What supply chain planners can learn from the global chip shortage. By Dominic Thomas
The current semiconductor chip shortage is expected to cost the global automotive industry $110 billion in revenue in 2021, according to consulting firm, AlixPartners. With much of this cost outside manufacturers’ direct control.
Covid-19 was amongst the catalysts for this shortage. As the world shut down with Covid-19, supply chains were hit with one of the most unexpected and widespread events in history. The initial impact was not uniform, with some economies being affected much earlier than others, and some regions imposing stricter restrictions around what work could and could not be done.
Because nothing like the Covid-19 pandemic had ever happened before, leaders across industries were forced to scramble to determine how to react. There was no historical data they could use that would inform the next step or case studies to reference to understand how others have navigated similar challenges. This was particularly impactful in the supply chain space, where historical data is heavily relied upon to forecast and plan, hampering machine learning and AI algorithms.
For automotive leaders, as they started to see a drop in demand, they made the conscious decision to shift focus to PPE development to support the pandemic response and to adjust for the demand shift. At the same time, an already growing demand for consumer electronics started to accelerate as the global population was adopting new ways of working remotely and equipping their homes with the latest entertainment options. When combined with production shutdowns due to outbreaks, semiconductor chips became in high demand globally.
Now that we have navigated through multiple pandemic waves, the automotive sector is returning to pre-pandemic levels, with the appetite for the latest in consumer electronics continuing to remain high. To keep up with consumer demand, supply chain leaders in both industries now have the opportunity to look at their network and find innovative ways to plan.
The pandemic demonstrated that organizations must broaden their planning cycles to plan for both ends of the supply chain spectrum, including sudden increases and troughs in both supply and demand. In the future, expect planners to focus their planning and stress testing on all potential scenarios to ensure supply chains are resilient enough to handle both dips and spikes in order to continue to best serve customers.
Supply chain leaders also recognize the fundamental changes that have occurred in the industry in recent years and are finally taking the leap to transform outdated practices. It’s becoming increasingly apparent to stakeholders that the search for the elusive ‘perfect plan’ over supply chain agility is a fool’s errand. Another key takeaway from this past year of unprecedented global disruption is the understanding that real-time supply chain concurrent planning and what-if scenario modelling are no longer ‘nice to have’ features of your supply chain planning technology.
What-if modelling and concurrent planning enable manufacturers to evaluate different scenarios in real-time and understand how changes will affect various aspects of the supply chain. Scenarios can be used to test out various supply options and play an important role in making decisions about the supplier base. This provides companies with the transparency across the supply chain to know what to do when a problem arises, and the agility to make a decision in time to make a difference. For example, planners can look at how a supply disruption or change in supply cost, will impact the bottom line. Furthermore, evaluating suppliers based on new sustainability measures like their CO2 emissions or renewable energy consumption are increasingly becoming important to S&OP and integrated business planning decision making.
Societal trends will also play a role in this planning. Trends that were all but expected a few years ago, may shift in the opposite direction. For example, younger generations that planned to rely on public transit and ride sharing, have now moved out of city centers and may require their own vehicle. Another emerging trend that will continue to accelerate is the partnerships between consumer electronics companies and car makers. These partnerships may continue to grow so companies can best position themselves to hold demand steady and guarantee themselves supply.
Covid-19 made leaders re-evaluate ‘business as usual’, especially when it comes to supply chain. The pandemic showed the world just how much the supply chain can impact daily life. Because of this, both supply chain leaders and consumers will be less forgiving of issues caused by the next disruption. While digital transformation and planning were top of mind for many organizations, the pandemic put in a sense of urgency like never before.
As organizations work to navigate their way through, industry leaders are already asking how they can be prepared for the next global shake up and are expecting processes to be put in place that will ensure they have the ability to survive and thrive. It is time for leaders to recognize that historical supply chain planning approaches are inadequate for the modern world. Scenario planning to enhance resilience and agility are table stakes and will be critical to any organization’s success. The ability to pivot quickly has never been more important.
Dominic Thomas is EVP Business Consulting at Kinaxis.
Everyday volatility and uncertainty demand quick action. Kinaxis® delivers the agility to make fast, confident decisions across integrated business planning and the digital supply chain. People can plan better, live better and change the world. Trusted by innovative brands, it combines human intelligence with AI and concurrent planning to help companies plan for any future, monitor risks and opportunities and respond at the pace of change. Powered by an extensible, cloud-based platform, Kinaxis delivers industry-proven applications so everyone can know sooner, act faster and remove waste.