Nearly a year after the COVID-19 pandemic shut down manufacturing plants across the world, many manufacturers find themselves in a similar position today. Long lead times, fluctuating production volumes and a multitude of supply chain concerns continue to disrupt the industry. The automotive industry has been impacted particularly hard, highlighted by the projected multi-billion-dollar losses driven by the semiconductor chip shortage.
The COVID-19 pandemic shutdown the automotive industry in Q2 of 2020. Fearing a drop in demand, OEMs reduced production volume forecasts, which in turn reduced automotive orders for semiconductor chips. As automotive manufacturers reduced chip orders, orders from technology companies such as Apple, LG, Samsung, and Microsoft, ramped up to meet the demands of millions of people quarantined or transitioning to a remote work arrangement. Chip manufacturers filled their newly available excess automotive capacity with technology orders. In Q3 of 2020, automotive production started to ramp back up. Demand for vehicles was much higher than originally anticipated and automotive manufacturers adjusted their production volume forecasts to near pre-pandemic levels. However, semiconductor supply no longer existed, creating a supply chain constraint for the entire automotive industry. The chip shortage has resulted in production plant stoppage for many OEMs and is expected to cost the industry billions of dollars due to lost production volumes. With automotive demand continuing to increase and no short-term fix in sight, this has become a major issue for the industry. The chip shortage example demonstrates the importance of implementing tactics to prevent future supply chain issues.
UNDERSTAND YOUR ‘SUPPLY COMPETITORS’
Performing strategic planning and analysis on key components and materials can help identify “supply competitors” (i.e. other industries, businesses who use the same components and materials). Examining the entire ecosystem helps to understand other competing sectors that may influence the supply chain. It is important to remember supply competitors are not always companies that sell similar products.
LOOK DEEPER INTO THE SUPPLY CHAIN
The semiconductor shortage has underlined the need for a deeper look into the supply chain and increasing visibility on all levels to identify possible risks. Supply chains are made of layers beyond immediate suppliers and risks exist at all levels. Mapping the entire supply chain for key components will help identify concentration risks and potential failure points. Moving the production of key components closer to the manufacturing site may mitigate some supply chain risks. With identifying weaknesses and mitigating risks as the main goals, performing stress tests on the supply chain can be a valuable exercise, allowing for adjustments before facing the scenario in real time.
STRENGTHEN SUPPLIER RELATIONS
Transparency, collaboration, and communication with suppliers are important to preventing supply chain constraints. Develop a process with suppliers to share information and data that will allow better monitoring of the entire supply chain. Consider incorporating technology into the data sharing process to provide greater transparency and more efficient communication.
ADJUST JUST-IN-TIME AND LEAN PRACTICES FOR CRITICAL COMPONENTS AND MATERIALS
Cost savings is always a huge priority for any manufacturer, but aggressive lean and just-in-time practices can leave businesses vulnerable in situations similar to the semiconductor shortage. Are there any areas where your business prioritized cost reduction over risk management? These concepts are important, but it is vital to understand which components and materials need a stockpile to prevent an unexpected change in supply or demand.
ADD STRATEGIC HIRES FOR PROCUREMENT OF KEY COMPONENTS AND MATERIALS
Employees that specialize in key components and materials are more likely to identify risks such as supply concentration. These employees should be familiar with the supply chain several layers deep, which is much more familiar than a business owner would have capacity to maintain. These employees should also be familiar with the “supply competitors” and know how to monitor the supply of key components and materials across multiple industries.
The automotive semiconductor shortage is expected to cause immense financial loss, but it can serve as a lesson to manufacturers, both inside and outside of the automotive sector. Now is the time to reduce risks by strengthening supplier relations and taking a deeper look into the supply chain to identify “supply competitors”, concentration risks, and potential failure points.