Global chip shortage: How to manage until your chips come in

Industry experts offer tips for manufacturers dependent on semiconductors. Here are some ways to move closer to the front of the line.

Microchips in a manufacturing plant

Image: Chris Ratcliffe/Bloomberg/Getty Images

With the global microchip shortage expected to disrupt the supply chain through the start of 2022, manufacturers are scrambling to adapt. The chip shortage started primarily with devices, such as power management, display devices and microcontrollers, fabricated on legacy nodes at 8-inch foundry fabs, which have a limited supply, according to Gartner. Other devices are now impacted, and there are capacity constraints and shortages for substrates, wire bonding, passives, materials and testing—all of which are parts of the supply chain beyond chip fabs.

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"These are highly commoditized industries with minimal flexibility/capacity to invest aggressively on a short notice," the firm said.

While the chip shortage is a tremendous challenge for electronics manufacturers and the purchasers responsible for procuring parts, it's also a great opportunity to re-examine staid processes that have fallen behind the times, said Jens Gamperl, CEO and founder of Sourcengine, a global electronics components e-commerce marketplace.

"So much of purchasing is still done over the phone, via email and on spreadsheets, despite purchasers being charged with procuring thousands of parts that may be available from hundreds of sellers," Gamperl said. "Even without shortages, it's slow-moving and based on relationships with suppliers more than it is data and optimal efficiency."

Because so many organizations are battling it out for extremely limited supply, speed is more critical than ever and manufacturers are finally willing to break these old habits, he said.

Gamperl suggested that organizations should follow the path companies have been following for over a decade now: Bring your buying online.

"The e-commerce marketplace approach removes the time-intensive, piecemeal negotiations and instead gives purchasers a more complete look at availability at large and in real-time, as opposed to comparing quotes from five different vendors given on three different days over the course of the past week," he said.

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In addition to decreasing the necessary time to purchase, the instantaneous look into various factors means doing an easy comparison of the factors that are the highest priority for the purchasers and their organizations–whether that is price, speed of delivery or something else, Gamperl said.

 Gartner recommends four key actions OEMs can take to mitigate risk and revenue loss during the global chip shortage:

  • Extend supply chain visibility—The chip shortage makes it essential for supply chain leaders to extend the supply chain visibility beyond the supplier to the silicon level, which will be critical in projecting supply constraints and bottlenecks and eventually projecting when the crisis situation will improve.
  • Guarantee supply with companion model and pre-investments—OEMs with smaller and critical component requirements must look to partner with similar entities and approach chip foundries or OSAT players as a combined entity to gain some leverage. Additionally, if scale allows, pre-investing in a commoditized part of the chip supply chain or foundries could guarantee the company a long-term supply.
  • Track leading indicators—While no relevant parameter by itself will project how the shortage situation will evolve, a combination of relevant parameters can help guide organizations in the right direction. 
    "Since the current chip shortage is a dynamic situation, it is essential to understand how it changes on a continuous basis. Tracking leading indicators, such as capital investments, inventory index and semiconductor industry revenue growth projections as an early indicator of inventory situations can help organizations stay updated on the issue and see how the overall industry is growing," said Gaurav Gupta, a research vice president at Gartner, in a statement.
  • Diversify supplier base—Qualifying a different source of chips or OSAT partner will require additional work and investment, but it would go a long way in reducing risk. Additionally, creating strategic and tight relationships with distributors, resellers and traders can help with finding the small volume for urgent components.

Gamperl believes the length of the global chip shortage will vary by industry. Those at the "top of the list" will be able to return to normal within the next three to six months, but the trickle-down effect may last up to nine to 12 months.

"There is limited capacity to produce new chips and certain verticals hold greater sway over that capacity. The auto industry–which is struggling mightily now–will likely be one of the first to see their demand met, and everything will trickle down from there depending on what makes the most business sense for the semiconductor foundries," he said.

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