.
2. Vendor-Managed Inventory (VMI): This agreement allows the supplier to manage the retailer’s inventory, reducing the risk of excess or insufficient stock and leading to lower overall costs.
3. Adjust Policies on Cancellations and Returns: Lenient order cancellations and return policies can help companies better manage fluctuating demand.
4. Consistent Pricing on the B2C Side: Sellers can offer everyday low prices (EDLP) instead of temporary promotions to help stabilize demand.
5. Horizontal Collaboration: Current shortages have led to hoarding and overbuying, leaving some companies with excess supplies and others without enough. Rather than competing, companies should consider collaborating by sharing resources and improving communication. The current situation demonstrates that focusing only on self-interest may lead to stagnation, while collaboration across the industry can create a more resilient supply chain.
This ongoing shortage is a stark reminder of how globally interdependent technology manufacturing has become. Addressing these challenges will require cooperation and strategic planning to ensure the semiconductor industry can meet the demands of a technology-driven world.
