The electronic component shortage that came along with the global pandemic has been sweeping the world ever since, and the automotive industry is not exempted from this shortage crisis. We saw business giants calling Asian semiconductor manufacturers for extra chip supply every day. What exactly is causing such a dilemma? As a car enthusiast and a supply chain worker, I am providing an “imprecise and rude” picture of the “Great Chip Shortage”.
The root cause of all the clashes and debates is the unbelievable complexity of modern cars. Cars today are far more than metal parts. Digitalization devours everything from onboard entertainment and precise control of the power train such as injection and differentials. Today we even see a touch screen on each of the door panels for passenger frilling control. All these components, including ECUs, stereos, screens, and control panels, require a set of PCA to make it work. Another characteristic of the automotive industry is the various regulations imposed by different governing bodies. The homologation and the qualification process can be costly and time-consuming, and this further boosts the costs of materials. It is not common to see cutting-edge technologies arrive in a car immediately as the manufacturers tend to apply more mature components for better reliability and regulatory requirements.
The enormous complexity implies higher material costs and assembly difficulties. Car manufacturers have to utilize various strategies to cut costs and maximize revenue as the margin of automobiles is shrinking. A prominent way is to find a cheaper supply of materials, and this is where procurement management kicks in. Sourcers and buyers are trying everything to achieve lower purchasing prices. Innovative operational tactics become a popular topic for internal cost management. We already saw the outsourcing of non-core components, the just-in-time ordering with near-zero inventory, and the cross-product-line modularization. All the efforts did drive the operational costs down as well as the inventory level, but such lean management makes the system more prone to external volatility.
The system was already at the limit and was highly vulnerable, and the breakout of the global pandemic was just the last push for the supply chain collapse. It drastically impacted the short-term demand forecast and forced the manufacturers to further cut their costs. We saw the shutdown of factories, layoffs of employees, delayed payment to the supplier, and reduced material purchasing prices. All the measures taken could have a significant impact on the upstream suppliers. Once the short-term income for upstream suppliers falls below the variable costs, the upstream might shut their business down as well. As the impact goes all the way to the top, the long-term productivity of the whole supply chain declines. Such a phenomenon could not be reversed in a short time as all the decision-making is at a strategic scale.
In a hindsight view, we know the reduction in the demand after the pandemic was not as drastic as estimated, but the initial movement against the pessimistic forecast has already triggered the corresponding reactions within the supply chain. The overall productivity cannot be resumed in a short time even if the forecast and the orders were soon added back. This explicitly demonstrates that volatility is the killer of a complex system. Information transparency and supply chain synchronization are critical in a multi-echelon supply chain because downstream players could overreact to a demand shock. As the effects get multiplied throughout the supply chain, the bullwhip effect occurs.
Ironically, we are now seeing supply chain workers overreact to the global material shortage and the prolonged material lead time by placing excessive purchasing orders. Although it is understandable to have a higher safety inventory level given the longer material lead time, the potential risk is the further reduction of demand resulting from global political incidents. We already saw the overreaction to the global pandemic, and we might just see the reverse reaction to the shortage and the long lead time. It is definitely stressful to work in the supply chain function this year, but it is fun to see all the textbook theorems happening in the real world.
