What will the bottom-line impact of the global electronic component shortages be for Australian businesses?

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What will the bottom-line impact of the global electronic component shortages be for Australian businesses?
During the next 12-24 months there is going to be considerable strain on global supply chains due to the component shortages.
Photo by Robin Glauser on Unsplash

Shipping container shortages, freak weather events, fires in silicon fabrication plants...

... the blockage of the Suez Canal, high electric vehicle demand, port bottlenecks, not to mention supply and demand issues caused by the pandemic, have all contributed to a perfect storm that has led to a global electronic component shortage.

The scarcity of components such as semiconductors (silicon chips) has impacted many companies manufacturing and supplying goods to Australians, ranging from computers, mobile phones, tablets, vehicles, smart home technology, medical devices, washing machines, manufacturing equipment and network devices.

Experts say the global chip shortage could last for two years and will affect both Australian manufacturers that utilise these components as well as the businesses that buy and supply the equipment that incorporates them as well as consumers. Not to mention all the distributors, suppliers, installers, maintainers and the entire ecosystem that relies on and supports the multitude of products that cannot function without chips. But what is the bottom-line impact to Australian businesses and what can they do to mitigate the issues?

The industries affected

The scarcity of manufacturing equipment and spare parts containing semiconductors could lead to maintenance issues, bottlenecks and downtime in the Australian production facilities for many types of goods.

Of concern would be the potential impact on the producers of food and beverage goods, pharmaceuticals, medical devices, textiles, batteries, clothing, wood, paper, petrol, coal and chemical products while they wait for essential parts or equipment replacements to arrive. It could also impact the printing, publishing and broadcast media industries if they struggle to upgrade, replace or maintain essential equipment.

It will therefore be essential for all manufacturers to optimise the lifecycle of their equipment and parts using predictive maintenance systems to ensure that production lines are constantly monitored for any issues before any breakdown occurs causing downtime.

This electronic component shortage will continue to impact the supply chains for many of the major industries I have already mentioned, but one of the most impacted is the automotive sector. Sales of both new and used cars have seen a significant surge here in the past eighteen months due to increased private car usage as people avoid public transport and go on driving holidays.

Vehicles are highly dependent on semiconductors and contain 1500 to 3000 chips that direct and manage engine performance, safety features, navigation and entertainment systems. The scarcity of in-demand electric vehicles coming into Australia may have a knock-on effect on the demand for lithium here for batteries, as an example.

How do manufacturers manage the impact of chip shortages?

Manufacturers must plan actionable steps to prepare for and reduce any production risks due to the shortage of components like chips. If they choose to reduce the number of components purchased to reduce costs, it could impact the consistency of supply and the time to market for their products.

Another possible impact could be that there will be delays in getting orders out to customers or insufficient supplies to meet the demand, driving up prices. It will be better to secure the specific components that are fixed in the design as soon as possible, such as for laptops that are designed around the new Intel 11th generation Core i7 processor for instance.

It’s not just Intel that makes semiconductors, whilst they are at number one, Samsung is in second place as the world's largest supplier of memory chips and at times it overtakes Intel. They are followed by producers of motherboard chipsets, network interface controllers, integrated circuits, flash memory, graphics chips, embedded processors and special-purpose chips, including TSMC, SK Hynix, Micron, MediaTek, Qualcomm, Nvidia and Intel’s rival, AMD.

The best-performing supply chains in the world use Sales and Operations Planning (S&OP), which is integrated with their Enterprise Resource Planning (ERP) system. The more balanced the “S” becomes with the “OP,” the fewer component shortages there will be.

Supply chain agility

Ordering parts early will only have a minor effect on procurement costs, but with full visibility of the supply chain with inventory management in place through the ERP, the production schedule can be adjusted and optimised accordingly. Getting this right will help boost brand image, which is the ideal end game of any manufacturing business.

Any semiconductors in the supply chain that can be switched and sourced from an alternative supplier should be. Ultimately, customers that want specific types of components will choose another supplier who has enough inventory available, which could end up being a long-term arrangement and potentially difficult to reverse when supply returns to normal levels.

Another thing to consider is that customers may come to associate a lower value with a product that has cheaper components, because it consequently fails more often or does not perform as well as they are accustomed to. The long-term effects of this decision could be detrimental to the future success of a manufacturing business and its supply ecosystem.

Looking ahead

During the next 12-24 months there is going to be considerable strain on global supply chains due to the component shortages. Businesses therefore need to ensure their supply chains are agile and ready to respond and those that have implemented accurate demand forecasting, resource management and supply chain management that are all integrated into their ERP system will be better positioned to make decisions that help them to weather this semiconductor shortage.

Rob Stummer is Asia Pacific CEO at SYSPRO.

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