Building a Resilient Semiconductor Supply Chain

Oct 21, 2021
High-Tech | 12 min READ
For the entire semiconductor fraternity, the whole of the year 2020 probably went into defining the right logistics nodes to serve the burgeoning demand of semiconductors across the globe. Considering this as future learning, semiconductor companies need to identify different ways of moving parts to assembly in the shortest possible time. To happen, they need enhanced visibility into their integrated supply chain networks which can identify, react and control the disruptions. By deploying advanced visibility tools such as IoT, mobility, and AI, companies can gain visibility into the supply chain, determine the critical components, supply origin, and alternate sources, thereby creating a resilient supply chain that can wither any unforeseen external pressures.
Nitin Jindal
Nitin Jindal

Digital Partner

CMT Vertical


The State of Semiconductor Industry
Top Strategic Imperatives
Semiconductors are the fourth-most-traded product in the world after crude oil, refined oil, and cars. Semiconductors, being the highly complex products to design and manufacture, capture a truly global supply chain in the literal sense. To give you a sense of its vastness, the US leads research and development-intensive activities such as electronic design automation (EDA), core intellectual property (IP), chip design, and advanced manufacturing equipment. At the same time, East Asia is the hub of wafer fabrication, and China has been the undisputed leader in assembly, packaging, and testing. At the same time, all these countries are interdependent for the movement of material, equipment, IP, and products around the world to the optimal location for performing each activity.
A fully 'self-sufficient' local supply chain in each region to meet the current levels of semiconductor consumption would require at least $1 trillion in incremental upfront investment, resulting in a 35% to 65% overall increase in semiconductor prices and ultimately higher costs of electronic devices for end-users. The high geographic concentration of manufacturing capacity has been a great area of concern for the resilience of the semiconductor supply chain. To achieve a well-balanced supply chain network, the semiconductor industry needs nuanced, targeted policies that strengthen supply chain resilience and expand open trade while assessing the needs of national security. Three clear imperatives demand a resilient semiconductor supply chain. Let's explore each one of them.
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Diverse demand patterns
Back in the 2000s, the semiconductor market was driven by data processing (PC, enterprise data centers) and communications (mobility, network rollout), with the primary supply chain model being the Build-to-stock. Over the years, the fast-paced use of semiconductors in almost every hi-tech product basket, smartphones, electronic appliances, and the automobile has catapulted the demand dynamics.
Lead time reduction across the global value chain is critical for semiconductor companies to optimize logistics costs and improve speed to market. Keeping sufficient backup inventory of key parts and safety stock can reduce the financial impact of disrupted supplies and help companies meet sudden spikes in demand.
Geopolitical dynamics
The semiconductor industry is the most geographically dispersed value chain, making it highly complex. The process takes more than 100 days between manufacturing, assembly/packaging, and test sites. The semiconductors cross international borders 70 or more times and eventually make the equivalent of three full trips around the world. The rising global tension is forcing many semiconductor manufacturers to lose access to the large Chinese market, which consumes more than 50% of all semiconductors, both for imports and exports.
Demand shocks are becoming apparent as the smoothening effect across geographies ceases to exist. On the supply side, these dynamics push the semiconductor players to move from global collaboration to self-sufficiency and allied strategies. Such changes will not only impact the industry's ability to utilize the comparative advantage for productivity and cost efficiency, but they will also intensify supply shortages. To adapt to geopolitical changes, entities must focus on redesigning micro supply chains for critical components rather than applying one-size-fits-all supply chain procurement models.
Fragmented product supply chains
A semiconductor manufacturing capacity involves complex nodes such as varied wafer sizes (100mm, 150mm, 200mm, 300mm, and the futuristic 450mm) and processes (from 350nm to 5nm), requiring a specific supply network. If the semiconductor industry had continued on the yesteryear growth path, such fragmentations wouldn't have been a problem for companies. The moment new-age technologies started challenging the expanse of semiconductors, the need for a resilient supply chain became evident.
A collaborative planning approach across the semiconductor product design, manufacturing, and test value chain can help the industry manage demand-supply shocks. To simplify the productization and reduce engineering development cycle time and WIP (wafer-in-process) requirements for NPIs, companies need to expand their platform-based product design across families of products and generations, using the open sharing of technology roadmaps between customers and chip designers.
Why Supply Chain Modernization is the Answer
The advent of Cloud, 5G deployment, connected vehicles, and digitization have collectively created 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, which is way behind 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. Digitalization in the supply chain helps companies define micro supply chains and apply true segmentation to deliver greater value versus a 'one size fits all' supply chain strategy. The digitalization journey also assists companies in determining if the inventory strategy should be 'just in time' vs. heavier assets-on-hand, as highlighted by the KPMG study. Let's take a look at the benefits of building a modern supply chain.
Why a Resilient Supply Chain is Crucial to the Semiconductor Industry's Success
'Cycle Time Drives Everything' is an apt adage to highlight the importance of product delivery on time. It is particularly crucial in the ruthlessly fast-paced semiconductor manufacturing industry due to tremendous competition in the market. Automation was a boon, and a necessity when wafer size increased from 200 mm to 300 mm. Recent research published in IEEE stated that an optimized strategy for batch preparation and dispatch showed an overall 30% reduction in total dispatch time.
A McKinsey study observes that, on average, companies lose 33% of the PAT when the product shipment is delayed by six months, as compared to the losses of just 3.5% even if 50% is overspent product development. With each passing day, manufacturers learn that the production and development time and faster GTM time required are the core drivers for success than the costs invested in these activities. This makes responsiveness an extremely crucial imperative towards building a digital supply chain.
The semiconductor value chain has multiple tiers, and any decline or increase in demand at each tier affects the entwined supply chain. As semiconductor manufacturing requires long cycle times with more than 90 days for high-volume manufacturing (HVM) end-to-end process and higher for product development, any unexpected disruption in the local supply chain can interrupt months of planning, ultimately resulting in huge cost implications.
Advanced planning approach across the semiconductor product design, manufacturing, and test value chain can prove to be a great aide in managing such unforeseen demand-supply shocks. Additionally, it empowers players to gain visibility into technology development, product development, and production capacity and aids in identifying any abnormalities that need immediate attention.
The semiconductor value chain is dependent on a large number of materials and equipment suppliers spread across the globe. While the industry has adopted supplier relationship management (SRM) practices, these programs don't prove beneficial to a greater extent owing to a broad expanse. Gaining visibility into such an extended hierarchy has been challenging for most industries, and it's especially a nightmare for semiconductor companies.
Innovative digital and machine learning solutions involve multi-tier, multi-factor supplier sensing, boost visibility into their supplier base, drive real-time decision-making for optimized capacity, and proactively manage supply chain risks. These practices are expected to aid the industry manage the business cycles well.
Why a Resilient Supply Chain is Crucial to the Semiconductor Industry's Success
What's Hindering Supply Chain Modernization of Semiconductor Industry?
Traditionally, the semiconductor industry's bulk of demands on the supply chain used to come from smartphones and industrial equipment, which made monitoring supply chain inventory, manufacturing, sales, and even research and development a predictable task. The dynamics have completely transformed with the advent of AI, the IoT, and autonomous vehicles, necessitating semiconductor firms to be more flexible, focusing on R&D, increased functionality, and shorter, more efficient production times. One of their biggest concerns facing the semiconductor supply chain is that the speed of new technology introduction exceeds the research and development timeline by at least 2-3 times.
Additional manufacturing steps like assembly and testing and a blended model are needed for front-end (FE) outputs like wafers or dies, making supply chain complex, efficient capacity planning even more difficult. These FE cycle times comprise 6 to 8 weeks, while the back-end (BE) cycle only requires 1 to 2 weeks, which entails postponing inventory at various manufacturing stages.
Additionally, no single semiconductor company can be self-sufficient when it comes to materials involved in manufacturing, which requires them to deal with several internal & contractual manufacturing sites and distributions centers. Such a complex web of the nonconnected network makes supply chain visibility difficult, leading to excess inventory growth and poor customer service.
Then there are data latency issues arising out of data becoming stored in multiple disintegrated systems. In the absence of modern supply chain execution tools, semiconductor companies will find it impossible to manage such a complex value chain. Moreover, a collaborative effort is needed to develop an interactive, organic supply chain to meet new demands for greater capacity, performance, and manufacturing costs.
The Pressing Need for Having a Supply Chain Modernization Strategy in the Semiconductor World
Due to tariff wars, pandemics, or extreme weather events, global supply chains are vulnerable to disruption. On average, significant disruptions in production now happen every 3.7 years. In such disrupting scenario, understanding the market demands is extremely crucial. Though semiconductor supply chain teams are equipped with resources to predict the market demands, which provide information to make a better decision on inventory management, manufacturing orders, and supply, the pandemic has further accentuated the need for a tech-enabled supply chain.
The future decision should be based on advanced tools that can capture external factors that severely impact the semiconductor supply chain. Semiconductor supply chain planning should leverage the power of data analytics than just depending on forecast or market intelligence. The digital supply network offers a new degree of resilience and responsiveness, enabling companies to provide customers with the most efficient and transparent service delivery. By deploying new-age tech tools such as advanced analytics, AI, Machine Learning, IoT, the journey towards supply chain modernization will not just be enriching. It will also create an inclusive value chain for semiconductor companies to drive value.
How to Build Your Supply Chain Modernization Strategy?
The pandemic has taught companies the real meaning of being agile and adaptive, and no other industry could best exemplify the real importance of being nimble-footed than the semiconductor. When the entire supply was disrupted during global lockdowns, some semiconductor companies made it their goal to reach their customers through rerouting components and flexing production capacities. But to make it happen, there needs to be visibility into the entire value chain. This necessitates robust digital systems as well as the analytics capability to run scenarios based on different responses.
Digitization helps companies enhance resilience without incurring unsustainable cost escalations. This is the number one compelling reason for semiconductor companies to drive supply chain modernization strategy. While taking on a digital path, semiconductor companies need to focus on these key parameters... Agility makes the supply chain resilient; developing metrics for measuring the organization's resilience; running scenarios leveraging modern supply chain resiliency solutions designed to assess weak links in the supply chain, and finally establishing best practices to drive growth.
Once semiconductor companies have mapped out their supply chain, they can implement solutions that will drive results in the short term and the long run. In this journey, Artificial Intelligence and IoT used in predictive analytics and forecasting should be the companies' top priorities to get ahead of customer demand for driving significant supply chain value. In all of these, semiconductor companies also need to optimize the human-technology partnership. Digital platforms and control towers deliver a personalized, connected command center of data, key business metrics, and events across the supply chain, greatly improving the user experience.
Such intelligent supply chains are better equipped to understand demand signals and rapid changes based on consumer behavior, weather, and seasonal surges. When organizations can get real-time insights on the possibility of an unforeseen disruption and on which products, they have the required lead time to execute avoidance and mitigation strategies immediately, determining demand by buying up inventory, controlling inventory allocations, and more. More importantly, such a resilient supply chain will avoid any cascading effect on interdependent industries.
How Technology Will Drive the Execution of the Strategy?
An HBR study pointed out that it can draw substantial benefits by investing in supply chain modernization for 12 to 24 months. How can companies achieve the feat? Well, the secret lies in focusing on the unified view of demand. They need to shift from a 'one-size-fits-all' supply chain strategy to a 'segmented strategy.'
Additionally, firms need to create a single plan to continually balance supply & demand and identify & respond to deviations or disruptions. If executed well, these initiatives lower supply chain costs and higher revenue because of fewer stock-outs and improved service levels. Smart execution encompasses three automated capabilities
  • The real-time capture of internal and external data revealing potential deviations from the pre-defined parameters, supply disruptions, or changes in demand.
  • Artificial intelligence identifying the potential impact of the variables on supply chain performance.
  • Analytics-driven optimization determining the best response, considering various trade-offs and objectives.
In short, a comprehensive, automated approach allows companies to redefine their supply chain strategies and respond quickly to deviations from the plan. Additionally, with the semiconductor supply chain capturing real-time information, companies can enhance collaboration among their key partners, which is a prerequisite to ensure a complete visible end-to-end value chain.
Why Is This the Right Time to Execute Your Strategy?
The COVID-19 pandemic has thrown open the loose ends that the semiconductor industry faced in managing global supplies. While companies were quick enough to fix the loose ends and keep their supply chains moving, in the long run, semiconductor companies will need to carve a full-proof supply chain strategy that can sustain any unwarranted external pressures in the value chain. For that to happen, companies MUST start investing and planning their digital supply chain strategy NOW.
There can be no better time than TODAY to execute the right supply chain strategy, which is beneficial to your business goals and offers you an edge over your competitors. Taking a cue from the US policymakers' thrust on revamping their semiconductor supply chains to become the global leaders, it's time for other semiconductor players to up their game by implementing next-generation technology tools.
With the adoption of tech tools such as connectivity (5G/6G), IoT, blockchains, AI, and ML, the semiconductor industry and its supply chain is set for a huge transformation and ride global growth. As they say, 'The Winner Takes It All,' semiconductor companies need to win over their competitors by building a resilient supply chain. Companies that can anticipate and flex around changes in supply and demand will be able to transform an unpredictable and dynamic market into a competitive advantage.
The time is ripe for the semiconductor players to plan their supply chain digital strategies to enhance visibility and transparency into the system and bring the right demand-supply equilibrium.
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