What Lessons Can Enterprises Learn from Today’s Semiconductor Shortage?

Toilet paper and cars – two very different industries with a similar problem. It was not long ago that toilet papers disappeared off supermarket shelves, as consumers braced themselves for the pandemic and the ensuing lockdown. But a similar situation seems to be playing out in the automotive industry too. While the toilet paper shortage could be linked simply to panic buying, the production cutback and plant shutdowns in the automotive industry due to the semiconductor shortage, can be traced to limitations in the supply chain. As vehicles sales rebounded after the lockdown, car manufacturers were left without an adequate plan to manage their supplier relationships, especially after they cut production in the first half of 2020. Europe’s largest carmaker, Volkswagen lost market share in China, while the global automotive industry lost almost $210 billion in revenues in 2021.

The strain on the supply chain is likely to grow, as auto firms focus on electric vehicles, which offer greater connectivity but need more chips. For instance, a Ford Focus car uses about 300 chips as compared to the company’s new electric vehicles, which use 3,000 chips, a report by CNBC stated. To add to this challenge, automotive original equipment manufacturers (OEMs) are competing with PCs and smartphones, as semiconductor manufacturers prioritize the already limited chip supply. With big electronic companies accounting for almost 70% of a semiconductor manufacturer’s revenues, in comparison to the 10% contributed by the automotive industry, chip shortages may continue to be a challenge soon, especially for automotive OEMs.

Besides raw material supply and production, geopolitical issues also have had a ripple effect on the supply chain. For example, the west African country Guinea produces approximately 22% of bauxite globally and exports nearly 50% of it to China for aluminum production. The military coup in Guinea, which took place in September 2021, has put the aluminum supply chain at risk, with the metal even trading a 10-year high price of $2,782 per ton on the London Metal Exchange earlier this year, a report by Bloomberg stated. This in turn could trigger potential shortages or price hikes for both the fast-moving consumer goods (FCMG) and automotive industries.

What’s happened in the automotive industry has exposed the risks of global supply chains. It is also a lesson of how real-time collaboration and an understanding of the gaps between demand and supply can mitigate any supply risk, irrespective of the industry. A big picture approach is key to building flexible, agile, transparent, and resilient supply chains.

Here are five capabilities that will allow automotive OEMs to overcome supply chain disruptions, especially during unpredictable global events:

• Extending supply chain transparency: The chip shortage has made it evident that supply chain visibility must extend beyond tier 1 suppliers to the sub-tier level. This will help OEMs understand potential disruptions due to unforeseen events such as a pandemic, floods, cyclone or earthquakes. Figure 1 represents a conceptual view of the supply chain starting from tier 1 and tier 2 to tier N suppliers, each aligned to a specific country, type of component, part number, and the vehicle associated with it. It also offers additional information such as status updates on latest events that could cause disruption and commodity prices. A detailed drill-down of such critical information, in addition to automated alerts can update OEMs about possible supply risks.

• Cataloguing sub tier supplier content: The next step would be to catalog the sub-tier content and break down the bill of material composition. This means mapping the OEM’s part number with the tier 2, 3, or tier N part numbers needed per vehicle. This information should be extended with demand over the next 18-24 months, which can then be shared with tier 2, 3, or tier n suppliers as forecast. Such forward-looking forecasting can help OEMs identify quantities needed across models and platforms and compare it to supply commitments and inventory levels over the next 18-24 months.
  
  
• Ensuring supply through direct contracting and pre-investments with suppliers: Creative contractual agreements can also mitigate any possible shortage crisis. For instance, OEMs could contact their suppliers directly and assess contracts with pre-investment. This would offer better visibility into the number of components or parts needed in the next 18-24 months.
  
  
• Correlating part numbers in the order book: Specific parts could have unique supply risks associated with it. OEMs need to have the ability to quickly view which order feature a part number (with supply risk) belongs to. This information must be aligned with the applicable model, country, and type of fitment (optional, standard, or mandatory) along with the number of orders and profitability in the order book. Using this approach can help OEMs make specification changes and understand the impact on the order book and production plan schedule.

• Reducing the complexity of features and part numbers: OEMs must develop a purchasing strategy to reduce the manufacturing and supply chain complexity. Based on TCS’ internal research, an automotive OEM in Europe had more than 1,27,000 active part numbers and over 250 feature codes per vehicle across 14 different models. Approximately 3,000 parts had one or more than one semiconductor on it. Combining such data with artificial intelligence (AI) and machine learning models, the firm was able to rationalize part numbers and features. OEMs can then update the design for manufacturing and assembly guidelines for these parts and features, which can serve as reference guides to reduce complexity during new product design.

Riding out the uncertainty with a transparent supply chain

Applying strategies to improve supply chain transparency requires an interconnected ecosystem consisting of product vendors, tier 1 and N suppliers, and retailers besides the product design, production planning, and more. Cloud-based products can make the supply chain more intelligent with features such as proactive risk mitigation, real-time market updates, and price and supplier performance tracking. Intelligent workflows, AI-driven automation, and data analytics can improve decision making, so that OEMs are quick to respond to changing market and supplier dynamics. Moreover, these capabilities can be extended to a variety of manufacturing parts or materials such as sheet metal, aluminum, etc.

The semiconductor shortage is a wake-up call for companies across industries – is there a similar situation around the corner? A connected, intelligent, and collaborative ecosystem, which provides 360-degree visibility into complex and diverse supplier networks, is the way forward.