Companies are changing the supply and demand formula in the wake of severe chip shortages, but it’s not a simple fix.
Companies that were hit with chip shortages during the pandemic are changing their strategies to prevent future problems, deploying a combination of supply chain mapping, second sourcing, and digital transformation.
Those shortages caused a $200 billion loss for automotive manufacturers, and the disruptions were far more widespread, in many cases lasting for years. Companies of all sorts were forced to beef up their digital transformations, improve visibility with suppliers and customers, and to engage in more long-term agreements.
“Without a doubt, semiconductor OEMs have been investing in improved resilience, planning, and management processes at a rapid pace,” said Scott Studer, vice president of customer experience, S&OP & Supply Chain at NI, an Emerson company. “Just recently, Gartner noted that supply chain planning software spend will double over the coming few years, a trend we’re certainly living.”
Last year, SEMI launched its Supply Chain Initiative to pool and share best practices aimed at improving supply chain agility and resilience. “Not everybody had risk management programs in place going into the shortage, and the wake-up call was certainly painful,” said Bettina Weiss, chief of staff and corporate strategy at SEMI. “So implementing just the most basic of risk monitoring programs is very helpful, as is multi-tier mapping to gain visibility into your supply base and your supplier’s suppliers so you can make better decisions faster. It’s also important to really monitor key metrics like leading and lagging indicators, capacity monitoring, and lead times. And we’re working with our supply chain Advisory Council on a dashboard that would capture the most important indicators.”
Fig. 1: Most industry participants do not engage in long-term agreements. Source: SEMI Semiconductor Shortage Survey, Spring 2022
The shortages also demonstrated the value of having long-term agreements, which is something of a double-edged sword in the industry. A SEMI and McKinsey study [1] revealed that three quarters of the companies in the semiconductor supply chain do not have long-term agreements (LTAs) with their suppliers, and the LTAs that do exist typically do not account for most of the company’s demand (see figure 1). The reasoning behind this lack of assurance is the industry’s famous boom and bust cycles, where fabs seem to be either running at full capacity with high average selling prices (ASPs), or demand lags and ASPs plummet, especially for memory devices.
One factor that exacerbated supply chain disruption during the pandemic was the lack of inventory stock due to just-in-time manufacturing practices. “There’s been a lot of talk about a shift to ‘just-in-case’ inventory management as opposed to ‘just in time’ inventory management. People are willing to take on more inventory as a buffer to mitigate issues,” said Lita Shon-Roy, president, CEO and founder of Techcet. But there is a limit as to how much stockpiling of chips is truly beneficial. “If a company carries more inventory, is that going to lock you into not being able to move to your next-generation chip?”
Semiconductors are the fourth most-traded product globally, and while supply chain disruptions are not new to the industry, they rose 88% year-over-year between 2020 and 2021. [2] Causes can span everything from a pandemic, which was one of the main drivers of the recent shortages, to factory fires, port disruptions, labor and trade disputes, wars, cyberattacks, chemical spills, hurricanes, earthquakes, floods, power outages, etc.
Some of the most notable incidents that severely impacted semiconductor production levels and pricing include:
In the face of such uncertainty, companies must be prepared to solve problems together.
“Collaboration across the supply chain is becoming essential. Sharing data across the supply chain allows companies to troubleshoot issues more quickly, predict potential failures, make data-driven decisions, and drive innovation,” said Meredith Green, director of quality engineering at Brewer Science. “Sharing data on specific defect types allows quick elimination and results in yield increases as well. The introduction of advanced analytics and AI will only further support this trend. Yet even with the advancements, there are concerns regarding standardization. Stakeholders utilize different formats and systems and have different proprietary rules in place. Ensuring accuracy and integrity of supply chain data is crucial for the success of a digital thread.”
“With respect to data sharing, we see equipment and materials suppliers sharing with their direct suppliers and supplier’s suppliers, but not across. So this is really sub-optimizing the whole endeavor,” explained SEMI’s Weiss. “Individual companies are better fortified but if they don’t share left and right the benefit is really lost.”
So far, the industry has rejected wide data sharing. “Overall, data sharing will take a culture shift,” said Green. “Raw material suppliers are hesitant to share data because this has often led to having harsher requirements forced upon them. This is costly and can result in some small suppliers not being able to be competitive in this industry. As the industry moves in this direction it is essential to be open and transparent about the goals and expectations to allow this process to be beneficial to all parties participating.”
But companies across the industry are sharing digital transformation strategies, which further accelerates adoption of advanced technologies. “NI replaced our two-decade-old on-premise MRP software as a result of the supply chain crisis with best-in-class cloud-based MRP in rapid succession. We transformed demand planning, statistical forecasting, supply planning, and even production scheduling to name a few,” said Studer. “Anecdotally, we are asked to participate as a reference several times per month for the best-in-class software supplier, a sure-fire indication of the demand for transformation in the market.”
UMC employs an enterprise risk management policy as part of its comprehensive sustainability program (see figure 2). “UMC actively performs enterprise risk management, pre-crisis prevention, and practice drills to facilitate timely and appropriate response capabilities for any possible crisis,” the company said. Its risk management procedures are built into daily operations at all its facilities and fabs. An ERM Committee consolidates risks in the areas of strategy, operations, finances and hazards, and evaluates the possibility and severity of their occurrence, defining the priority order and risk level of the risk items, and determining appropriate response actions.
Fig. 2: An enterprise risk management policy ties risks to company goals, includes operational procedures, risk awareness, and communication of risk levels and potential remedies to disruption. Source: UMC
Interdependencies, pricing pressures, and market concentration in the hands of a couple of suppliers, or even sole suppliers for particular parts or materials, leads to choke points in the supply chain when disruptions do occur. At the same time, immature technologies undergoing ramp-up can also be in short supply. “I have been told that the advanced packaging capacity is very limited,” said Techcet’s Shon-Roy.
Increasing digitization of business processes means building systems that companies trust. “People had done a lot of the digitization before the pandemic so that they could understand inventory levels. The next step is really data sharing, but there are very few companies that are willing to do big data sharing and visualization on a secure platform,” said Shon-Roy. “It’s going to take some time before people can trust that, but right now it’s going on with regard to the quality side of things in a limited way.”
Indeed, the need for comprehensive supply chain mapping and 24/7 supply chain disruption detection has led to third-party suppliers like Resilinc to provide secure, protected data environments specifically tailored to supply chain monitoring at multiple tiers, along with alerts to speed reaction and recovery from disruptions.
One of the key findings from the SEMI/McKinsey supply chain analysis was that 80% of supply chain disruptions occur at the Tier 2 and Tier 3 levels. Visibility typically becomes poorer the further one gets from the chipmakers themselves (Tier 1), so it makes sense that the risk level also increases dramatically as one goes down to the precursor and raw material suppliers.
For larger tool makers, having support facilities near clustered fab sites enables tighter cooperation. “Our supply chain is rooted in a ‘close to customer’ business strategy,” said Peter Holland, corporate vice president of Supply Chain at Lam Research. “By partnering with suppliers in the regions where our customers operate, we can build resilience against issues that may impact availability and movement of supplies. We further ensure continuity for our customers by investing in resilient supplier networks and inventories to secure spares and consumable parts.”
Better mapping
Following the fallout from the recent supply chain crisis, companies reassessed supply chain risks and practices. One proactive measure that can situate a company much better for the next disruption is supply chain mapping. Mapping the network of suppliers, manufacturing sites, parts, and identifying the products or materials at risk ahead of time can put companies in a much better position to pivot when changes occur.
Supply chain mapping involves drawing the relationships and procedures that form an organization’s business process. These maps are detailed and typically are developed in cooperation with suppliers. They outline the geographical location of suppliers, and the supplier’s suppliers, all the way down to the raw materials. By mapping out warehouses, distribution centers, manufacturing sites, and transportation routes, companies can get a better handle on lead times. The map typically contains the activities performed at each site, alternative sites that can perform the same operations, shipment frequencies, product mix and volumes, lead times, and supplier delivery performance.
“Being a data-driven organization and having all the data for managing supply chain under one system is one of the strengths that our supply chain relies upon. Demand from the customers, historical trends, demand planning engine, inventory management, and demand to the suppliers are all under one system,” said Kamal Malhotra, director of financial systems and procurement at Brewer Science. “Also, data integrity is equally important. Cross-functional teams constantly monitor the trends and adjust the system based on future projections so the data is relevant and accurate. For any material requirements planning (MRP) system to be successful, a 98+% inventory accuracy is required, and we constantly strive for that with our regular cycle count and physical count program.”
All of this goes hand in hand with meeting increasingly stringent quality levels. “As feature sizes get smaller and smaller, the cost of one failure increases exponentially, which is why a zero-defect mindset is so important to have within the supply chain,” said Brewer Science’s Green. “In addition, advanced packaging is becoming more prevalent. This means that companies across the supply chain must have a dedication to quality because at each step the cost of a defect is magnified.”
Supply chain management includes bringing specific product and process solutions to meet a variety of needs. “Our supply chain spans six continents and more than two dozen countries,” said Lam’s Holland. “It’s a complex network that requires strong oversight and governance to manage. We engage closely with suppliers throughout each step of the supplier lifecycle, from pre-selection to onboarding and beyond. Ours is a meritocratic model where suppliers compete fairly based on performance to make sure we leave no customer demand unmet.”
Second sourcing, better coordination
Second sourcing of semiconductor equipment and materials provides a higher level of supply chain resilience. However, it takes time for chipmakers to qualify a new material or tool, and when fabs are running near full capacity levels that time may be costly.
“Having a second supplier has always been a good rule of thumb for business continuity planning, but when the volume is so small, which is very likely for some precursors, it’s kind of difficult to justify, and possibly you can’t find that molecule anywhere else,” said Techcet’s Shon-Roy. “And when demand is so high, fabs don’t want to start to try to qualify a new source because running test lots all the way through from start to finish interrupts the flow of some portion of your process. Then you risk supplying key volume to your customer.”
The second source must meet all the stringent qualifications of the first source, while taking volume from the first source. That, in turn, may affect pricing. “During the pandemic people did some emergency quals, in a limited way, on those materials they felt were lower risk of that kind of problem,” she said.
Some of the materials that are hardest to second source include photoresists, CMP slurries, and specialized cleaning chemistries, which might be developed by the materials supplier engineers in conjunction with fab process engineers over a period of several months or years.
In addition to sourcing alternatives, sometimes companies expand their own capabilities. “In addition to second- and third-qualified sources, we have invested more into our vertical integration where it makes the most sense. As quality requirements continue to increase, you may need to control your own destiny by bringing the supply chain in-house,” said Mike Mathews, executive director of manufacturing and logistics at Brewer Science.
NI’s Studer highlighted three strategies employed by chipmakers. “First, they are increasing the pace and breadth of product lifecycle management, eliminating older technologies that were particularly challenging to them during the recent crisis in favor of higher-performing, smaller form-factor technologies. Second, they are requesting forecasts from customers across longer time horizons. Prior to the crisis, forecasts for 60 to 90 days were sufficient, but now we experience the desire for forecasts up to 1 year in advance, albeit with differing levels of confidence and commitment required. Finally, at the largest OEMs specifically, we are experiencing the desire for proactive supplier relationship engagement. The difference is that it’s being activated by the supplier versus the customer.”
Studer noted this engagement may or may not take the form of a long-term agreement. “Long-term agreements would certainly be a game-changer. However, right now the macro-economic fundamentals are too volatile, so long-term agreements aren’t a win-win for either party.”
Indeed, SEMI and McKinsey’s survey of companies at multiple tiers in the semiconductor supply chain revealed that the majority of wafer fab customers provide one to three quarters of demand visibility (see figure 3), while foundries and integrated device makers provide roughly the same level of supply visibility to their customers.
Fig. 3: Most foundries, fabless device makers, and IDMs provide 1 to 2 quarters or less supply and demand visibility. Source: SEMI Semiconductor Shortage Survey, Spring 2022
The supply-and-demand situation between semiconductor equipment and materials suppliers and their suppliers is similarly focused on shorter term notice according to the survey. Some 67% of equipment and materials suppliers provide three to nine months of demand assurance, but when it comes to supply notice, less than a third provide three to nine months, with roughly another third providing only one to three months of notice.
The survey talks about a so-called bullwhip effect, where small fluctuations in demand at the electronics level lead to increasingly larger fluctuations down the line to the distributor, semiconductor fab, equipment and materials, and finally the chips, sub-components and materials that go into making the process tools.
In fact, it was this escalating effect that gave birth to SEMI’s Supply Chain Initiative, which came about when toolmakers could not access the chips they needed to manufacture their wafer processing tools. “The impetus really came from the equipment suppliers during the chip shortage. They couldn’t get the small allotment of IoT chips they needed to make the tools,” said SEMI’s Weiss. Five companies — Google, Intel, Merck, Infineon, and KLA — banded together early on to break down the semiconductor supply chain problem, a core base that has since expanded to 14 firms.
“The initiative provides a safe space for competitors and peers, customers and end customers to come together and share best practices regarding the projects that they have implemented in their own companies that seem to work. Collectively we’re putting together a best-of-breed toolkit,” said Weiss.
The initiative is addressing the industry’s most intractable problems such as cybersecurity. “We have our guardrails in place,” Weiss said. “This is all protected by our antitrust guidelines and supports the standards, so individuals are free to speak and we never attribute anything to a particular company. We have safe ways of collecting and aggregating data that SEMI never sees, but where companies can report findings [Note: This reporting is performed by the same organization that provides SEMI’s World Fab Forecast and other market research reports.] So they like the idea of not giving away the store but contributing to a much broader industry-wide solution that they all need.”
Cybersecurity is a great example of this need, because while the larger chipmakers and toolmakers have strong cybersecurity measures in place, the level of protection may be lacking among small and midsize firms. The supply chain group further cooperates with SEMI’s cybersecurity and standards groups to prevent duplication of efforts.
Fig. 4: Multiple capabilities can impact supply chain efficiency. Source: SEMI and Resilinc
The SEMI/McKinsey white paper identifies how solutions such as digital transformation, machine learning and neural networks, collaborative decision-making systems and autonomous processes might impact the semiconductor value chain (see figure 4). “Digital transformation, especially applying genAI in supply chain management, is certainly helping, just from an administrative ease of burden standpoint. But also, some other competencies include internal document creation and outside stakeholder coordination, which really goes back to tier mapping and visibility, and really having a tight grip on your supply base, facilitation of customer interactions, reporting and tax status updates, so anything that can be automated can be improved and accelerated through AI,” said Weiss.
Conclusion
Massive semiconductor shortages led companies throughout the semiconductor supply chain to reinforce their risk management programs. The SEMI Supply Chain initiative, now open to all SEMI member companies, will be monitoring industry capacity and is positioned to provide a best-of-breed toolkit of supply chain strategies that have worked in practice. While the industry has little control over external disruptions such as the weather, it can be better prepared to respond to inevitable disruptions.
“Localization, geopolitical trends, trade wars, consolidation within the industry, labor shortages, and the race to become independent are changing the landscape of the semiconductor industry,” said Brewer Science’s Malhotra. “Vertical integration and having the flexibility to switch suppliers by qualifying multiple suppliers will be the key going forward. Risk mitigation plans are another key aspect that is important.”
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