Out of stock: how chip shortages impact the manufacturing industry
So, what are these chips, why do they matter, and how could they affect your business?
Computer microchips are semiconductors that are essential for electronic devices to function. They include cars, smartphones, televisions, computers, solar panels and even breweries. The shortage affects almost 170 industries in some way, says multinational investment bank and financial services company Goldman Sachs. They include healthcare, cosmetics, food and beverage manufacturers, construction and defence.
How has COVID created a shortage?
Chips are still being made, but not at a rate to meet demand. The rush on chips is partly due to increased need for electronic devices thanks to remote working and, for some, more leisure time, during the pandemic lockdowns. Chip shortages happen every four to five years, and COVID-19 has prompted this latest one.
Tougher restrictions at ports and international borders plus manufacturers closing workplaces during virus outbreaks continue to disrupt the supply chain. Add to those issues panic buying and stockpiling, which distorts the real demand of the market. It’s called the ‘bullwhip‘ effect.
There’s also a serious shortage of silicon, which gives microchips their semi-conductive properties. A fire destroyed a major microchip manufacturer Renesas in Japan in March. Drought has affected the Taiwanese company that makes most of the world’s chips as the manufacturing process uses a lot of water. It takes at least six months to make a chip because technology in these factories is very sophisticated, and it can take years to ramp up production, says New Scientist.
What ‘chipageddon’ means for you
In short, ‘chipageddon‘ means delays and higher prices. Expect a six month wait to buy a new car, no new model Samsung phone released until next year, and retail shortages of TVs and other electronics. Those retailers are unlikely to be discounting their existing stock if they know replacements are hard to come by.
In response, some manufacturers are halting production, increasing prices or redesigning their products to use easier-to-source chips. Already we’ve seen prices rise for electronics such as laptops and consoles. Factor in a 20% hike for purchases from global firms such as Apple and Toyota, which source their chips from the Taiwanese global chip leader. On the upside, the high demand for vehicles, shows used cars fetching more than a third of their price pre-pandemic.
The pandemic has and will change operational supply chain management, say international experts. There’s a greater need to collaborate and industry players should question implementing lean approaches during volatility and uncertainty. Instead, consider if the trade-off between efficiency and resilience works best or if you need to pivot between alignment and adaptability, say the experts. Agility and flexibility may be the focus for your future manufacturing operations.
Refine your risk management strategy
What does this look like from an individual manufacturer’s perspective? Engineering consultancy Aurecon advises minimising potential impacts by focusing on these five essential elements:
- Forecast the needs of your business
- Ensure you have a verified view of vulnerabilities in your supply chain
- Pinpoint the level of disruption you’re focusing on for mitigation
- Create a plan on how you’ll respond within a particular product category
- Actively monitor, evaluate and adjust your approach.
We can help you review and update your risk management strategies, including your insurance cover to protect your business. Typically, manufacturers opt for a package of policies including public & products liability, business insurance and management liability. We’ll customise a package for the unique needs of your business.