Organizations that use semiconductors and electronics components to build products are in firefighting mode. They’re struggling to find what they need amid the critical parts shortages.
The automotive, consumer electronics, LEDs and lighting fixtures and power industries have been the hardest hit by the chip shortage, notes Fierce Electronics. The New York Times reported that Toyota cut production by 40% in October due to the chip shortage. This was the second month in a row the world’s largest automaker slashed production amid the shortage. AlixPartners predict that the semiconductor shortages will cost the worldwide automotive industry $210 billion in lost revenues this year, up from its May estimate of $110 billion.
Manufacturers across sectors are also facing logistics challenges. Business Insider notes “record numbers of huge cargo ships stuck at key ports.” According to CNBC’s Squawk Box, “Transfer points are backed up and containers delayed because there are not enough workers or equipment to haul them away.” Squawk Box added that rates for the top 18 shipping lanes have increased 102% since 2019. Container shipping rates from Los Angeles to Dallas went up 279% in the same period, and trucking rates are 91% higher than they were pre-pandemic.
Things have gotten so bad that the White House is now working to address ongoing supply chain problems. Businesses are also taking extreme measures. Some have increased testing to ensure the quality of key components they’re buying from unauthorized channels. Many are scurrying to qualify or requalify suppliers for alternate parts or capacity.
All of this is going on right now. It’s a pressure cooker out there, but it’s not all bad.
Revisit Systems Thinking and TOC, and Consider How They Relate to Today’s Environment.
In his classic book The Goal, Eliyahu M. Goldratt discusses systems thinking and the theory of constraints (TOC). TOC was originally defined by Henry Ford and later improved on by Toyota’s Taiichi Ohno. You should review these concepts and consider how they apply to today’s environment.
Ford understood that addressing TOC involves leveraging the four fundamental principles of flow. That includes optimizing flow, or throughput, which is defined as revenue minus marginal costs; establishing a practical mechanism to determine when not to produce; abolishing local efficiencies; and focusing process on where it makes the biggest difference at any given time.
Ohno evolved these principles of flow and applied them to limit work-in-process inventory. This led to Toyota’s just-in-time manufacturing innovation, which is now widely used across sectors. But be aware that this approach requires stability and predictability in both internal/production and external/market environments. That is problematic in today’s increasingly volatile world.
Understand That Risk Management Should Start in The Product Design Phase
As a recent study by Roland Berger notes: “The current crisis reflects a structural mismatch in the automotive and semiconductor supply chains. The automotive just-in-time paradigm is fundamentally at odds with the long manufacturing cycle times and ordering lead times in the semiconductor industry.” This excerpt nicely outlines the short-, medium- and long-term approaches for automotive OEMs to improve supply chain resiliency.
But it fails to focus on the true root cause: the design phase. To address today’s reality, consider where potential supply risk is designed in and where true upstream constraints exist.
The Roland Berger report later explains that to improve risk management and be successful during the supply chain crisis, it’s helpful “to define a process for companies to design and source to risk.” The European consultancy cited potential indicators such as risk transparency and categorization, strategic sourcing, real-time monitoring, sourcing team with a focus on relevant components, SKU reduction and standardization, software-based function definition and safety stock of critical components.
Qualify More Components and Suppliers Upfront
Engineers locally optimize based on how their success is measured. Those metrics may include whether they get products out the door on time and hit the design quality goals for the product that the business has set for them. But this doesn’t necessarily translate into the lowest risk.
Lower your risk by qualifying more alternate components and suppliers. The number of suppliers that you qualify will depend on your sector and the details in your bill of materials.
Qualifying alternate suppliers isn’t easy in the highly regulated automotive, defense and medical devices industries. But doing such qualification in advance is critical because the cost of making changes after a product has been launched in those industries is extremely high.
Jump on The Opportunity to Make Better Decisions Through Cross-Functional Collaboration
The challenges created by the pandemic have been significant, but there have been some positive developments as a result. Businesses now have a greater appreciation for how critical it is to understand long lead time constraints across multiple tiers of the electronics value chain.
These issues are no longer exclusively within the zone of supply chain or commodity managers. They have now reached the board level and the purview of every executive steering committee. This means that there is now a major opportunity for transformation and increased resilience.
Harness this new awareness to drive organizational change to make better decisions cross-functionally. Break down silos across your engineering, procurement, sales and supply chain.
Act Based on What’s Happening Now, Rather Than What Worked in The Past
Resist relying solely on what you did in your past designs to guide you in the future. Instead, take an outside-in perspective as you work to bake resiliency into your designs.
Leverage solutions that employ engineering and sourcing signals based on intent, demand and risk parameters to understand where supply chain fragility exists. Connect the dots to expose the interdependencies between multiple sectors and their end markets. Employ analytics and analysis to decide how best to reduce risk and navigate the increasingly complex supply chain.