Smooth Roads Ahead? How to Avoid Supply Chain Challenges

During the COVID-19 pandemic, semiconductors became a worldwide news story, due to a shortage with particularly notable effects on the automotive industry that left entire manufacturing plants shuttered. Automakers faced unprecedented losses in vehicle production and revenue, and consumers felt the squeeze as waitlists for vehicles grew longer and car dealerships stood empty.

Staring down the threat of continued losses, automotive manufacturers were challenged to rethink their usual supply chain practices and explore new resources and expertise in electronics purchasing. Now, over two years into the ongoing shortage, the long-term costs and benefits of each manufacturer’s approach have emerged. Comparing the effectiveness of automakers’ semiconductor strategies reveals best practices for smoothing out supply chain disruptions, both now and in the increasingly semiconductor-heavy future.

The Backdrop: Intense Semiconductor Demand With an Inadequate Sourcing Framework

The number of electronic components in automobiles has risen steadily in the past half century. The total value of electronics made up only 5% of a car’s cost in the 1970s, compared to 35-40% today, and some estimates are 50% by 2030. Despite their increasingly large semiconductor spend, automotive OEMs’ electronic-component procurement prior to the shortage differed from that of traditional technology companies, like personal-computer, server, and consumer-electronics manufacturers. For decades, automakers relied on a wide range of Tier 1 suppliers for everything from braking systems to seating to infotainment.

This arrangement led to a decentralized structure in which each of these suppliers purchased all the components for their bills of material. Often, automotive OEMs do not have access to a full list of semiconductors in their end product due to a lack of insight into their suppliers’ bills of material. Computer OEMs, by contrast, generally rely on one or two EMS providers, with significant procurement oversight, visibility of bills of materials (BOMs), and input on substitutions, which centralizes purchasing of electronic components.

Attacking the Problem: Identifying and Evaluating Three Common Strategies

Regardless of the market situation, three best practices apply across the board to effectively navigate the electronics supply chain challenges:

Align With a Strategic Partner

Narrow down your list of suppliers and align yourself strategically with companies to overcome your sourcing and excess issues.

Establish Clear Procedures for Purchasing Decisions

A clear, efficient, easy-to-follow procedure not only provides insurance for all parties, but also increases the overall chances of supply being secured, allowing automotive manufacturers to move at the pace of the open market.

Uphold Consistent Standards for Quality

Automotive OEMs can construct their own approved-vendor lists and hold their suppliers to the same list or work with their Tier 1 suppliers to create individual lists according to quality standards.

Learning From Experience: Moving to Long-Term Supply Chain Strategy

As the market shows signs of stabilization, automakers have started to think about a return to “business as usual,” although experts predict the shortage of components for the automotive industry will persist through 2026.

Short components are not the only problem currently facing manufacturers. Many automakers now find themselves with excess stock they no longer need. This is yet another challenge that open-market expertise can address. While this may seem counterintuitive in a shortage market, industry experts are familiar with this cyclical situation and see it frequently. Distributors can provide a variety of cost-savings solutions when it comes to excess inventory.

Those automotive manufacturers who continue to take ownership of their supply chain, align themselves with a trusted strategic partner, and establish clear, efficient procedures for purchasing decisions, will be best prepared to ensure supply, prevent or reduce production losses, and save on costs in the increasingly semiconductor-reliant future.

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