Set the CEO free if you want to be a success, says Straumann chairman
Gilbert Achermann has taken on both roles with the Swiss dental group, giving him an insight into how to make the relationship between the two work well ...
Strategy
How a semiconductor shortage was a surprise late entry to the pandemic chaos
At the height of the supply chain disruptions caused by COVID-19, the focus was on consumer goods like milk, eggs and toilet paper. Now, as the world begins to slowly rebalance, a surprising consequence of the pandemic has emerged: semiconductors.
There is currently a shortage of semiconductors; it is a story that acts as a very useful example of the difficulties of macro-demand planning and limited supply chain surplus capacity. But what do we mean by this?
Semiconductors: small and significant
Semiconductors are small chips used in electronic circuits: computers, smartphones, televisions, and increasingly in appliances and automobiles. As the Internet of Things has transformed every device into a ‘smart’ one, semiconductors have become integral building blocks of the Internet of Things.
The manufacturing of semiconductors is capital intensive, highly automated and multi-step, with production concentrated in a handful of suppliers concentrated in Taiwan, in addition to some vertically integrated companies like Intel. Lead times are long for semiconductors, at up to four to five months.
But here’s the issue: semiconductors are in short supply everywhere. And, given their wide-ranging demand, the impacts are being felt everywhere. Automobile manufacturers are slashing production – some companies by as much as 20% – for lack of chips.
There are many root causes that have converged to make fertile ground for the current shortage. During the height of the pandemic, lockdowns came into full force and purchases of computers, video-game consoles, headphones and other equipment that was needed for people to muddle through and be productive at home skyrocketed. It could never have been predicted through demand planning.
The events only added to already growing demand from 5G technology and from stockpiling in the semiconductor space, which was brought about by the trade-tension dynamics that led Chinese electronics companies to hoard chips, and their competitors to follow suit.
The small number of semiconductor manufacturers were also impacted by global lockdowns, forced to slow or even stop production for several weeks.
With semiconductors now so critical to so many different product categories, it is no surprise that the situation is getting a great deal of attention from both the media and national governments.Ralf Seifert & Richard Markoff
Meanwhile, most automobile manufacturers had to cut production in the face of plummeting levels of demand, which has only ramped back up again in recent months. Though still below 2019 levels, it seems that the increase in demand was not captured in their demand-planning process.
The result? A supply chain perfect storm, with something for everyone: a concentrated, constrained supply combined with growing underlying demand, stockpiling and unforeseen spot demand peaks.
With semiconductors now so critical to so many different product categories, it is no surprise that the situation is getting a great deal of attention from both the media and national governments.
Could semiconductors trigger wider supply chain configuration?
As supply chains were disrupted in 2020, there was much discussion about companies reshoring or reconfiguring them to be more resilient. However, there is reason to be skeptical that this will occur in the absence of tangible incentives. After all, these supply chains have become highly extended and concentrated, through market forces of cost optimization and at the expense of agility and resiliency.
But here’s the twist: the ongoing semiconductor shortage might be the first prominent example of a post-pandemic major supply chain reconfiguration happening in front of our eyes.
Prompted in large part by the current situation, President Biden signed an executive order to conduct a review on what the US administration deems ‘critical supply chains’. It includes pharmaceuticals, rare earth minerals and semiconductors. Currently, only about 12% of semiconductor manufacturing occurs in the US.
What comes from the semiconductor shortage and executive order could have significant impacts on those future supply chains that the US has deemed ‘critical’. Any significant change to supply chain configurations would have to come with enough incentives to overcome cost motivations, and these could come in the form of grants, favorable tax treatments or other such measures.
A possible inflection point
There is a willingness to embrace new supply chain models. According to Gartner, 87% of supply chain executives are interested in investing in resiliency, with 30% of respondents reporting plans to shift to more regionalized supply chains.
But importantly, Gartner notes that any incremental costs will have to come out of existing supply chain budgets.
Companies already struggle to identify the costs of inflexibility and long, extended supply chains, particularly when compared against tangible, measurable purchase costs. Any successful change in the existing paradigm will have to come with either strong external incentives, be it tax incentives, grants or a third option – or a change in thinking.
Explore more in this topic
How smart subsidies help social entrepreneurs scale impact
To make social enterprise financially viable, investors should optimize subsidy design...
Authors
Related
Four strategies to make your energy supply more resilient to price spikes
With the prices of natural gas, coal and electricity spiking to record highs, manufacturers should start thinking about how to reduce their energy consumption so they can keep production humming irrespective of...
Localization – where effective supply chain management meets smart politics
With global threats from COVID to trade tensions exposing companies to costly disruptions, leaders should be thinking about supply chain resilience and regionalization ...
Rejuvenate corporate strategy for the post-COVID world
As economies reopen after lockdown many organizations are finding the competitive landscape has shifted beneath their feet. ...
3 steps to critical problem solving
When faced with a strategic challenge, executives often treat the symptoms of the problem rather than the underlying pain. To avoid this trap, it is important to go beyond the surface characteristics...
Learn Brain Circuits
Join us for daily exercises focusing on issues from team building to developing an actionable sustainability plan to personal development. Go on. They only take five minutes.
Explore Leadership
What makes a great leader? Do you need charisma? How do you inspire your team? Our experts offer actionable insights through first-person narratives, behind-the-scenes interviews and The Help Desk.
Join Membership
Log in here to join the conversation with the I by IMD community. Your subscription grants you access to the quarterly magazine plus daily articles, videos, podcasts and learning exercises.
and then