The semiconductor industry must view the last two years' logistical challenges as a wake-up call that drastic action is required. In this article, we will look at the obstacles they will face and the factors that will help them succeed.
The first is an almost unparalleled rise to prominence. Powered by the proliferation of smartphones and innovative technologies like AI, Internet of Things (IoT) and 5G, semiconductors are now the 4th most traded product in the world; McKinsey claims it will be a trillion dollar industry by 2030.
Not only that: semiconductor companies have become increasingly profitable over the years, with some companies projected to achieve 50% profit margins in the coming years. At the end of 2021, KPMG’s Semiconductor Industry Confidence Index was at an all-time high.
When COVID-19 hit, many businesses saw a dramatic dip in sales. The automotive industry lost 80% of its buyers, leading to a sudden drop in demand for semiconductors. When demand shot back up in 2021, semiconductor companies found themselves unable to cope - with shipping, transport and labour severely limited. The result? A global semiconductor shortage which some claim will last into 2024.
It’s estimated these shortages have cost the global economy more than $500 billion between 2020 to 2022. But worse than the immediate financial impact is what these shortages have revealed: semiconductor supply chains are not fit to purpose. A number of clear vulnerabilities have been exposed, and fixing them is more than a matter of simply catching up with order backlogs.
Semiconductor companies’ future depends on finding a way to merge these two conflicting stories.
They must take the last two years’ logistical struggles as a signal that drastic action is required. Because demand for semiconductors is only going to grow, those that are able to get them to end-users more efficiently will win the lion’s share of growth in the coming years. In this article, we explore the challenges they face in doing that and which factors will help them succeed.
The semiconductor value chain is unusually complex, relying on multiple materials and equipment suppliers stationed across the globe. This makes efficient management of the supply chains exceptionally difficult, leading to excess stock and routine bottlenecks. Freight management is a good example here. From port congestion to container shortages, freight problems can lead to increased lead times and longer shipment delays. Other factors - such as humidity, shock impact and theft - also impact the supply chain. But without precise data on the progress of shipments and GPS tracking, leaders are often left operating in the dark.
The net result is a lack of insight upon which to base key decisions. With truck markets fragmenting and shipping container costs spiraling, leaders need to be able to see what their options are and compare different courses of action. But doing so requires centralized, reliable real-time data. So while 83% of companies say they are more aware of the risks associated with transport blockades than before the pandemic, they still need to find the right technology to facilitate proper visibility.
The pandemic perfectly demonstrated how disruptive a single event can be, producing cascading throughout entire semiconductor supply chains. This points to the vital importance of supply chain flexibility - the ability to adapt material purchases, production levels and transport capacity to match demand. But recognizing this proves extremely tough. Typical lead times can already exceed four months for products that are already well established in a manufacturing line; increasing capacity by moving a product to another site can add six months to that, while switching manufacturers could add another year or more. Not to mention that some chips can contain manufacturer-specific intellectual property that may require alterations or licensing.
KPMG notes a problem with overreliance on single partners within semiconductor supply chains. Whether its material supplier, manufacturing base or freight providers, semiconductor companies need access to multiple partners in order to ensure their supply chains are resilient. Yet gaining access to multiple partners is not so straightforward, especially when many brokers have hidden biases. This means leaders are tasked with either navigating multiple highly complex markets for themselves or finding a partner that can connect them with providers with true impartiality. Another problem is trust: flexibility requires companies to have multiple providers they are confident will comply with regulations. This means they must either have an extensive due diligence process, or find a partner who they can outsource this responsibility to with genuine transparency.
Shortages have cost semiconductor companies a lot. Taiwan Semiconductor Manufacturing Company (TSMC) set aside $44 billion to address the problem this year, while Intel announced it would spend $20 billion on a new chip making factory. But the costs don’t stop at businesses’ bottom lines. Earlier this year, Samsung announced that it was raising the cost of its semiconductors by 20%, citing the growing expense of material and logistics. A month later, Taiwan Semiconductor Manufacturing Company (TSMC) said it would raise its prices a further 6% in 2023. These are just a few examples of supply chain problems resulting in price hikes. While consumers may be willing to absorb rising costs, there is a clear competitive advantage to those companies that are able to maintain their costs and offer users a better deal.
To illustrate the challenge, let’s look at freight. Shipping container prices have quadrupled - reaching $15,000 per container - before dropping to levels some read as indicators of a recession. This shows just how much costs can fluctuate - and how much a single provider decision can impact your bottom line. Many semiconductor companies don’t get enough quotes for their freight, or don’t receive them fast enough. The result is they make non-optimal decisions that lead to unnecessarily high costs.
A number of trends have made semiconductor supply chains more complex. The first is a shift in the products being produced: a recent survey found that the biggest product challenge semiconductor companies face is the complexity of customer requirements. This has led 64% of large companies and 38% of smaller ones to say they are realigning their business towards end markets - such as automotive, communications and consumer electronics. As a result, companies are having to rethink the way their supply chains are structured.
The second trend is transport. Huge investments are being made to bring key semiconductor processes back to the USA; Samsung has invested $17 billion to build a Fabrication Plant (FAB) in Texas, while Intel has dropped $30 billion on a new FAB in Arizona and TSCM plans to spend $12 billion on their own Arizona factory. Building these FABs means a lot of Capital Equipment moving around; sourcing the requisite freight creates complexity - and a potential for overspending. The same problem will rear its head when the factories are built: how are they going to handle the massive volume of chip movements? Semiconductor companies will struggle to navigate this complexity; it will require the right combination of people, processes and technology. But they will also need help managing freight suppliers - likely in the form of a spot-buying tool.
If spend is any indicator, leaders believe digitization is the answer to most of their supply chain woes. Investment in supply chain technology has increased 5x since 2020, with companies introducing everything from automation software to Internet of Things (IoT) solutions.
The hope is that digitization will enable greater visibility and control over supply chains:
But making this a reality has proven more challenging than many suspected. Nearly three out of five semiconductor companies have already begun their digital transformation, yet over half of those are modifying their transformation process as they go. The message is clear: they know digital is the answer, but they’re not certain which solutions will best serve their needs.
Introducing technology to your supply chain is costly and time-consuming. But Transportation Management Systems (TMS) are one of the easiest and quickest wins leaders will find.
A TMS will enable semiconductor companies to take complete ownership of their shipping logistics, enabling you to plan, execute and optimize the movement of your semiconductors.
Lower costs: The right TMS will enable you to receive more quotes and buy the cheapest freight possible. Your logistics will instantly become more financially efficient, as well as increasing resilience by gaining access to more partners.
Better visibility: Real-time data on all of your shipments will enable you to better cope with delays or disruption. It will also help you keep customers better informed and increase the overall connectivity of your supply chain.
Reduced complexity: A TMS provides clarity and control, ensuring your shipping process is as streamlined and easy as possible. It will take care of your compliance concerns and boring paperwork, leaving you to focus on growing your business.
Increased productivity: By automating repetitive tasks and increasing visibility, you will ultimately empower your teams to be more productive. They will enjoy their work more, have less stress and be able to make better, more impactful decisions.
According to PwC, 50% of transportation and logistics companies face challenges related to digitalization, with a lack of digital culture and training being companies’ top challenge. No matter how powerful a solution is on paper, it will not be worth implementing if nobody actually uses it. That’s why usability is so important. The best technology is built with users in mind and makes it easy to integrate the new tool into your process.
Successfully introducing a new technology requires buy-in from multiple stakeholders. That generally means being able to show them real figures to demonstrate the value a new piece of technology offers. That’s why measurable outcomes matter. The best providers will be able to quantify the impact of their offering and clearly indicate what level of return you should expect.
As the market for supply chain technology grows, it becomes harder to determine which companies you can really trust. The recent collapse of Kuebix showed how impactful an unreliable partner can be. That’s why service is so important. The best providers will offer complete support around the clock, no matter where you are based.
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