What will be some of the ramifications of the global chip shortage and the general supply chain dynamics of today (mid 2021)?

What are the ramifications?

The previous 10 years was ringing out all costs out of the supply chain at any cost. I think of the automotive industry where deliveries from suppliers every 2-4 hours was the norm. So the supply chain professionals have been focused on ringing out any speck of excess, because the excess was viewed as costs. And there wasn’t a return on those costs.

What this chip shortage has revealed is twofold:

At a bigger macro level, I think there’s some dynamic at play in the consolidation of the industry. There are fewer players creating semiconductor chips today, which is constraining supply. These are multibillion dollar fabs. You can’t just decide six months ago “Hey, we have to build more, we have to start up another fab in the US”. That is an 18 month project and $2 billion dollars minimum. So this just doesn’t get fixed overnight.

At the tactical or micro level, it’s caused supply chain professionals to think about some excess as not being a bad thing. It’s caused the finance people to say, “Wow, look at the ultimate cost of wringing out everything out of our supply chain. We can’t react now and that’s causing us huge problems with net income because we just can’t ship, we are lying down.”

So I think it will cause a bit of a change back to some allowable excess. I also think it is causing people to think more long term in their planning. Particularly in the US and Western Europe there was very short term planning happening, “I’ll send you my forecast on Friday and I want your deliveries coming in on Monday or Tuesday. And I want 40% up or down capability within that forecast.

This approach created many inefficiencies and now maybe is causing them to pause to think about creating forecasts of several months, or even a year visibility. So if I’m a larger OEM that’s going to allow less effect on my supply chain when things happen in world economies, for example fires in fabs in Japan.

Those that are getting serviced better today are those that are giving a little bit longer term horizon to their supply chain. The people making decisions on who gets a chip today are viewing more favorably those that gave them more time to plan and reserve inventory over those that did not.

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