Product shortages have been a steady pain point for businesses and consumers, throughout the COVID-19 crisis. From grocery stores to big-box retailers, hardware suppliers, and more, products that are typically easy to find have been hard to come by – with some items being nearly impossible to track down.
Semiconductors may be the scarcest of them all. Otherwise known as an integrated circuit, or “chip” for short, the semiconductor is a special component that plays a unique role in dozens of manufacturing processes and consumer technologies, both big and small. Whether in motor vehicles, video gaming consoles, laptops, smartphones, scanners, or even many smart kitchen appliances, semiconductors serve as the nerve centers for the electronics people use every day. By conducting electricity – made possible through silicon – the semiconductor is a material that essentially makes modern conveniences possible.
However, due to a combination of factors, the semiconductor industry in general – and semiconductor manufacturing in particular – has been plagued by one supply chain issue after another. These issues have disrupted numerous manufacturing processes that rely on semiconductor technology for product functionality. As noted by the Department of Commerce, semiconductor fabrication in the United States and abroad was problematic before anyone knew about the coronavirus, never mind when the pandemic began wreaking havoc.
But why? How did the chip shortage materialize? How long is it projected to last? What are producers doing to enhance semiconductor device output and optimize supply chains?
At Inspirage, we are in the business of helping organizations make their supply chains more agile and adept and preparing them to meet disruptions head-on. We do this by digitally integrating their enterprises with Oracle Cloud solutions and, this was something we helped an international semiconductor fabrication equipment manufacturer achieve. But before we get into the particulars, let us examine how the semiconductor shortage came about, what is involved in the semiconductor manufacturing process, the growth in demand for integrated circuit technology, and what producers are doing to address their supply challenges.
How did the semiconductor shortage develop?
Much like the layered nature of supply chains themselves, the dip in semiconductor availability cannot be traced back to one single thing but rather a combination of factors. However, at the core of any shortage, is a growth in demand, which the chip industry has encountered. Indeed, according to the Commerce Department, the median demand for chips in 2021 was 17% higher than in 2019.
The natural response to an increase in demand for any product is to enhance output, but this is something semiconductor chip manufacturing centers have had trouble doing. In 2019, the median inventory for semiconductor products was 40 days, the Commerce Department reported. But in 2021, the median supply of computer chips fell to just five days, leaving factories vulnerable to shutdowns.
Why have chip makers been unable to increase semiconductor production?
Just as semiconductors allow tech products to perform a wide variety of capabilities, chip manufacturing is somewhat labyrinthine in nature. For instance, for silicon to conduct electricity, it requires other constituent elements and materials, such as silicon dioxide, phosphorus, gallium, and boron. These charge carriers are added with special semiconductor manufacturing equipment, like capacitors and substrates. This component of the fabrication process is called doping.
As the Commerce Department has reported, however, the semiconductor industry was struggling back in 2019 to obtain some of the equipment necessary for semiconductors to achieve the appropriate level of electrical conductivity through doping. These production and semiconductor manufacturing difficulties set the stage for the pandemic shortages. The coronavirus’s novel nature – and the pandemic’s reaction to slow the spread – both reduced semiconductor production and ramped up demand.
Factories around the world shut down
At the start of the pandemic, little was known about the virus regarding how it spread and from where it originated. Two years later, some of these questions remain unanswered. What was clear was the contagiousness of the disease, as infection rates soared almost immediately. In an attempt to “flatten the curve,” scores of businesses worldwide reduced their operations or closed their doors entirely.
Among those businesses were several chip developers throughout much of the Asian continent, where a considerable portion of the globe’s semiconductor supply originates. The Wall Street Journal points out that Taiwan, South Korea, China, and Japan account for 75% of global semiconductor production capacity. It didn’t take long for chip developers in Silicon Valley and other parts of the U.S. to follow suit.
Lockdown measures intensified consumer demand
When businesses closed their offices to in-person work, it forced millions of employees to work from home 100% of the time. In the early stages of the coronavirus lockdown, 63% of Americans were working in remote environments, according to a Gallup survey. This resulted in a surge in demand for products that contain semiconductor technology, such as desktop computers, laptops, Wi-Fi infrastructure, and routers.
Additionally, with more people spending their free time in the comfort of their homes, demand for high-definition televisions and gaming consoles skyrocketed. But with semiconductor factories working with skeleton crews, the growth in demand led to shortages for products that require integrated circuit technology to operate appropriately. Many of those hard-to-find items continue to this day, like the PlayStation 5 and ultra-high-definition television sets from manufacturing giants like Samsung and Sony.
Highly fragmented industry structure
Another challenge contributing to the shortage relates to how the semiconductor industry is structured. As illustrated by Bob Krysiak, an independent tech industry consultant, the semiconductor sector is fairly evenly distributed. There isn’t a single chip developer or material provider that owns more than 15% of the market. This even-handedness is a good thing in some respects because it helps to increase competition and encourages manufacturing entities to embrace cooperation. But at the same time, this setup leaves much room for error. Each manufacturer is reliant on the next to complete the processing steps on their contribution to the process as a whole (e.g., silicon dioxide, wafer material, silicon, doping equipment, wet etching, wafer fabrication, and silicon crystal).
The siloed, independent nature of the semiconductor manufacturing industry parallels a challenge that a client of Inspirage’s was facing. Cohu, an international semiconductor equipment manufacturer, had acquired several other businesses, each with its unique manufacturing processes in place. Because each organization had its way of communicating, workflows, and operational norms, it prevented the company from producing collaboratively as a unit.
They turned to Inspirage to put the right pieces in place to support more visibility and ongoing growth, flexibility, and enhanced productivity. Company leaders wanted to simplify their global footprint by bringing every department, business unit, and entity together under a single platform. Since our client already had Oracle Cloud Human Capital Management (HCM) and was pleased with its results, it made the most sense to make the Oracle Cloud the default platform for supply chain, ERP, and product lifecycle management.
The company’s transformational ERP project has unified all the disparate teams and business units acquired through acquisition under a single Oracle Cloud solution. The visibility, planning, resourcing, and collaborative benefits have been tremendous, helping the business operate more efficiently, minimize supply chain delays, and boost profitability globally. The result: an integrated set of business processes leading to accelerated product releases which are essential in an economy in dire need of more availability of semiconductor devices.
What is the semiconductor industry doing to increase supply?
While the COVID-19 mitigation measures are gradually dissipating, which should help to increase work output, Bloomberg reports that the chip shortage is projected to continue for the remainder of 2022 and into 2023. In the meantime, chip manufacturers are making many strategic investments to build semiconductor supply. For example, Intel recently announced building two new semiconductor manufacturing factories in Ohio, part of a $20 billion project. But it will take years for those factories to start pumping out more products.
Manufacturers are also investing in cloud ERP solutions to help improve overall performance and output. And many, like Cohu, have selected the Oracle Cloud as their preferred solution. This cloud-based enterprise resource planning platform can set your business up for growth and efficiency by smoothing out formerly rough production processes and turning weak business points into strengths. The tenured team at Inspirage would be delighted to help you get started.
Contact us today to learn more about how we can help your business prepare for supply chain disruptions like those facing the semiconductor industry. Check out our blog section for related articles on supply chain challenges and Inspirage’s solutions.
