As many industries, including automotive and consumer electronics, move toward product interconnectivity—which increasingly requires a significant number of semiconductors—companies are being forced to rethink their supply chains to adapt to a constantly evolving market. Consumer-appliance OEMs, for example, are experts at making washing machines, refrigerators and ovens; however, integrating semiconductors for connectivity introduces an entirely new challenge.
Those that are used to working closely with the semiconductor supply chain, such as in the fast-paced world of smartphones, understand the need to be agile. These companies are able to adjust quickly in the face of unexpected disruptions and often keep chip availability top of mind when designing products, which has given them a distinct advantage in the ongoing chip shortage. The good news for less agile companies is that there are still opportunities to learn and thrive in this sphere.
As companies have grappled with the ongoing supply chain imbalance, many have come to find out that their well-established business models may not be working as they once were. Traditional OEMs have long relied on a just-in-time (JIT) business model, which has been a death knell in the current shortage due to its lack of flexibility. While the shortage has created some chaos, there are still additional hurdles to cross on the horizon.
With the expansion of the Internet of Things and the rise of electric vehicles, the overall demand for chips continues to multiply. Electric vehicles are projected to double or triple the number of chips needed compared to cars with internal-combustion engines, exacerbating the current shortages and putting additional strain on the supply chain in the long run.
In thinking about shifting the paradigm from lean to agile, traditional OEMs would do well to follow in the footsteps of companies who have fortified their supply chains against vulnerabilities by diversifying their supplier bases and working with partners to better manage their inventories. As chipmakers expand and build new fabs in the next few years to help catch up to the increased demand, OEMs also have an opportunity to reorganize and strengthen their supply chains.
Below, we’ll explain three important lessons OEM supply chain leaders should keep in mind as they work to evolve their strategies for supply chain management:
Lesson 1: Incorporate Flexibility
In an ever-changing landscape like the electronic-component supply chain, the importance of flexibility cannot be overstated. Seasoned supply chain veterans have incorporated flexibility into product design to keep production going in times of shortage. This can look, for example, like being able to quickly and easily swap in similar components when one is unavailable. It can also be beneficial to work with manufacturers to design products that utilize more readily available chips instead of opting for more expensive and less widely used custom chips.
As better, higher-processing, more energy-efficient chips are being developed, OEMs in some industries are being given an extra push by chipmakers to move on from older generations that have lower profit margins for foundries. Furthermore, there is a real possibility of end-of-life (EOL) chips going into instant obsolescence. Building flexibility into design moving forward allows for your company to integrate newer process geometries more easily and without major changes to your overall products.
Lesson 2: Diversify Your Supplier Base
In a complex supply chain where a small disruption can have widespread ramifications, the strategy of having multiple vendors and backups is necessary to keep operations running smoothly. Although it can seem like a large undertaking to navigate (let alone diversify) your supply chain, there are some steps that OEMs can take to progress in the right direction. Most importantly, suppliers should be viewed as valued partners and, as such, should be vetted thoroughly as a foundation for building a long-term relationship.
One way to securely expand your supplier base is by working with a trusted distribution partner. Distributors have a wealth of knowledge and understanding of market dynamics to help navigate supply chain complexities. They can help to not only procure chips in times of shortage but also to ensure that those chips are coming from trusted sources and are of the highest quality. As with any supplier, distribution partners should be assessed with a keen eye: Tenure, financial capital, global reach, and a comprehensive quality-assurance program are key characteristics to look for.
Ultimately, partnering with an independent distributor beyond the shortage is a useful tool in managing your supply chain through the entire lifecycle of your products. As supply chains move toward equilibrium, there will undoubtedly be excess inventory to contend with. Having a partner that understands how to work the open market will be a valued asset when it comes to maximizing return of excess and obsolete material.
Lesson 3: Knowledge Is Power in Inventory Management
It’s a cliché for a reason: Having as much information as possible is key to navigating the ebbs and flows of the semiconductor supply chain and making informed decisions for your business. In addition to cultivating partnerships that provide you with insights and access to data about supply, lead times and pricing, this also means knowing how best to manage your inventory.
The time and money spent on inventory management can be significant, from stock-level maintenance and forecasting to shipping and warehousing. Vendor-managed inventory programs are designed to help OEMs and other manufacturers be more resilient, reduce risk and optimize access to inventory for product-lifecycle management. As we've seen in the last two years, supply chains—especially lean supply chains—are fragile. While you may not be able to predict an interruption, you can have the knowledge to respond to surprises quickly and effectively.
Final Thoughts
As the past few years have highlighted, the importance of supply chain agility cannot be overstated. Understanding the landscape and adjusting your supply chain approach to fit your company’s needs in line with the trajectory of the industry will be key ingredients to success moving forward. Looking ahead, the demand for chips is only going to continue to grow with the expansion of connectivity—so prioritizing your supply chain, and establishing partnerships that will strengthen it, will continue to maximize your return on investment and keep you moving seamlessly.
Todd Burke is president of Americas for Smith. A 25+-year veteran of the company, he holds degrees from both Texas A&M and Christian Brothers University.
