Semiconductor Shortages – Part II

Part II: Resilience in the time of Chip Shortages

How are firms to build supply chain resilience through global semiconductor chip shortages? Read on in the second of this two-part report

With semiconductor supply chains becoming a major strategic asset in recent global geopolitical events, semiconductor consumers will need to be increasingly wary of where they source their chips from. Consider some examples from this year’s Bain & Co. Global Technology report:

“This year, Russia limited exports of noble gases, including neon, a crucial ingredient in chipmaking. That followed Japan’s 2019 restriction of exports to South Korea of high-purity hydrogen fluoride, an etching gas used in semiconductor manufacturing.

Growing tensions between China and the US threaten to further bifurcate the global technology ecosystems. The US has already cut off China from receiving advanced tools, and domestic-first policies in China may make it difficult for Western firms to access lagging-edge chips from China, where there’s a concentration of lagging-edge wafer manufacturing hubs coming online.”

Pragmatism in the time of adversity

While most of the downside risks attached to global semiconductor supply chains are out of tech executives’ control, firms can take several pragmatic steps to protect themselves from disruption:

• Concentrating on flexible resilience whilst building products: Market leading firms consistently refine and refurbish products in order to ensure resilience in the face of exogenous disruptions – especially in early stages of product development and (ideally) before a supply disruption hits.

Bain & Co. research has found that certain things consistently prove to be useful:

“…reducing a product’s number of parts, reusing components, using standard design approaches and flexible product architecture wherever possible, and decoupling software from hardware. In a chip shortage, for example, the fewer “hooks” the product has into silicon, the better.”

• Getting closer to the semiconductor supply-chain: Traditional supply chain approaches in an era of disruption are just not good enough. Many leading tech firms, especially those ahead on their digital transformation curve, are looking to get closer to their suppliers in the semiconductor ecosystem.

Some are subsidising suppliers’ production capacities in exchange for a guaranteed pre-agreed volume of sale, whilst others such as Taiwanese electronics manufacturing powerhouse Foxconn, for example, have gotten even more hands-on – forming joint ventures to build chip fabrication plants across Malaysia and India. Others have even started experimenting with in-house designs for semiconductors and the development of new capabilities for doing so.

• Carrying out regular risk assessments: Trying to get ahead of the disruption curve is perhaps the most important in allaying supply chain concerns. Leading companies are proactively – and continuously – assessing risks across all aspects of the supply chain and carrying out a varied range of scenario analyses. Bain & Co. cites an example of a study they conducted in their recent report:

“After chasing parts for 18 months, one global technology company recently stepped back to evaluate the potential magnitude and duration of a wide range of risks, including those related to specific suppliers, natural disasters, and geopolitical tensions. This helped highlight where investment was most critical to shoring up supply chain resilience. To reduce its reliance on a single supplier for key components, the company had to pay extra to keep multiple suppliers active and bring its procurement department into product development discussions earlier. As a result, the company should be able to fulfil more orders during the next major component shortage, potentially saving several hundred million dollars of revenue it would have otherwise lost.”

• Revamping the operating model: Leading firms are refreshing their operating models in order to improve collaboration amongst procurement, sales and marketing, engineering – all teams critical in managing through as well as preparing for supply disruptions. These companies can create rapid feedback mechanisms to allow these departments to communicate better, prioritise crucial requests – stressing on highest-value product redesign opportunities and further strengthen operations by emphasising on cross-functional collaboration in their training programs.

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