Adaptation Key to Waking Up From Supply Chain Nightmare

The pandemic has caused massive disruption of global supply chains, affecting everything from toilet paper to cars – leaving many wondering when the crisis will end.

The impact on the automotive industry likely will extend into late 2022, primarily due to the ongoing semiconductor (microchip) shortage. As many OEMs struggle to obtain the chips needed to get cars off the production line, consumers are left frustrated by the lack of cars on the lot.

While some supply chains appear to be bouncing back, the automotive industry is experiencing a delayed recovery. At the onset of the pandemic, early market projections for the industry were miscalculated.

Some experts predicted the pandemic would limit the number of cars purchased, as people were driving less. As a result, manufacturers reduced their own production and cut back on chip purchases.

The supply that had been reserved for auto OEMs was quickly redistributed to other consumer electronics that were seeing unprecedented growth fueled by work-from-home mandates.

However, as the pandemic went on, consumers purchased more vehicles than anticipated, with Ford selling more than 500,000 vehicles in Q1 2021 – a 1.0% year-over-year increase in total vehicle sales.

As consumers continued to buy vehicles at this unexpected rate, OEMs began to feel the pains of the ongoing pandemic affect their supply chains, and their tried-and-true just-in-time (JIT) approach left them without access to the vital chips today’s vehicles require.

How Just-in-Time Hurt the Auto Industry

The automotive industry has long thrived using the JIT model for inventory management by moving cars out of manufacturing and onto the lot as demand requires.

This “lean manufacturing” idea was developed to cut overhead costs by keeping surplus parts and components to a minimum, but the ongoing chip shortage has emphasized the juxtaposition between the chip supply chain and automotive supply chain methodologies and requirements.

What does the chip shortage have to do with the JIT approach? OEMs, who have traditionally run lean with minimal buffer inventory or supply stocks, have little margin for error.

Any disruption to the semiconductor supply chain, such as a weather-related event that shuts down a chip manufacturing plant or chips delayed in shipping, almost immediately impacts vehicle production, and OEMs’ losses begin to mount.

As a result, we’re seeing hundreds – and sometimes thousands – of unfinished cars parked in sprawling lots, unable to be shipped because they are missing their semiconductor chips.

Solving the Chip Shortage and Preparing for the Future

As cars become more and more reliant on semiconductor components, OEMs must move away from being reactive to supply chain disruptions and start being proactive. One way the automotive industry can do this is by shifting its mindset away from the JIT approach when procuring the parts needed to keep production moving.

Procurement teams who are responsible for securing chips are under more pressure than ever to get the right part, in a certain quantity, and for a reasonable price. It’s not always easy.

They can find themselves in a desperate situation purchasing chips on the open market that appear to be a great deal but may be of poor quality or are not authentic.

To help overcome the current chip shortage and prepare future prevention strategies, procurement teams must make crucial considerations when sourcing components to ensure quality parts make it into the vehicles their company manufactures.

Marc Barnhill-Smith-150x150

While the auto industry is a relatively new player in the semiconductor sphere, many electronic component distributors have been around for decades.

This longevity, when paired with a global market outlook and a robust quality program, provides the insight needed to not only source in-demand parts, but also confirm their authenticity. Procurement teams can work with a qualified distributor to find solutions to meet their unique needs and help alleviate the pain points brought on by the current market.

Marc Barnhill (pictured, above left) is chief trading officer of Smith and Associates, an independent global distributor of semiconductors and electronic components.