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Pass the Chips: Robust Forecasting is Key to Solving Supply-Chain Volatility

May 21, 2021
The automotive industry is grappling with a COVID-related semiconductor shortage. Some might call it self-inflicted.

What you’ll learn:

  • Why global supply chains are susceptible to geopolitical and pandemic-based disruption.
  • Why traditional Sales and Operations Planning (S&OP) strategies come up short.
  • How software-based modeling and forecasting tools help reduce risk.

COVID-19 has taught manufacturers a series of painful lessons, not the least of which is that forecast models are often unreliable. For example, pundits suggested early in the pandemic that the automotive sector would slow or even collapse due to government-mandated shutdowns. They were partly right, but what no one predicted was how quickly the industry would recover.

Buying levels were approaching pre-pandemic levels by late summer, thanks in large part to an increase in online automobile sales coupled with the need for many workers to use personal vehicles over public transportation. It seemed that the auto industry was on the road to recovery. 

There was just one problem, though, and once again, it was something that no human could have predicted. All of the millions of people working from home, the students forced into hybrid learning, the streaming and binge-watching and online gaming—all of it led to skyrocketing sales of laptop computers, tablets, and game consoles. Semiconductor manufacturers took notice and quickly shifted chip production to consumer electronics. Unfortunately, that’s right about the time when everyone realized—too late—that automobile consumption wasn’t going anywhere but up.

Between that and the chipmaking industry's internal COVID challenges, the die was set. Shortages abound, and automakers are now dealing with a new slowdown as they struggle to shore up their semiconductor supply chains. Ford, Dodge, Subaru, Fiat, and others have either trimmed production schedules or, in some cases, idled entire plants while waiting for the microprocessors found in everything from engines and transmissions to heated seats and infotainment systems.

Worse, personal electronics and automobile manufacturers alike are now paying premium prices for chips, up to 20% higher in some cases. This unpleasant situation became even more dire thanks to a recent fire at Tokyo’s Renesas Electronics Corp., a leading supplier to the automotive sector. The result? Chip prices are in all likelihood going to rise even higher as manufacturers invest in the capital equipment and additional tooling needed to increase production capacity.

Such volatility is nothing new, although it usually occurs at a far lower scale. The pace of change and innovation has always been high in the semiconductor industry, given its complexity, abbreviated lifecycles, diverse product mix, and extreme competition. These historical challenges have led the manufacturers of these goods to take a defensive stance and run their fabrication facilities at maximum capacity. The result? Any supply-chain hiccup or market readjustment can lead to shortages and price increases, hopefully just temporary ones.

Girding for Market Disruptions

The question then becomes: How can semiconductor manufacturers better prepare for these dynamic, sometimes fundamental market transformations? Just as importantly, how can they sidestep offending their customers and trading partners with price increases that some might say are avoidable, while maximizing their capacity to meet changing customer demands and achieve a flexible, responsive supply of chips?

Several changes are required to address each of these needs. A comprehensive, integrated business platform eliminates spreadsheets, manual processes, and islands of information from disparate software systems. This is particularly important for the chipmaking industry, which must not only deal with continuous change, but also play a pivotal role in supplying countless other manufacturers.

With that comes access to integrated analytical and simulation tools. Market predictions should be made based on real-time data rather than market trends, sales history, and even educated hunches.

Chipmakers must gain the ability to model their supply chain and production capabilities in a single planning environment, one that supports what-if scenarios and allows supply chains to be optimized based on various corporate KPIs. The resulting information also should be seamlessly tied to the production floor, where dynamic, flexible, demand planning capabilities help drive efficient manufacturing processes and reduce waste.

Lastly, chipmakers will need to embrace more integrated and collaborative digital practices. As other industries have discovered, multi-site, cloud-based collaboration with suppliers and customers provides countless opportunities for process improvement and a resilient supply chain. So does an S&OP strategy that relies on accurate, up-to-date information only possible with a robust, company-wide software platform.

The result of all these actions will be a supply chain that can better anticipate and respond to unexpected interruptions in critical resources, hopefully not caused by another pandemic.

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