Chipageddon and How CEMs Can Help
By Paul van der Tang, Purchasing Director, Offshore Electronics
A global shortage of semiconductors has dominated electronics manufacturing for the last 18 months. With an immediate solution looking unlikely, Paul van der Tang, Purchasing Director at Offshore Electronics, offers advice on how the industry can weather the storm of what some are calling ‘chipageddon’
It’s easy to overlook the complexity behind some of the electronic devices we use on a daily basis. Whether it be a smartphone, computer, dishwasher or fridge, almost every single electronic device imaginable relies on a microprocessor. Without this vital technology, most of these devices would malfunction or simply not work at all.
For this reason, an ongoing shortage of semiconductors – a crucial design component in any electrical product – has understandably had a significant impact on the wider industry. Even now, the latest generation of games consoles remain out of stock almost a year after their initial release, while cars lay unfinished on the assembly line and consumers looking to purchase a new fridge or freezer face a sixth-month waiting list.
What is causing chipageddon?
It’s often assumed the global shortage has been caused by COVID-19, as is the case with many other current supply chains around the world. However, this is something of a half-truth. While it has definitely worsened the effects of chipageddon, problems were present long before the pandemic emerged.
Semiconductor production is completed by way of 200mm and 300mm silicon wafers that are split up into smaller chips. As such, dwindling supplies of silicon and a lack of 200mm manufacturing equipment highlighted as early as February 2020 can be considered leading factors, as can the growth of ‘just in time’ manufacturing practices and escalating tensions between the Chinese and US economies.
As the pandemic began to spread, many firms took to stockpiling components and submitting orders far in advance, further restricting global supplies. National lockdowns and a mass move towards home working also resulted in a sharp spike in demand for electronic devices such as laptops and games consoles, all while factories continued to suffer from significantly decreased output. Together, these formed a powder keg of factors that would eventually develop into a serious yet underreported global crisis for the electronics industry and the contract manufacturers (CEMs) which serve it.
What can my business do?
Almost every organisation working with electronics will have faced delays in recent months – even those that anticipated challenges. CEMs are arguably under the most strain, having to manage the demands of customers on one side and long, expensive lead times from suppliers on the other. That said, recent experiences have shown measures can be put in place to minimise the most difficult aspects of procuring necessary materials. Offshore Electronics, for example, recently signed a sole source contract with NCAB Group to guarantee its own supply of printed circuit boards – a key piece of the supply puzzle. With this agreement in place, the business can exploit a worldwide network of manufacturing facilities in order to circumvent regional bottlenecks.
Pragmatism should also be a given in the current climate. Few businesses, if any, will have enough sway to secure what they need without having to wait, especially when competing against some of industry’s most influential names. Yet there are small but significant changes that can be made to cut lead times. Credible substitute components, for instance, are a practical way of keeping assemblies on track without sacrificing quality. In the last few months, Offshore Electronics has used its engineering expertise to propose alternative semiconductors, connectors, passives and other key electromechanical parts – the benefit here is the customer only has to look at the data to provide approval, rather than having to do all the research themselves. This may seem obvious but it’s an approach that can actually alleviate some of the market pressures that are prolonging chipageddon.
Businesses working with CEMs should also place faith in their market knowledge and give them the power to make key decisions – that includes material price increases and minimum order quantities. While it’s reasonable to have limits on these kinds of decisions, it’s also sensible to allow partners to commit when the opportunity arises. Ultimately, customers who are firm with their purchase orders are more likely to secure what they need compared to those who wait – that goes for individual parts as well as completed assemblies
Long lead times may be inevitable today but smart decisions can still be made that save money. For example, businesses can capitalise on better pricing by opting for longer shipping times via sea freight. Agreeing to these longer schedules allows businesses to secure components against more competitive and consistent pricing. On a more practical level, it’s also useful to buy larger quantities when possible as this keeps more of what’s needed on the shelf.
These reflections are just some of the lessons I’ve learned having worked closely with customers over the last 18 months. Chipageddon won’t be solved soon, not least because it’s an issue with different competing factors, but it’s clear that CEMs have a central role to play helping businesses get products to market.