How to reduce the global chip shortage

Using advanced analytics to predict future demand could help insulate manufacturers from market disruptions

Using digital workflows & advanced analytics to predict demand could help prevent chip shortages.

Semiconductor demand is far outstripping supply. That’s bad news for the global economy, as these micro-sized chips power not just phones, computers, and cars, but an increasing array of appliances and other smart devices that define our daily lives.

Finding solutions is critical, as the global chip shortage could impact the pace and scale of the world’s economic recovery from the COVID-19 pandemic by forcing manufacturers to throttle production. Take General Motors: Since the pandemic began, the company has been repeatedly forced to idle operations, due to a lack of chips for its cars and trucks. In early September, GM shut down nearly all its assembly plants in North America.

The chip shortage is rooted in several trends. One is the ongoing uncertainty in the industry’s global supply chain. Over the last several decades, chip manufacturing lines moved from the United States to Asia to take advantage of highly educated, less costly labor forces. But the U.S.’s trade war with China, Brexit, and a breakdown in international trust and relationships have strained the world’s supply of computer chips.

$3 trillion

10-year global R&D and capital expenditure investments to meet semiconductor demand

Then came the pandemic, exacerbating the shortage by reducing workforces and slowing down production schedules to accommodate new safety regulations, and changing the demand for chips from the different industries. For instance, the first months of the COVID-19 lockdown were terrible for the auto industry, as demand for vehicles plummeted, but stellar for consumer electronics, as home-bound consumers splurged on gaming consoles and other entertainment devices.

Difficult, expensive, and not local

All these changes, and the uncertainty they created, made correctly forecasting the demand for chips far more difficult. No surprise for an industry that measures manufacturing lead times in months and where the production of semiconductor wafer requires up to 1,400 discrete processes.

The U.S. now accounts for only about 12% of global production, compared with 39% in 1990, according to a 2020 study by the Semiconductor Industry Association and Boston Consulting Group. Reversing that trend will require several years and billions of dollars in federal spending.

To meet the increasing demand for semiconductors, semiconductor manufacturers worldwide will need to invest about $3 trillion in R&D and capital expenditure over the next decade, the report said.

“To strengthen U.S. semiconductor supply chains over the long term and boost America’s economy and national security, it’s critical that the federal government enact funding for domestic chip manufacturing incentives and research initiatives,” Dan Russo, a spokesman for the Semiconductor Industry Association, told Workflow by email.

Strategic solutions

There are ways to mitigate the shortage of chips. To minimize disruptions in the supply chain, industries that rely on semiconductor technology for their own products can move to longer-term contract agreements with semiconductor manufacturers. Also, employing analytics models that combine supply and demand signals can make the decision-making process more intelligent, compared with error-prone manual methods.

Indeed, some companies like RKWireless, a chip manufacturer that works with Amazon and Google, are starting to make larger, upfront commitments to customers, thanks to more informed estimates on future demand.

Domestic manufacturers have also started increasing production, says the industry association’s Russo. “The semiconductor industry is shipping more units than at any other time in the market’s history,” he says, “indicating chip makers have significantly ramped up production to address rising demand.”

Adjusting on the fly

Chip makers have ample room to improve the efficiency of their operations, industry experts say. One way is digitizing manual and paper-based processes, says Shruddha Agarwal, ServiceNow’s global director of technology industry solutions.

“Semiconductor companies need to maintain a close-to-accurate inventory to avoid oversupply of inventory or risk losing customers’ trust by not meeting their demand,” Agarwal says. “Changing an order can be a messy, complex task if you rely on paper and spreadsheets. Using a digital workflow platform speeds operations, automates processes to respond faster to customer order changes, and protects margins.”

How quickly the U.S. can ramp up chip production to better support technologies critical to its own security, infrastructure and economy remains to be seen. What is certain, industry analysts and executives say, is that remaining rooted in non-digital processes and workflows from the last century is not a viable option.