The perfect storm

7 min read

COVID-19 and the on-going global health crisis have brought many challenges to businesses and forced them to adopt new business practices and operations.

The pandemic has impacted every business sector, some more extensively than others, and brought to the fore questions about resilience.

A pivotal area has been that around the effective management of supply chains with many companies are looking at how their supply chains function.

Turning to specific sectors such as automotive, the past few months have brought into question how the supply chain functions and whether what we have needs to be radically reformed.

“The onset of COVID-19 affected us all in many ways but it had a significant effect on the automotive industry with the expectation that the demand for cars would fall significantly,” said Ian Wallace, Senior Director, EMEA Business Development, Digi-Key Electronics. “Automotive manufacturers responded by cancelling orders for components from the beginning of Q2 2020. However, while people had a much lower demand for cars, at this time, the demand for other products remained robust reflecting how our lifestyles had changed in response to the crisis. If you look at products in the consumer market such as tablets, laptops, smartphones, gaming consoles, televisions and wearable electronic devices etc., demand for them boomed.”

As a result, there was a significant shift among manufacturers to support the consumer market but then, “the demand started to come back to the automotive market towards the end of 2020,” added Wallace.

“Manufacturers and their fabrication facilities have and are continuing to make capacity adjustments, but it takes time to readjust in order to accommodate the automotive industry’s increasing requirements.”

In response, a growing list of governments around the world are said to be looking at the possibility of subsidising the construction of new semiconductor factories as continuing chip shortages affect the auto and electronics industries. In fact, increased shortages over the coming year are likely and this has raised questions as to whether, in the longer term, semiconductor production in Asia is calibrated to meet the needs of European customers.

Governments in the United States, the European Union, Japan and India are all said to be contemplating spending billions of dollars on new chip fabrication plants. This is a move that it not only intended to address possible shortages of key components but also to address more strategic issues - with more than two-thirds of advanced computing chips manufactured in Taiwan there are worries that future tensions with China could have serious implications for manufacturers in the West with supplies curtailed or even cut-off.

It’s interesting to note that a top US military commander recently warned lawmakers in Congress that a Chinese takeover of Taiwan was the military's foremost concern in the Pacific.

According to Joseph Notaro, VP of WW Automotive Strategy and Business Development at ON Semiconductor, “The supply chain has turned into a really big story at the moment and in terms of semiconductors the situation is tight. COVID-19, the bad weather in Texas, and the fire at Renesas’ facility in Japan have all put a strain on the supply chain.

“When you look at the automotive supply chain, however, it is not so much about market conditions but rather the way in which the market operates. The industry has been doing the same thing for years, so why did we expect a different outcome this time?

“Lean manufacturing and just-in-time are central to the way the supply chain works – that’s fine when it’s stable and predictable, but not so good with the level of market disruption we’ve seen.”

Notaro argues that the supply chain needs to operate differently.

“The industry has a short memory. Once things get back to normal it’ll probably go back to how it’s always operated, but it needn’t and shouldn’t.”

Already Digikey is seeing increased demand, according to Wallace. “As a consequence we are seeing lead times extending and production capacity of certain semiconductors being booked up for long periods of time. The importance and prioritisation of electric vehicles by car manufacturers is also contributing to the increased demand and urgency.”

According to Notaro, however, while a car can be manufactured in hours it takes months to build and deliver semiconductors, so while the industry cancelled orders in 2020 as the pandemic hit new orders, in the light of a more rapid recovery especially in the Far East, wont be appearing until Q3 this year.

“The automotive industry has traditionally made no real volume commitments going forward, tending to re-book at short notice, and that has to change. Risk has to be shared better and the cancellation of orders should really stop. I think we need to see more reliability and stability in the supply chain with binding orders over the longer term,” Notaro suggested.

“There is certainly a different attitude today and I believe that the industry is more aware of the complexity associated with the supply chain, which will only get more complex with electrification. There’s more ‘how can we work together to solve this’, than the banging of hands on tables as in the past.”

Supply constraints are also being felt in other areas, according to Graham Maggs, Vice President of EMEA Marketing, Mouser Electronics.

“Another component where we are seeing shortages is multilayer ceramic capacitors (MLCCs) which are contained in various technologies, such as electric vehicles, smartphones, laptops, and 5G telecommunications infrastructure. The annual market growth for MLCCs is often in double-digits, and these devices are produced in staggering numbers — literally trillions of units, every year,” Maggs explained.

“Such is the ubiquitous nature of their use that demand for MLCCs can fluctuate dramatically. Again, as industries rebound from the initial impact of the pandemic, MLCC makers are rapidly expanding production at a time when staggered shifts must be maintained for social distancing.” According to Maggs, production levels are also constrained as manufacturers struggle to cope with staff shortages caused by the need to self-isolate.

The supply of MLCCs, like semiconductors, is therefore under pressure and that is, according to Maggs, feeding through to manufacturers in a broad range of sectors with increases in prices and lead times.

“There will be other products apart from capacitors that will have extended lead times, including MOSFETs, and we are keeping a close watch on other passive components,” added Wallace. “It is an uncertain time, but we believe things are moving in the right direction with the COVID-19 situation, and we’re managing the needs and requirements of the market in the most productive yet safest way possible.”

Streamlining supply chains

Pacer is a specialist supplier of optoelectronic, display and laser solutions, and according James Woodhead, Manager of Projects Division, the market can change or boom in a relatively short space of time, and it takes a long time for manufacturers to increase existing capacity.

“Customers are looking for significant flexibility and proactivity on top of the usual elements of good pricing, customer service and a willingness to go that extra mile,” said Woodhead.

“Flexibility, therefore, is critical. Customers want distributors to be flexible and agile, so we really need to mimic such an approach in our supply chain. Good communication is crucial; impersonal communications and sudden unexpected decisions can damage relationships and discourage customers from trusting their suppliers.”

As a consequence companies are looking to rationalise their suppliers.

“To ensure future supply chains are efficient, we will probably need to follow the model of the automotive industry, which is regularly cited as the gold standard along with health, defence and aviation,” Woodhead suggested.

“The automotive industry pioneered the requirement for very agile supply chains which can work off ‘just in time’ deliveries, making everything as efficient as possible, while not handling stock for longer than is necessary. And I believe that it’s here that digital transformation and artificial intelligence will come to the fore with computer modelled assembly and robotics.”

However, despite such an approach reaping many benefits, the recent component shortages have exposed challenges within this type of automotive supply chain model, which Notaro highlighted earlier, with many car plants across the world either having to close or severely curtail production.

“The lack of any buffers has been highlighted as a weakness so caution is required but there are elements of this approach that we will want, or need, to emulate. Furthermore, it can be argued that these initiatives are still really for the big players. For some, this may be the only way to compete.

“Going forward, technology will undoubtedly have a significant role to play in the supply chain in general, and its rationalisation in particular.”

The ‘cloud’ of Brexit

For UK companies the global shortage of components has combined with having to adjust to new trading relationships brought about by the UK’s formal withdrawal from the EU in January this year.

“I think Brexit has had an effect on many companies in our industry, with new rules and regulations to understand and adjust to,” said Wallace. “For Digi-Key, and other global distributors like ourselves, we don’t ship from the UK to the EU or vice versa. We have a central warehouse location in Northwest Minnesota, so the challenges have been limited for us on this subject. Having said that, we have seen extended delivery times to customers in Northern Ireland, due to delays related to Brexit, which we are working hard to normalise.”

From a distributor perspective, it has never been more important to invest in and maintain strong inventory to help the industry overcome any sudden market turbulence, argued Maggs.

“Forward planning, ordering many months in advance of expected demand, and holding large inventory all provide a crucial means of staying ahead of lead-time extensions and product availability issues. It is only by constantly tracking the market, anticipating future bottlenecks, and acting before they occur that distributors can ensure product continuity and maintain speed of supply,” he explained.

This sort of foresight has proved vital in minimising problems which has been exacerbated by Brexit.

“Throughout January, many companies shipping into or out of the UK saw delays to their shipments due to the new customs processes implemented from Brexit. We know that significant shipment delays occurred throughout January, but disruptions were worse for some companies than others.

“For Mouser specifically, forward planning was critical to minimising the shipment delays to our customers, as we set up a new logistics system that avoided any transfer across EU–UK borders. Since Brexit, we have shipped products directly from the US to EU countries or directly from the US to the UK - made possible because of our central distribution facility in Texas.

“In the past, all EU shipments (including those UK-bound) would land in Paris Charles de Gaulle Airport and then be transported to their final destinations. Post-Brexit, UK shipments go directly to London’s Stansted Airport, bypassing the need to cross EU borders. Consequently, shipments to customers in the EU were not affected, and our shipments to UK customers were expedited faster by avoiding EU–UK borders.”

According to Maggs while Brexit presented significant problems for some, delays were much reduced. “We still experienced some delays due to the backlog of shipments being processed by UK customs, but we were able to minimise the disruption with careful planning.”

There is certainly more to be done and whether we will see new factories opening nearer to end markets is still up for debate and is the discussion around cost, technical expertise, value, and building business resilience. What the past few months have shown, however, is that there is a question around the management of the supply chain and whether the ideas of the past few years remain as true today as they were then.