How Manufacturers Can Survive the Latest Chip Shortage

By Logan Wamsley

The root cause for the unprecedented chip shortage facing the automotive industry as well as other industries such as healthcare and consumer electronics is three-fold:

• The first cause has been the extreme market volatility in the automotive industry the past year, which has seen an extreme economic slowdown followed by a rapid recovery of vehicle sales.

• Second is the ongoing and ever-increasing demand for consumer electronics, which are being led by consumer demand for smaller, more efficient hardware that, in turn, significantly decreases the lifecycle of components before obsolescence.

• Finally, there are the ongoing issues related to elongated lead times for components that have resulted from the effects of the COVID-19 pandemic.

Together, these issues have created a market “perfect storm” chip shortage that is seeing automotive, consumer electronics, healthcare, and even aerospace industries competing against each other for the same limited chip supply. This in turn puts chip manufacturers in a very difficult position of having more customers than they are capable of maintaining.

“Right now [automakers] are competing in the supply base with phones, and notebook computers,” said Willy Shih, professor of management practice in business administration at Harvard Business School. “Apple will sell more iPhones, in the first three months of this year than all the automakers combined will sell vehicles in the whole year. So then if you’re a semiconductor maker who’s the more important customer?”

As this chip shortage crisis continues to make headlines, the coming months are going to see industry experts and lawmakers alike enter into discussions on how to address it. An executive order was recently passed in the United States. In concurrence with action that may stem from these sorts of discussions, it is equally important that OEMs take a long look at their own supply chains and consider what can be done internally to avoid future disruption.

A Partstat inventory management solution offers one such path forward. By having Partstat step in to purchase inventory on their customer’s behalf in a single bulk purchase at the beginning of the production process, the manufacturer will never have to enter the volatile market more than once. Additionally, without having to dip into any upfront working capital — a precious commodity in a market still recovering from the COVID-19 pandemic — Partstat customers have the unique ability to use that capital to expand infrastructure, retain talent, or even expand their workforce at a time when competitors are implementing cost-cutting measures.

More details on the chip shortage crisis are to come, but manufacturers don’t have to wait to start making changes that will effect short and long-term profits now. The sooner changes are made, the quicker benefits can be realized.