If you have recently been looking to purchase a car, a television, or a home appliance, you may have noticed that prices have been on the rise as of late. Some products have been suffering incessant stock-outs, such as the next-gen gaming consoles, which are having stock issues since their launch in November 2020. At the root of these happenings lies the global microchip shortage of 2020-2021.
As complex as it may seem, the ongoing microchip shortage is nothing more than a classic case of supply and demand.
Supply chains are essentially very complex networks of distinct business units that work harmoniously to produce a certain output. We can think of it as a complex machine or even the human body. When a component doesn’t work properly, the whole system becomes vulnerable, adversely affecting the output. When one microchip manufacturer in China is unable to fulfill its orders, a household in the US struggles to buy a new car, a dishwasher, or a gaming console.
Let’s start from the demand side of the problem. Due to an increased number of people seeking entertainment at home during lockdowns, demand for the next-gen gaming consoles and high-end televisions was much greater than anticipated. Likewise, consumer demand for personal computers, smartphones, wireless headphones, and printers saw a steep rise due to the shift to the work-from-home model. Similarly, consumers seeking an alternative to crowded public transport due to health concerns turned towards purchasing personal vehicles, spiking the demand in the auto industry. Even household appliances such as dishwashers, washing machines, and vacuum cleaners saw increased demand because of increased hygiene concerns.
So, what do all these seemingly different products have in common? Microchips, of course.
This brings us to the other side of the coin: Supply.
Microchips (also known as semiconductors or integrated circuits) are an essential component of nearly every product with a built-in computing mechanism. This includes everything from cars to smartphones to televisions, even washers and dryers. When microchip manufacturing companies -mostly located in Asia- started shutting down at the beginning of the pandemic due to health restrictions, they started building up an immense backlog of unfulfilled orders. It didn’t help that a microchip is a remarkably complex product to build, with a lead time of up to four months. When the chip factories came back online, they simply couldn’t meet the increased demand.
We have compiled the 4 important lessons we can learn from the global microchip shortage from a supply chain perspective:
1. Don’t put all your eggs in the same basket.
Diversify your suppliers so that your supply chain isn’t disrupted when one of them goes out of service. Your customers count on you to fulfill their orders despite setbacks, so you should always have a plan B in case your go-to supplier suddenly can’t supply to you anymore.
2. Follow up on behavioral trends to be one step ahead of fluctuating demand patterns.
Keep yourself updated about the latest global news, technological advancements, and consumer habits. It’s like the butterfly effect. A sudden demand surge in one part of the world can have a global impact and cause a supply chain disruption elsewhere. Think about how external events such as pandemics, extreme weather, competitor campaigns, and price wars can affect your supply chain and prepare in advance to be one step ahead.
3. Benefit from predictive and prescriptive analytics for effective inventory planning.
Artificial neurons can process data and compute at a much faster rate than the human mind. This is why AI-powered software solutions have the capability to recognize hidden patterns in data to make accurate forecasts and even make intelligent recommendations to optimize your inventory levels in the face of an upcoming demand fluctuation.
4. Increase the maturity level of your supply chain to make your business more resilient to unexpected challenges.
The pandemic has taught us that even in the 21st century, life can change in an instant due to external factors beyond our reach. But it has also shown us that we have the digital tools at our disposal that make it possible to live, connect, produce, and consume even in the face of a global health crisis. As retailers and manufacturers, a robust, resilient, and flexible supply chain is your most valuable asset against uncertainties. With the help of intelligent systems and digital transformation, and automation of supply chain planning, you can make sure your supply chain grows strong and is ready to take on the next challenge.
The future of supply chain planning is here.
Businesses of all sizes can benefit from the digital transformation of supply chain planning. Consolidation of internal and external data on a single platform is the foundational advantage offered by digital transformation. On top of this, digital platforms have several advanced capabilities such as demand-sensing models, which are used to improve the agility of the forecasting process, integrated planning to automatically respond to the fluctuations in demand and supply, and scenario planning to support what-if analysis with different planning parameters and constraints.
Businesses that successfully digitize their supply chain will be ready to tackle the challenges of the future.