Jim Witham is CEO of GaN Systems.
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There’s no doubt that the tumultuous events of the past 18 months led to the massive disruption of many key supply chains. Although industries experienced supply chain fragility before the Covid-19 pandemic, the current scale and diversity of impact are unprecedented, with shortages in critical medical equipment, consumer electronics, cars and even lumber.
If we look at the past several decades, geopolitical trade wars, shipping delays, plant closings, raw materials shortages, earthquakes and tsunamis have all exposed supply chain vulnerabilities and sent ripples throughout regional and global manufacturing. Geopolitical conflicts have stressed our increasingly globally interdependent networks, including the U.S.-Japan trade wars in the 1980s, the 2019 disputes between Japan and Korea in the semiconductor industry and the past four years of trade friction between the U.S. and China (paywall).
Japan’s 2011 tsunami and earthquake temporarily impacted consumer electronics and automotive industries. In 2013, the SK Hynix fire rattled smartphone manufacturers’ supply chains. Factory fires were a leading reason for supply chain disruption in 2020. And who can forget the Ever Given saga, in which a mammoth cargo ship blocked the Suez Canal, stranding 400 vessels and holding $9 billion in global trade hostage each day?
Although the inciting incident of these disruptions is different, they’re the same in that supply chains eventually rebounded or pivoted and operations pressed forward — that is until the next disruption came along. But were any lessons learned and new practices put into play?
More than any of these past events, the Covid-19 pandemic exposed the degree to which our global supply chains are fragile and lethargic in their ability to respond to unexpected changes in demand. Although disruptions are inevitable, we need to plan and respond differently if we're to ensure global economic resiliency in the future.
My experience in the tech industry has taught me that there are four areas in which we need to look at the supply chain in new ways, but these all apply regardless of the industry:
1. Vulnerability must be an everyday, not a 100-year, planning event consideration.
The pandemic underscored the imperative of manufacturers and supply chain partners to do more than plan for infrequent and “100-year” events. We have to admit that with deep global economic interdependence, more serious disaster planning must become the defacto standard.
This past year, companies made bold moves in risk mitigation by adopting a more distributed manufacturing strategy to diversify supply chains and better prepare for vulnerabilities both natural and man-made. Early in 2021, Taiwan Semiconductor Manufacturing Co. announced a new factory in the U.S. with possible new manufacturing operations in Germany and Japan. Amazon has increased investments in Amazon Logistics, expanding its distribution warehouse center footprint and growing its fleet of airplanes, trucks and last-mile carrier vans to deliver on the surge in e-commerce sales and reduce reliance on third-party carriers like UPS, FedEx and USPS.
2. The love affair with just-in-time manufacturing may be over.
The just-in-time manufacturing mantra born in the auto industry during the 1970s enabled companies to adapt to fluctuating market demands and bolster bottom lines through inventory reduction. These practices were subsequently embraced by innumerable industries to achieve the same economic benefits. But the extent of pandemic-related shortages across vast ranges of goods now challenges whether these benefits are worth the tradeoff if the result is a significant lack of preparation for future disruption.
We need to recognize that today’s reality may eclipse just-in-time reactivity. Companies should consider business risk in new ways to reflect this. Recently, major automotive manufacturers have made moves to the century-old concept of vertical integration (paywall) to gain more control of the inner workings of their supply chain by moving responsibility for more core components from long-standing vendors to inside their own four walls.
3. Electrification megatrend means more companies are semiconductor-dependent.
In our increasingly data-driven and electrified world, the products of a growing number of companies now require semiconductors, making them dependent on the chip supply to bring products to market. The current automotive industry spends around $40 billion on chips per year. This will only grow with the rapid transition to electric vehicles (EVs), which require four times the number of semiconductors.
In our homes, there are semiconductors in air conditioning temperature sensors, rice cookers, refrigerators, LED lighting systems and, of course, in all of our digital devices from phones to laptops. Businesses are also experiencing a greater need in areas such as data centers, renewable energy systems and the increasingly automated processes of Industry 4.0 factories and warehouses.
Given the extent of the integration of semiconductors in our businesses and personal lives, what might have been viewed as a supply chain hiccup years ago now has far-reaching effects. In this past year, semiconductor shortages and supply chain woes have impacted a wide range of industries, from cars back-ordered for months (paywall) to TVs and everyday appliances (paywall).
4. Relationships between supply chain partners must evolve.
Virtually overnight, the pandemic created incredible pressure for businesses to diversify not only their services and products but to reconsider their power and relationships within the supply chain. Large companies that canceled significant business with their smaller vendors and then returned assuming immediate capacity have been surprised that their place in line has been taken by others. Vendors diversified into providing services to other industries that needed them during the earlier stages of the pandemic.
The lesson that needs to be learned: We can’t assume suppliers will always be there if we don’t treat them well during difficult times. Even the smallest vendor demands a new level of respect. How you nurture and respect every partnership within the supply chain makes a difference.
The last 18 months of the Covid-19 pandemic have shown us that we can no longer think about the supply chain the way we used to. We need to transform the pain of that experience into new ways of thinking about and acting on relationships in our complex global supply chains. Put simply, it’s imperative to build toward a more resilient global economy.
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