What the Automobile Chip Shortage Means for the Supply Chain

The past two years have been marked by supply chain challenges. The first issues revealed themselves because of social distancing restrictions and lockdown orders, which were issued as a response to the COVID-19 pandemic. These lockdowns bred logistics challenges that had a ripple effect across the supply chain, leading to shortages of everything from machine parts to medicine, technology, and toilet paper.

According to Deloitte, these problems were not sudden, but systemic. The COVID-19 pandemic simply "exposed the vulnerabilities of many organizations, especially those who have a high dependence on China to fulfill their need for raw materials or finished products."

One of the most impactful supply change challenges organizations face today is the dwindling supply of computer chips. Computer chips are now used in millions of products, from washing machines to smartphones and, significantly, automobiles.

The semiconductor shortage will cost the auto industry $210 billion in lost revenue.

According to Koray Kose, an analyst at Gartner, this problem has been developing for years and was only accelerated by the pandemic and other events. In a BBC article, Kose claims that pressures facing the rise of 5G increased demand for computer chips and semiconductors, and the decision by the U.S. to prevent the sale of semiconductors and other technologies to Chinese multinational technology corporation Huawei led other producers to be flooded with orders from the company.

Other disruptions, such as the winter storm that crippled the Texas power grid, have led to production challenges. Now, analysts and procurement organizations are searching for a path forward.

Prospects for Recovery

The future for microchips and semiconductors isn't entirely bad. Chipmakers are significantly increasing their capacity to meet increasing demand.

According to Forbes, "Intel, the largest US chipmaker, is doubling down on manufacturing, investing $20 billion on two new fabrication centers in Chandler, Arizona. Indeed, local tax incentives have made Arizona the U.S. hub for semiconductor manufacturing with the Taiwan Semiconductor Manufacturing Corp. reported to be spending $35 billion in market and Samsung also considering Arizona for new fabs."

This could take some time—building new factories takes years, for example.

However, Forbes suggests there are some prospects for expanding the capacity of existing 200mm fabs—these are nodes that were used to engineer legacy chips in the early 2000s. Ironically, the U.S. trade war led many companies to stockpile these fabs, as they weren't covered by the regulations.

Formally measuring the secondary market for capital semiconductor equipment could help to "improve rigid supply chains that contributed to global shortages" and "enable smaller manufacturers to compete in legacy technologies," according to Forbes.

What Procurement Organizations Can Do

These supply-side changes could help to relieve some of the challenges faced by procurement organizations, but procurement teams also have little control over them.

On the procurement side, organizations could work toward a convergence of both areas of business: procurement and supply chain. According to a recent article in Harvard Business Review, "Supply chains that continue to operate among silos will not have the resilience or agility to respond quickly or effectively enough to disruptions. Supply-chain convergence enables businesses to achieve more seamless, more effective cross-functional collaboration, which is key to building the resilience to withstand disruptions."

Disconnections in the supply chain often occur between departments or between suppliers and the company procuring the product. Integrating procurement with the supply chain would enable procurement to better support supply chain functions when disruptions occur.

Furthermore, convergence would enable organizations to develop new operational efficiencies through automated processes that span both areas of business.

This type of convergence could be a major shift for some organizations, and it would certainly not solve the automobile chip shortage overnight. Nonetheless, it could be a necessary step for organizations to take to ensure they're prepared for future disruptions.

As we've learned, the chip shortage we're experiencing right now is the result of years of systemic problems. There's never a bad time to start working on systemic solutions.

Don't Miss the Next ProcureCon Event

As the global economy recovers from the impacts of COVID-19, it is still contending with some significant supply chain challenges. Thankfully, many organizations have been able to innovate to overcome challenges, providing lessons for others to follow.

Supply chain challenges and their solutions are set to be hot topics for the next several months, and they'll be widely discussed at the next ProcureCon conference. Find the next event using the WBR Conferences search tool.