It’s time to get serious about risk management

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What else could go wrong?

Two years into the Covid pandemic and a year after the worst semiconductor shortage in recent memory, chief purchasing officers (CPOs) are prioritizing supply chain risk over cost, reports the Hackett Group.

And not a moment too soon. Japanese Kioxia Corp. just announced contamination of materialslinked to its Yokkaichi and Kitakami plants, partially affects production of its three-dimensional (3D) BiCS FLASHTM flash memory at both facilities.

Buyers were expected to benefit from a price reduction on NAND Flash in the first quarter, according to TrendForce. The aftermath of this latest incident could boost the price of NAND Flash in the second quarter by 5-10%, the analyst said. The electronics supply chain, already stretched to its limit, is facing a new shortage of supply.

Until recently, OEM risk issues focused only on shortages of a proprietary or strategic component and holding too much inventory. Today, production lines are jammed with so-called “nickel-and-dime” coins. The financial toll of the chip shortage is highlighted by the auto industry: globally, automakers in 2021 lost $210 billion in revenue and stalled vehicle production, AlixPartners estimates.

The past two years have highlighted unprecedented levels of supply chain risk – upstream suppliers, logistics disasters, factory fires and, of course, a global pandemic. The electronics supply chain is already organized to manage risk. Electronics distributors, who hold the bulk of inventory in the tech market, smooth out the peaks and troughs of upside or downside customer forecasts. OEMs and EMS providers have reduced the financial risk of component purchasing and maintenance through just-in-time and lean inventory practices. It was also fairly easy to return or resell unused parts.

Covid has only exacerbated an upcoming chip shortage. A little-known substrate supplier, Unmicron, suffered a factory fire in November 2020. It turns out that the Taiwan-based company is one of the three largest substrate suppliers in the world. In January 2021, automakers reported semiconductor supply issues.

Other fires – at ASML, Renesas, Asahi Kasei Microdevices and Nittobo – have since added to the supply pressure. Such incidents are more frequent, according to a risk management company resin, because quarantines and labor shortages have delayed annual factory inspections and routine maintenance. Contamination of materials should not be a surprise.

The impact of Covid on the electronics supply chain has been widely covered, but material and logistics issues have reached a new high. Reducing supply risk rose from #2 to the top of the Hackett Group’s 2022 supply priorities survey. The top five, in order, are:

  • Reduce supply risk to ensure continuity of supply
  • Decrease spending
  • Act as a strategic advisor to the company
  • Enable corporate sustainability
  • Accelerate the digital transformation of purchasing

The jump reflects continued disruptions to supply chain, labor and other aspects of operations, the research firm said.

Many customers are designing – or redesigning – products to overcome the current chip shortage. But the supply chain is gradually moving towards longer-term solutions that help mitigate disruption:

Extend visibility beyond Tier 1 vendors. Example: Western Digital/Kioxia. End users are generally not concerned with their suppliers’ suppliers, but monitoring the materials and sub-assembly processes associated with component manufacturing would provide an early warning of future disruption. When tantalum sources are disturbed, you can guarantee that the capacitors will be affected. Overreliance on a few sources – Unimicron for example – is also a red flag.

Automakers are now engaging with semiconductor suppliers rather than just buying from them.

Digitization/automation. It’s not just data analysis, it’s also an opportunity to draw signals from end-to-end supply chain stakeholders. Logistics providers focus on air, land and sea transport; traffic jams such as the grounding of Ever Given; the flow of goods through customs and dozens of other indicators. If labor shortages cause many supply disruptions, automated inspection or maintenance could reduce human error.

Investment/long-term contracts. End users are accustomed to (poorly) forecasting their component needs and to returning or reselling the parts they do not consume. With few exceptions, customers rarely provide cash in advance to secure their supply. Now, suppliers and distributors are setting up more non-cancellable, non-refundable (NCNR) contracts. Annual cost reduction plans are abolished. TSMC has been actively involved in its pursuit of customers’ long-term order commitments, DigiTimes. Payment for future work can support cash-strapped vendors.

A prolonged shortage of semiconductors could be the catalyst for these measures and others. The next supply chain disaster is not an “if” but a “when”. The long-term change will force customers to shoulder more of the burden of risk management – ​​traditionally a difficult climb for the electronics supply chain.

Author: Barbara Jorgensen

Barbara Jorgensen

Barb Jorgensen is editor of supply chain publication EPSNews and has covered manufacturing, sourcing and e-business for over 25 years. Barb has spent most of her career with Electronic Business magazine and EBN; independent; then founded the online publication EPSNews with two industry veterans, Bolaji Ojo and Gina Roos. EPSNews was acquired by AspenCore in 2017.

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