Semiconductor chips may or may not be high-spend items for your organization, but if you need them, you need a plan.
What can you do to prevent production halts and huge delays when there’s no end in sight to the global chip shortage?
Our newest bulletin, How Enterprises Can Combat the Global Chip Shortage, discusses steps to draw up short- to mid-term plans, mitigate risks and secure your supply. It also includes a case study on how GEP helped an APAC engineering firm find reliable suppliers, secure components faster and save 12% on costs.
What’s Inside:
- Why the shortage will continue and prices will rise
- How to leverage procurement expertise
- Four action points to maintain supply continuity
This bulletin is a must-read for business and supply chain leaders looking to avoid large-scale disruptions that impact revenue and reputation.
The global shortage of electronic components is unlikely to be resolved anytime soon, and businesses that require semiconductors and other components must have a plan in place to manage an extended period of shortages and price spikes.
Expect Turbulence to Continue
The electronic components industry has been going through a turbulent time since the U.S.-China trade war began. Shortages kicked in after organizations started stockpiling in anticipation of sanctions and cutoffs. The situation has been exacerbated by the pandemic and the increasing demand for electronic components for cloud servers as well as personal electronic and medical devices. Add on supply limitations owing to production capacity and container and airfreight constraints and you have the answer to why shortages are likely to persist in the future.
With the current stockout crisis expected to last well into 2022 and the next wave of technologies being led by AI, IoT and the metaverse, demand for electronic components — especially printed circuit boards (PCB) and multilayer ceramic capacitors (MLCC) — will keep rising. Manufacturing sites for MLCCs are mainly in Japan, South Korea, Taiwan, China and mainland China. The majority of advanced packaging service providers are based in Japan, Taiwan, China and mainland China, while the market for low- to medium-end products is gradually being taken over by mainland China. Shortages are expected to worsen around 2025. So, whether your company offers equipment to other businesses or devices to consumers, a continuous, on-time and complete supply of electronic components must become a priority for your procurement team. .
The prices of electronic components rose between 15% and 20% from 2020 to 2021. In 2022, the rate of increase is expected to slow to 10%-15% as per GEP’s price benchmark analysis, but the price of individual parts may double depending on the buying channels (distributors or OEMs).
Partner With Experts
Businesses that are likely to be badly affected are the ones unprepared to handle the situation — especially those for whom electronic components are only a fraction of their direct spend and are seen as noncritical parts. In such cases, there may not be established supply channels, strong supplier relationships or adequate internal know-how. To prevent supply bottlenecks and order fulfillment problems, companies will need a strategy for even their low-value or slow-moving electronic products.
Companies, particularly those without in-house expertise, will benefit from leveraging external procurement knowledge and experience to monitor market trends and price fluctuations, establish a comprehensive overview of their supplier landscape and capabilities, and devise inventory and collaboration plans. Cost-saving opportunities will arise once there’s a clearer understanding of the market dynamics.
Supply Chain Analysis
An in-depth analysis will enable organizations to draw up better short- to mid-term plans to mitigate risks and prevent future disruption. It should include:
- Identifying the key drivers for shortage of the specific parts needed
- A review of the measures taken by policymakers and major players
- Examination of the time OEMs require to set up new manufacturing sites
Prepping the Supply Chain
These four steps will go a long way in anticipating and preventing large-scale disruptions that will impact production, order fulfillment and the company’s revenue and reputation:
1. Supplier Forecast Collaboration: Collaborate with key suppliers in real time and gain greater visibility into supply and demand as well as suppliers’ processes and timelines to draw up accurate forecasts and inventory plans
2. Advance Ordering: Share long-term forecasts with suppliers and place orders three, six or 12 months in advance to secure supplies and build up additional inventory
3. Strong Relationships With OEMs and Distributors: Deepen partnerships with existing key suppliers and establish business relationships with OEMs
4. Multisourcing: Split up your purchasing volume to reduce the risk of supply disruption or stockouts
How GEP Helped an Asian Engineering Firm Save 12% on Costs
An MNC specializing in engineering and electrical equipment won a multiyear project with a significant spend volume on both active and passive components.1
Prior to this, the components were a minor category for the client, supplied by one distributor who provides a one-stop shop service. However, to fulfill the new demand, the firm required help to:
- Evaluate buying channels and suppliers
- Verify component availability, especially end-of-life (EOL) components
- Understand and analyze market prices and trends
- Validate lead times
- Identity savings opportunities
The firm selected GEP as a partner to provide market insights, confirm parts availability, monitor price trends and identify alternatives for end-of-life constraints for active and passive components.
GEP conducted a pilot analysis for 200 out of over 700 parts, which not only improved the company’s understanding of the market but also led to a 12% cost savings ($1.5 million) and gave access to a list of reliable suppliers that could offer the required components. Being able to choose from suppliers helped the company secure components faster.
- Active components, e.g., transistors, diodes, integrated chips, etc., have circuit parts that rely on external sources of power to modify or control electrical signals. Passive components, e.g., resistors, inductors, transformers, etc., rely on current present or traveling through the circuit to function, which means no external source of power needed.
Turn ideas into action. Talk to GEP.
GEP helps enterprise procurement and supply chain teams at hundreds of Fortune 500 and Global 2000 companies rapidly achieve more efficient, more effective operations, with greater reach, improved performance, and increased impact. To learn more about how we can help you, contact us today.
Michael Seitz
Vice President, Consulting, GEP
Michael is responsible for business development and customer delight while growing and guiding our China team. He has 15 years of experience in procurement advisory and supply management and a strong background in cost optimization, procurement transformation, procurement system implementation and supply chain strategy. He has been working in Shanghai for the past decade.
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