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Why the Chip Shortage is Lasting so Long, and What Industry Leaders Can Do About It

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On Feb. 24, 2021, then newly-elected President Joe Biden signed an executive order aimed to address a worldwide shortage of semiconductors that has impacted industries ranging from automotive, medical supplies, consumer electronics and even machinery.

That was 10 months ago, and the chip shortage is still firmly hindering those same markets. While some aspects of the semiconductor supply chain have improved, various estimates put the shortage lasting well into 2022.

So, what's taking so long, and how can industry leaders adapt. We'll explain here.

How did the COVID-19 pandemic impact the semiconductor industry and resulting shortage?

COVID-19 was the accelerant for this shortage. As the world shut down, so did supply chains, and because this event was unprecedented, steps had not been taken beforehand to offset the impact. Couple that with the lockdowns not being uniform across the globe – some economies were affected much earlier than others, some regions had stricter guidelines around what work could and could not be done – and this was a recipe for disaster from the start.

The impact started in January 2020, when China originally shut down. It was then exacerbated by a lack of global demand for new cars – people weren’t traveling, and many did not have the job security to invest in a new vehicle. In response, automakers slowed production. However, at the same time, there was an increase in demand for consumer goods – like the newest gadgets and gaming consoles – which also rely on semiconductors. As demand there surged and the Chinese economy reopened, manufacturers focused on fulfilling orders for consumer products, leaving little leftover supply for automakers to leverage as demand rebounded. Now that many economies have reopened in varying capacities, demand has surged in the automotive industry. The combination of sky-high demand in several of the world’s largest markets has caused consumers to feel the brunt of the shortage, with vehicle and consumer device prices rising. 

How can supply chain leaders better adapt to disruption?

The shortage we are seeing today is a result of a perfect storm caused by lean supply chain practices that called for less inventory to be held in stock, coupled with the COVID-19 pandemic. Because brands were already in possession of less inventory than in decades past, there was not as much of a cushion for them to rest on when demand surged—either immediately because of the pandemic, or more than a year later as a return to “normal” began.

Because nothing like the COVID-19 pandemic had ever happened before, leaders across industries were forced to scramble to determine how to react. There was no historical data they could use that would inform the next step or case studies to reference to understand how others have navigated similar challenges. This was particularly impactful in the supply chain space, where historical data is heavily relied upon to forecast and plan. But historical data isn’t the only tool supply chain planners have at their fingertips. Today’s organizations capture and ingest more information than ever before, and supply chain planners must use that information to their advantage to better navigate disruptions in the future. By removing organizational siloes and increasing access to data from marketing, sales, finance and beyond, supply chain planners have a broader view of all the factors impacting their supply chain. 

How can supply chain leaders ensure they don’t run into this issue again?

In addition to broadening the kinds of data they leverage to fuel forecasting and planning; supply chain planners must broaden their overall planning cycles to plan for both extremes of demand in the supply chain—surges and dips. While leaders have always planned for and ensured their supply chains were agile and resilient enough to handle dips in demand, surges have been less of a focus. 

Another unique aspect of the COVID-19 pandemic was the breadth of the impact it had on industries. Companies producing in-demand goods like toilet paper, cleaning products, hand sanitizer and masks experienced just as much disruption as automakers, but on the opposite end of the spectrum. In the future, we expect supply chain planners to focus their planning and stress testing on all potential scenarios to ensure supply chains are resilient enough to handle extreme dips and extreme spikes. 

Supply chain leaders also recognize the fundamental changes that have occurred in the industry in recent years and are finally taking the leap to transform outdated practices. Whether it’s prioritizing accuracy over agility that keeps planners from seeing the bigger picture or holding back from digitizing for fear of a costly and time-consuming transformation, if leaders don’t seize the opportunity to shift their supply chain practices today, they may not be given another one. 

What will be the lasting impact of this shortage on the supply chain industry?

COVID-19 made leaders reevaluate “business as usual,” especially when it comes to the supply chain. U.S. President Biden’s executive order to review supply chains dependent on foreign suppliers, as well as his infrastructure plan that calls for investment in semiconductor manufacturing and research, show that the supply chain is top of mind for the country’s leader. 

The pandemic showed the world just how much the supply chain can impact daily life. Because of this, both supply chain leaders and consumers will be less forgiving of issues caused by the next disruption. While digital transformation and planning were top of mind for many organizations, maintaining the status quo was the path of least resistance. This is no longer the case with shortages of nearly everything causing massive disruptions. As organizations work to navigate their way through what is hopefully the tail end of this disruption, leaders are already asking how they can be prepared for the next major crisis and are expecting processes to be put in place that will ensure they have the ability to survive whatever comes their way. It is time for leaders to recognize that historical supply chain planning approaches are inadequate for the modern world. Resilience and agility will be critical to any organization’s success—the ability to pivot quickly has never been more important. 

Manda Headshot Square 300x300As the Senior Manager for Industry and Solutions Marketing at Kinaxis, Manda Schweitzer-Miller delivers timely and informative content across the supply chain, with a particular passion for how supply chain professionals in the automotive and industrial manufacturing industries can apply smart technology and solutions to thrive in uncertain times. She joined Kinaxis in 2019, bringing with her over a decade of marketing communications experience, including five years in supply chain. She holds a Bachelor of Arts in English from Coe College in Cedar Rapids, Iowa and a Masters in Strategic Communication from American University in Washington, D.C.

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