Deloitte has published a set of five recommendations for the semiconductor industry designed to help it better weather a future chip shortage that it has described as not a possibility, but an eventuality.
By the time our current semiconductor shortage ends, Deloitte said, it will have lasted more than 24 months and will likely have had a global cumulative revenue impact of more than $500 billion USD. Anyone shopping for holiday gifts in 2021 knows how dire things have become: Countless products are unavailable and wait times don’t seem to be shrinking.
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Far from being an unprecedented shortage, Deloitte reminds us that there have been six shortages of similar duration or magnitude to today’s in the past three decades. As semiconductors become more important to the global economy, the risk of a shortage only increases, it seems. “In the coming decade, it’s a near certainty that some combination of events such as a global recession, major weather event and disruption near a critical maritime port or strait could all occur roughly at once,” Deloitte said in an article covering its recommendations.
The semiconductor industry is famously rigid, and making changes can be difficult due to long lead times, material acquisition and countless other factors. Any number of different factors could lead to another shortage, and Deloitte admits there’s no stopping a shortage, only lessening it.
To that end, Deloitte has five recommendations covering four types of players with a stake in the semiconductor industry: Chipmakers, distributors, customers and governments.
Five fixes the semiconductor industry needs to implement
As you can see in the above chart from Deloitte, the actions that different stakeholders need to take varies based on their role. “Our research suggests that no single one of these is a panacea, capable of fully mitigating the next shortage. All of the various players need to do all of their respective parts, work together and at the same time not create a glut,” Deloitte said.
Increase overall capacity
The first thing that businesses need to do, specifically chipmakers and governments, is to build overall chip development capacity. Deloitte says semiconductor demand is skyrocketing, with the three largest players expected to exceed $200 billion in capital expenditure from 2021 to 2023, and by 2025 that number could double.
Existing plants have upped their production capabilities, and new plants are being added, but it won’t be enough based on current demand vs. production capacity numbers: Deloitte said that demand is growing as fast as, if not a bit faster, than production. Don’t expect that to slow down.
Increase localized capacity
Secondly, Deloitte recommends that those same two players, especially governments in this case, work hard to build local semiconductor production capacity to stave off any geographical issues that could cause shortages. “[High concentration of chip production in East Asia] has attracted significant government attention from the United States, Europe and China, and plans are already underway to build new plants in those countries or regions, as well as Israel, Singapore and others. This process is also known as ‘localization,'” Deloitte said.
Deloitte warns that this isn’t a sure-fire solution however, and will only help alleviate shortages by a bit, especially since its findings indicate that localized production initiatives “will only cause concentration in East Asia to drop by a few points, meaning it would still produce more than half of all chips by 2023.”
Be lean, but not too lean
The third recommendation is to become strategically lean, but not to go too far: “There is such a thing as too lean,” Deloitte said. The early stages of the pandemic proved that having a supply chain that’s too focused on a “just-in-time” philosophy leaves a company stranded when shortages begin to occur because they have no cushion.
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“Those buyers with less lean supply chain models fared better with the chip shortage, at least at first, “Deloitte said. As our current shortage has worn on, it’s grown to affect almost every industry and every company, which Deloitte said indicates a tight balance is needed that leaves a bit of flexibility for short-term interruptions, but realizes that long-term problems can’t be easily weathered. “Being strategically lean can buy time, but a severe and prolonged enough shortage seems to hit everyone,” the report said.
Break the bullwhip
Breaking the bullwhip, the fourth of Deloitte’s recommendations, is the only one that applies to each of the four semiconductor stakeholders, but it’s not a term with an obvious meaning, either.
When you crack a whip, the waves that you create at the end you hold are miniscule, but as they travel down the length of the whip they become larger, and further distort the shape of the whip. Replace the whip with the semiconductor supply chain and the hand holding the whip with customer requests or orders and you have a picture of where disruption happens: Further down the chain toward the bottom-level manufacturers like chip foundries.
“Most OEMs, distributors/suppliers and customers have not adopted systems or processes to enable real-time information exchanges,” Deloitte said. Companies with a stake in the semiconductor supply chain should work to develop six key digital capabilities, Deloitte said:
- Stay connected to customers to head off any ripples before they begin to grow.
- Develop products digitally to increase agility and innovation speed.
- Synchronize planning between internal and external suppliers for both long-range needs and real-time demands.
- Make use of intelligent supply chain capabilities to reduce risk.
- Implement smart operations technology to streamline factory operations and improve uptime.
- Use a dynamic fulfillment that allows products to be adaptively manufactured from a multi-sourced supplier network.
Deloitte has several other recommendations for breaking the bullwhip effect, and everyone with a stake in semiconductors should take the time to learn how their organization can implement required changes.
Digital transformation is essential
Deloitte said that most semiconductor companies that participated in a recent study had embarked on some form of digital transformation by spring 2021. The sorts of transformations they’re undertaking include collaborating with supply partners to implement blockchain, sensors, AI and other supply chain technologies, as well as taking actions that work toward tracking and improving customer demand patterns and buying experiences.
“Taking a combined approach toward digital transformation by addressing business, technology, and workforce and operational considerations can enable them to be more adaptive to future supply chain-driven business disruptions,” Deloitte said.