In March 2021, Gartner published a report on how the semiconductor shortages must drive greater collaboration for resilience, with a focus on the affect the shortage had on the automotive industry. As we enter 2022, some of the issues pertaining to the supply chain visibility, sourcing complexity, lack of collaboration and use of older technologies remain challenges which still impact automotive and other industries, which bore the brunt of this global shortage. Per Gartner, the sheer volume of vehicles which were projected to be delayed was around 1.3 Million units. This massive backlog in production indicates serious challenges in supply chain strategy and material management at the OEM level.

Decoding the Automotive Industry Chip Shortage

In order to fully understand how this massive shortage of semiconductors came to be in the automotive industry, it is worthwhile to understand the complexity of the supply chain. Then we can move to the events which led to the past and ongoing chip shortages across the globe.

The automotive industry prides itself on a JIT or Just in Time sourcing model, where they have contracts to source requisite amount of sub-assemblies as needed from Tier 1 suppliers. The Tier 1 suppliers in turn buy automotive-grade chips from specialty producers who constitute the second tier of the automotive supply chain.

The complexity creeps into the supply chain as Tier 2 suppliers, due to investment constraints involved in setting up new fabs, contract out the bulk requirements to the oligopolistic ecosystem of massive foundries, which constitute the third sourcing tier. Tier 3 suppliers typically located in Asia are producing chips for the entire market, and automotive supply is a mere part of the portfolio for them rather than a business priority.

Automotive semiconductor ecosystem (Source: Gartner)

With the COVID pandemic came forced shutdowns, which led to reduced demand from the automotive sector. When coupled with the JIT model of sourcing and lack of projected orders, Tier 3 suppliers prioritized production of chips for industries which were experiencing a boom in demand even during the pandemic: everything related to 5-G devices, gaming and networking took priority over the automotive industry.

As the lockdowns eased and demand bounced back in late 2020, automotive OEMs started scrambling for sub-assemblies and chips to no avail, as their supply lines were already diverted. To add insult to injury, trade policy decisions and the political tug of war among consumer and supplier nations led to a further delay in getting essential chips from Tier 3 suppliers, which because of their size and capabilities dominated the flow of goods, rather than the OEMs manufacturing the automobiles. This began the domino effect of OEMs falling behind on their production schedules – and the trend continues even today.

Tech on wheels

Other equally important contributing factors involve all-electronic content vehicles: everything from microcontrollers for engines and transmissions to sensors for collision avoidance systems, integrated circuits for power management and displays/infotainment systems. The chips used in the automotive industry are mostly a product of older technology, on smaller wafer sizes and larger production lines, which implies that while the number of electronic components and microchips used in vehicles has increased, the core technology involved in the design and manufacture of these chips hasn’t yet graduated to the most modern tech. Second, the visibility and collaboration OEMs have with second and third tier suppliers is virtually non-existent. When there is a drop in their demand, lower tiers of the supply chain might feel as if they were left without any options. 

Steps being taken to handle the crisis

Gartner highlights a number of measures automotive industry OEMs must undertake to ensure they not only come out of the crisis, but are able to prevent it in the future. With projected sales of $67 billion plus, the semiconductor requirement in the sector is only going to balloon, but in order to get actual product a lot needs to be done.

Short Term Steps

In the short term, OEMs have limited options, as a crisis like this indicates the need for a strategic and fundamental reconfiguration of the entire supply chain. However, Gartner suggests OEMs should at the very least start closer monitoring of Tier 1 suppliers. They should do the same for the next tiers and start collaborating with these lower tiers to gain better visibility, and thereby better control. Other action items include political lobbying, and strategically choosing which models to manufacture, considering that the shortage will last for a longer duration are the other action items.

Long Term Steps

In the long term, automotive industry incumbents need to examine what went wrong and then decide what needs to change fundamentally to create a healthier ecosystem, as opposed to the OEM driven non-collaborative approach. We examine the long term solutions proposed by Gartner from a Platform perspective, combining the need to reinvent the supply strategy with digital transformation initiatives which should happen in parallel to achieve a truly transparent, collaborative and resilient supply system.

From a supply chain perspective, OEMs need to re-examine the JIT philosophy and perhaps create a hybrid sourcing model where essential components are kept at a pre-determined minimum stock level, at the Tier 1 supplier level or at lower levels as agreed. Subsequently, the technology and design of chips forming the electronic sub-assemblies needs to be re-evaluated and graduated to a level where chip manufacturers find it feasible to manufacture the requisite chips using their existing set-up and wafer size, making the investment for additional capacities less risky and avoiding reversion to otherwise obsolete production technology just to add capacity for the automotive sector. Better utilization of chips in production, multi-site chip sourcing, deeper tier visibility and supply chain diversity need to be brought into the strategy mix to enable a sustainable and resilient value delivery system.

The Platform Perspective

An extremely critical aspect of the supply chain restructuring is the use of Industry 4.0 digital tools and solutions to help implement a strategic vision and make it a grass-root reality. The modern IoT enabled MES data platform forms the very basis of digital transformation and in this case supply chain transparency and collaboration. 

Identification of Bottlenecks

The MES application controls and orchestrates the entire manufacturing process, which means it is the source of all operational data. In order to understand which sub-assemblies need to be sourced just-in-time and which need to be stocked at their own or supplier’s end, the need to identify bottleneck process facets and critical material inputs is essential. The MES delivers this data along with past context and future projections through application of AI and Advanced Analytics on existing and past process data. This analysis helps process owners plan production and inventory needs better and create the hybrid sourcing model which may help overcome future fluctuations in both demand and supply.

Optimum Oversight

The MES platform can also be the ideal tool for optimizing chip utilization. The application monitors both material movement and consumption across manufacturing facilities and supply chains, as it integrates with automation and equipment level applications at the plant level and with supply chain applications within and beyond the OEM’s operation. This allows the MES to measure, monitor and analyze the way in which each and every material input is being consumed and suggest optimal utilization paths. With this level of oversight, which extends to each and every individual inventory component, OEM’s can better utilize existing inventories and safely project future consumption patterns.

Design for the Future

The MES integrates with PLM applications, enabling streamlining of the design process. When OEM’s try and graduate their technology to accommodate production capabilities of their suppliers, MES plays a vital role in simulating how production itself adapts to the new technology and whether or not a drastic remodeling of any process facet would be needed to accommodate the updates that happen in the electronic components. The MES not only completes the feedback loop of trials and experiments performed in actual production conditions, VR-driven digital twins help model the process simultaneously to provide an optimal production path for new designs and technologies, which means faster TTM and more resilient supply chain structure.

Collaboration in DNA

Most automotive OEMs have multi-site manufacturing operations, with a common MES platform orchestrating. In this scenario, the inherent complexity in managing and rationalizing supply chain relationships and dependencies is reduced. The tiered collaboration advocated by Gartner can happen when the right MES is in place, as it can not only help streamline and create supply redundancies based on supplier and component performance, it can virtually automate the act of sourcing across multiple sites and vendors based on both pre-determined and real-time supply chain inputs. Supply chain partners gain transparent sourcing orchestrated by the MES, and OEMs benefit from real-time MES control and demand/projection based planning, which leads to a better supply ecosystem.

Finally, lessons learnt from the semiconductor shortage and subsequent proposed response indicate one thing: the old norm no longer exists for any industry and organization. The market today is governed by chaos and disruption, and only manufacturers who are willing to create a hyper-digital, fully-integrated, self-orchestrating, fast-responding and collaboration-centric supply chain will survive, for which having the MES platform is a priority.