The complexity gets exacerbated with the needs of modern product giants such as Apple and Samsung, whose dependencies for every product launch lies solely on semiconductor suppliers; one can imagine the amount of stress a supply chain needs to deal with.
Supply-chain performance is critical in the semiconductor industry for customer retention. McKinsey's analysis of one semiconductor company revealed the outcomes of delayed deliveries on its revenues fluctuations. The company's revenue dropped by 28% for customers whose on-time delivery (OTD) rate was between 0% and 40%, whereas it dropped only by 2% when the OTD was 80% or higher.
The analysis emphasizes the direct correlation between supply chain inefficiencies and customer retention. The theory of Right Product, Right Time, and Right Location is what the semiconductor supply chain aims to imbibe and improve customer satisfaction.
Semiconductor Supply Chain Issues
Semiconductor manufacturing is a complex global intertwined ecosystem, making its supply chain vulnerable to macroeconomics, geopolitics, and natural disruptions, which we saw during the onset of the COVID-19 pandemic. Semiconductor companies are spread across the length & breadth of the global geography, having country-specific and international laws corresponding to health and environmental regulations.
An HBR study highlighted that the chip shortage had been a ticking time bomb due to a few (unrelated) supply-chain disruptions. Then came the challenge of global transportation, the onset of the pandemic resulted in severe shortages of shipping containers which ultimately moved customers to air freight. This resulted in cost escalation due to premium pricing by air cargo operators, who were also few in numbers due to global restrictions in place.
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The Effect of Pandemic on the Semiconductor Supply Chain
Kearney's study highlighted that despite projections of a downturn at the beginning of the COVID-19 pandemic, the semiconductor market witnessed growth by 7% in 2020. The trend seems to continue with the estimated growth of 11% in 2021. Reflecting the positive sentiments, the market is expected to grow for the next five years, with the industry expected to generate $650 billion in revenue by 2025.
Production lines independent industries such as automotive and computing hardware are still under the clutches of the pandemic, which is stretching the supply side. Though overwhelmed to strike a balance between the demand and the supply, the fabrication equipment industry is profiteering from the situation by increasing prices by 30%.
The Growing Need for Digitalizing and Modernizing Semiconductor Supply Chain
The advent of Cloud, 5G deployment, connected vehicles, and digitalization have collectively created a never-seen-before demand for high-performance computing, and the most sought-after semiconductor market is also in the race to join the digitalization bandwagon.
According to the 16th annual KPMG global semiconductor industry outlook, 50% of industry leaders say COVID-19 has accelerated their digital transformation. Yet this pace lags the tech sector overall (89%) and other industries (81%). Data insights are a critical component of enhanced supply chain resiliency. Using technology and applications to collect granular data and metrics at all supply chain points enables semiconductor companies to make faster, data-driven decisions.
Going ahead, digitalization in the supply chain will also help companies define micro supply chains and apply accurate segmentation to deliver greater value versus a 'one size fits all' supply chain strategy. The digitalization journey would also assist companies in determining if the inventory strategy should be 'just in time' vs. heavier assets-on-hand, as highlighted by the KPMG study.
Top Technology Imperatives to Revamp the Semiconductor Supply Chain
Collaborative Planning Using Cloud
The semiconductor industry is a significant global business and enhancing supply chain collaboration with leading customers is paramount in improving the overall supply network performance. In line with this, collaborative planning using the Cloud helps develop and deploy a multi-enterprise supply chain system that synchronizes material flows of individual components throughout the extended supply network and reduces uncertainty, strengthens customer satisfaction, and maximizes revenue.