Embracing Authorized Channel Distribution to Minimize Supply Chain Disruption

By David Loftus, CEO and President, ECIA

During the Covid pandemic, the news was filled with stories about how the automotive industry was beset by tremendous shortages of semiconductors and other electronic components.  According to the consulting firm AlixPartners, the global automotive industry lost $210 billion  in revenue due to semiconductor supply chain disruptions in 2021 alone.  These shortages also idled tens of thousands of workers, and contributed to unprecedented inflation in the cost of new automobiles.

The demand for semiconductors has skyrocketed in recent years, driven by the rapid proliferation of emerging technologies like 5G, artificial intelligence (AI), and the Internet of Things (IoT). According to industry reports, the global semiconductor market is projected to grow from $573.44 billion in 2022 to $ 1,380.79 billion by 2029, at a CAGR of 12.2% in forecast period, 2022-2029.

Modern vehicles rely heavily on semiconductors for various functions, including engine management systems, advanced driver-assistance systems (ADAS), infotainment systems, and more. The shortage forced major automakers to cut production, leading to significant revenue losses and inventory challenges.

At the height of the shortages, industry insiders revealed that automotive manufacturers had created many of their own problems by cancelling their backlog during the early days of the pandemic, only to restore their order backlog a few months later. They then frantically tried to expedite deliveries after realizing that end customer demand was not going to fall off a cliff. Top automotive executives pleaded with TSMC, other foundries, and semiconductor OEMs to shift capacity back toward automotive from other industries that had seen their own acceleration in business levels.  CEOs, including Mary Barra of GM, attempted to negotiate dedicated capacity for the automotive sector.

Even though automotive makes up approximately 10% of the worldwide semiconductor demand, with projections of 15% by 2035, semiconductor providers were reluctant to kick other paying customers to the curb to satisfy the demands of the automotive industry.  In a recent DIGITIMES article, referencing a comment made at the 27th Automotive Electronics Congress in Ludwigsburg, Germany, Paul de Bot, General Manager of TSMC Europe is very frank: “It is not possible to reserve capacity for the auto industry,” he said.  After highlighting the need for auto manufacturers to design in newer, mainstream components where more fab capacity is being brought online, he concludes with a recommendation to the automotive industry that they must create stockpiles as buffers against supply chain fluctuations.  In essence, TSMC is advising the automotive industry to do more to help themselves if they want to avoid future plant shutdowns due to the near certainty of future electronic component supply chain fluctuations.

ECIA has previously highlighted the need for automotive manufacturers and their subsystem partners to increase their partnerships with authorized electronics distribution to minimize these supply chain disruptions.  In a February 2022 Wall Street Journal Letter to the Editor we argued that from the electronics manufacturing industry’s point of view, automotive is mostly a low-volume, high-mix customer segment, and it requires buffering through component distributors. Instead, the auto makers’ extreme focus on cost optimization and lean manufacturing meant eliminating these valuable supply-chain partners. The focus on lean should have been balanced with a pragmatic view on the extreme cost of idled automotive production lines. To shut down production lines for $80,000 vehicles because of a missing $2 microcontroller is catastrophic.

Leadtimes for electronic component new orders can range from 30-60 days in normal business conditions, but extend well past 300 days during demand peaks, which occur every 4-5 years.  For lower volume, high mix customers like automotive and industrial, distributors buffer inventory to match a customer’s demand for a steady flow of product to the long production cycles of semiconductor manufacturing and also provide many value added services:

• Strengthening Supplier Relationships: Electronics distributors can work closely with semiconductor manufacturers and suppliers to establish strong relationships. By fostering open communication and collaboration, distributors can gain better insights into the supply chain dynamics, including upcoming product releases, production capacities, and potential bottlenecks. This knowledge allows them to proactively manage inventory and ensure a more efficient flow of semiconductors to their customers.
• Inventory Management and Allocation: Effective inventory management is essential in mitigating shortages. Electronics distributors can employ advanced analytics and forecasting tools to optimize inventory levels and anticipate customer demand. By accurately predicting demand patterns and aligning their inventory accordingly, distributors can better allocate available semiconductors to customers, reducing delays and meeting critical needs more efficiently.
• Diversification of Suppliers: To mitigate risks associated with relying heavily on a single supplier, electronics distributors can actively diversify their supplier base. By partnering with multiple semiconductor manufacturers and suppliers, distributors can access a broader range of products and increase their chances of obtaining critical components during shortages. This strategy also promotes healthy competition among suppliers, potentially leading to more favorable pricing and availability.
• Reserving Capacity: Electronics distributors can proactively reserve production capacity with semiconductor manufacturers. By securing dedicated production slots or establishing long-term contracts, distributors can ensure a steady supply of semiconductors for their customers, even during periods of high demand or supply chain disruptions. This approach provides a level of stability and reduces the impact of shortages on their customers’ operations.
• Collaboration and Communication: Electronics distributors can collaborate closely with their customers, such as original equipment manufacturers (OEMs) and contract manufacturers, to understand their specific semiconductor needs and production schedules. By maintaining open lines of communication, distributors can help identify potential supply chain challenges in advance and work together to find alternative solutions or adjust production plans accordingly.
• Value-added Services: In addition to providing semiconductors, electronics distributors can offer value-added services to their customers. These services may include component engineering support, product lifecycle management, and supply chain consulting. By assisting customers in optimizing their designs, streamlining their processes, and navigating the complexities of the semiconductor market, distributors can contribute to overall efficiency and resilience in the supply chain.
• Investment in Inventory: Electronics distributors can strategically invest in inventory to mitigate shortages. By anticipating future demand trends and procuring critical semiconductors in advance, distributors can create buffer stocks and reduce the risk of supply chain disruptions. While this approach requires careful financial planning and market analysis, it can help meet customer requirements promptly, even during periods of scarcity.

By implementing these strategies, electronics distributors can play a vital role in alleviating electronic component shortages. Their close collaboration with suppliers and customers, effective inventory management, and proactive measures contribute to a more resilient and efficient supply chain, ultimately benefiting the industries heavily reliant on semiconductors.  With the Covid 19 pandemic mostly behind us, it is imperative for all industries to prepare for the next upswing in the electronic components business cycle by working with their authorized distribution partners to align forecasts and minimize supply chain disruptions.