Industrial Automation Magazine India

The Looming Microchip Shortage: Need for Better Supply Chain Planning

Published on : Saturday 02-04-2022

Modern tools won’t solve all supply chain challenges, but they have proven to put companies in a better position moving forward, says Murali Manohar.

The current shortage in the availability of microchips in the automotive industry has led to a sharp decline in the global car production rates. The chipmakers are struggling to meet the demand gap, given the disruption caused by the pandemic and the rising need for the semiconductor from several sectors. Hampered by this supply chain disruption, automotive manufacturers are actively seeking ways to tackle this chip shortfall crisis. The sudden halt and unplanned events brought about by Covid 19 have unfolded the dire necessity for automakers to adopt emerging technology to better plan and control their inventory. Transforming their strategy and supply chain planning can enable businesses to anticipate and operate efficiently in the future, mitigating the impact of such challenges facing the industry.

How bad is the current chip shortage?
As cars have almost literally become smartphones on wheels, semiconductors have become increasingly critical for a variety of applications, from fuel-pressure sensors, to digital speedometers and artificial intelligence-driven tools that assist with parking, finding the next fuel station, or alerting the driver when an oil change is needed. Without these tiny silicon wafers, the auto industry’s post-pandemic recovery has stalled, as manufacturers are unable to complete orders. By some estimates, the impact on global production volumes is expected to be about 7-to-8 million units, and McKinsey reports that major carmakers have already announced significant rollbacks in their production due to chip shortages, lowering expected revenue for 2021 by billions of dollars. As per the India Ratings and Research (Ind-Ra), the chip shortfall has resulted in reducing sales growth in passenger vehicle segment to 15%-18% yoy during FY22, down from 18%-22%.

Where did all the chips go? 
The trouble began in the early months of the Covid-19 pandemic when auto sales plummeted. The lack of demand for new cars caused factories to close, workers to be sent home and orders for parts and components – such as semiconductors – to be cancelled. This may have been short-sighted. When automotive OEMs shut down, cancelling orders, they left disgruntled chip suppliers holding inventory and excess capacity. At the same time, some sectors needed more semiconductors to meet exploding demand from housebound consumers and remote workers. Sales spiked for PCs, tablets and consumer electronics, as students and workers set up workstations at home and people consumed more streaming media. Those manufacturers were happy to snap up the chip inventory. Now, they aren’t letting go. 

The impact is far reaching, beyond just frustrated car shoppers. When factories close, jobs are lost, crippling the economy. Some OEMs are now taking matters into their own hands, trying to develop their own microprocessors and even software. While this may mean more control, many experts consider these economically impractical, as automotive chips are typically low-value, commoditised items. Investing in building foundries, a high-cost endeavour, would take decades to break even.  

How can we respond to the chip shortage in the longer term?
Technology can help overcome the complex challenges:

Data Insights. Manufacturers can look to technology to help them leverage data and make sense of the economic indicators. Analytics will be an important weapon in this battle but must be applied strategically – projecting likely outcomes, as well as understanding historical influences.  

Extend supply chain visibility. The importance of supply chain visibility is crystal clear. And visibility must extend beyond just tier one suppliers, all the way down through the layers of the entire supply network. Using secondary options, though, such as small cargo ships, adds some reliability concerns, complicating issues in another front. This is likely to be a long-term effort with some trial and error. Drilling down into this detail is the only way to obtain a true picture of potential bottlenecks and risks.
 
Maintain supply chain flexibility and mitigate risk. It isn’t enough to observe potential trouble spots. Companies must also be able to take action, reassigning orders or re-mapping shipping routes, as needed, to keep inventory moving, routed to the most optimal location. Platforms that link trading partners via common processes and shared data can provide enhanced sense-and-respond capabilities, thereby significantly reducing risk.

Collaborative innovation. Changing product design specifications may be able to help ease some inventory gaps. Procuring consumer-grade chips with more capacity (and higher costs) may turn lower priority automotive accounts into ones that receive more attention from semiconductor producers.

Some tech-savvy companies are already applying technology to improve a wide variety of operational objectives, including supply chain planning. For instance, leading automotive suppliers are increasingly relying on cloud-based ERP solutions to improve workflow management and automate monitoring of production, addressing today’s many market challenges. A comprehensive multi-tenant cloud platform improves end-to end visibility, helps organisations apply integrated business planning and AI-driven business insights, especially important during this semiconductor shortage. By enabling standardisation of digital business processes, automakers can optimise the use of data, connectivity, and robotics to respond with speed and agility.
 
Digital networking with all business partners and the provision of data in a centralised data lake will lead to faster and more efficient decision-making and easier reporting in the future. A central view of all company data means that Industry 4.0 and machine learning initiatives can be implemented strategically. As the chip shortage – and other challenges – unfold, manufacturers using advanced cloud solutions will be better equipped to respond with agility and intelligence. Modern tools won’t solve all supply chain challenges, but they have proven to put companies in a better position moving forward.

Murali Manohar is the Senior Director and General Manager for India Subcontinent at Infor. With an extensive experience in building businesses from scratch, formulating marketing strategies, building sales teams, forging relationships with partners/ large SI's and ISV's, Murali has worked with diverse companies like NetSuite, Oracle, and Firano Software to name a few. Murali holds a Master of Business Administration in International Marketing from Institute of Finance and International Management and a Bachelor in Civil Engineering from Mangalore University.