The Bullwhip Effect on the Semiconductor Industry

Mitigating by collaborating 

The COVID-19 pandemic has greatly impacted the global supply chain in many industries. We all remember the toilet paper shortage that occurred in its early stages. Anxious customers began hoarding toilet paper in a shopping frenzy, which led to empty shelves in stores for days. This is a simple example of how sudden fluctuations in demand cause a bullwhip effect. Variations in demand, at the retail-end, tend to dramatically amplify themselves upstream through the supply chain toward the production end. This coordination problem causes inefficiencies such as high or low stock levels, poor customer service, and delays in production schedules. 

This is also true in regards to the semiconductor manufacturing industry. The problem here is not toilet paper shortages, but the astoundingly wide range of items we rely on today that require chips. Due to the chip scarcity, the global automotive industry for example could make five million fewer cars this year than expected, and buying a big SUV could cost at least 20% more than it did last year. Supply constraints on iPads and Macs will cause Apple to lose as much as $4 billion in quarterly sales, and Samsung cited an imbalance between global supply and demand for chips while warning it might delay the launch of its next phone. And the list goes on.

Initially, the pandemic caused a relatively minor decrease in consumer demand – as consumer spending plummeted. Then, some months later, demand for all sorts of chip-dependent gadgets suddenly rose as people set up home offices or looked for electronic diversions. The companies that manufacture these devices then sent a wave of semiconductor orders rippling up the supply chain, which quickly overwhelmed the few fabrication plants that apparently manufacture all of the world’s computer chips. Shortages were quick to follow. Concerned about the chip shortage, all companies are stockpiling chips in order to make it through the crisis. But hoarding further distorts the demand signals that are rippling through the supply chain, making it look like companies need a lot more chips than are truly required to meet consumer demand.

 

The War in Ukraine Disrupting Supply Chains

To further complicate things, the conflict between Russia and Ukraine has exacerbated the semiconductor manufacturing supply chain. 

Neon, a colorless and odorless gas, plays a critical role in producing chips. It operates the highly accurate lasers used to turn silicon — the primary ingredient in chips — into the miniature circuits that make computers operate. Manufacturers use these lasers to etch tiny, delicate patterns onto the glass, transforming a sheet of silicon called a wafer into a sheet of chips. Because these chips are so small and intricate, though, the wavelength of light emitted by their lasers needs to be in exact control. That’s what neon is for. Until recently, the source of neon was mostly Ukraine, where only two companies purify enough neon to produce devices for much of the world. They did until Russia invaded.

The neon shortage is unfortunately only the beginning of the chip industry’s problems. Even if new sources of neon are found, the ongoing war could still lead to a shortage of other crucial supplies used for chips. Russia owns a large portion of the US’s supply of palladium, a metal that’s used in chipmaking. It also provides much of the world’s nickel, a critical material for creating C4F6, another gas used in chipmaking. Helium, another noble gas required for semiconductors, is also in deficit worldwide.

 

Challenge

The reality is that making a single chip takes an incredibly long time. At the same time, building more chip manufacturing plants (or fabs) requires years of engineering and construction and a budget of billions of dollars. Chip suppliers need to carefully plan their expansion, otherwise they risk creating a semiconductor glut in the next few years, which may be followed by another shortage.

 

What can companies do to mitigate the crisis?

Here are some ways through which the bullwhip effect conundrum may be substantially alleviated.

  • Improving flow of communication –  increasing flow of information within the company (top to  bottom, bottom to top) – that way fluctuations in stock are being reported and taken care of on time.
  • Vendor Managing Inventory (VMI) – a supply chain agreement where the manufacturer or supplier takes control of the inventory management decisions for the seller or retailer. In supply terms this means the upstream agent is responsible for the inventory of the downstream agent. This policy can prevent stocking undesired inventories and hence can lead to an overall cost reduction.
  • Adjusting lenient policies on order cancellations and returns.
  • On the B2C side, sellers can offer a constant everyday low prices (EDLP) instead of temporary promotions.
  • Horizontal collaboration – The various global shortages in semiconductor manufacturing materials have brought worried companies to hoard and overbuy, leaving others with no supply. Many contractors may have excessive stock levels of one material, while having a damaging deficit of another. The uneasy situation might wrongly encourage policymakers to become more competitive and secretive within the industry. The present need, however, calls for collaboration. Focusing entirely on ourselves will lead to stagnation. It has become clear that better communication between companies and sharing/collaboration are the key.

    This looming shortage is a harsh reminder that technology manufacturing is distributed around the world where different companies can be concentrated in a single country.

     

    What can we do?

    We (Lesico Process Piping or LPP) help fabs get their chips done earlier by providing piping. And we do this with passion and precision. Moreover, we are on the lookout for business partners willing to collaborate. As we are open to changes, we can support our partners with design, subcontracting, project oversight, parts manufacturing and inventory supply.

    Surely, a single company cannot mitigate the disrupted supply chain by itself. Collaboration is a group effort. With this in mind, can the semiconductor industry collectively collaborate to navigate out of the supply-chain crysis, despite being highly competitive and devoted to secrecy?

     

    Interested in a collaboration with a reliable supplier?

    We have capabilities and domain expertise from serving the semiconductor industry for the past 15 years. Furthermore, we are serving some of the biggest players in the industry. In addition, we are working with large inventories and have strong relationships with suppliers from around the world. To learn more, check out our services and material-supply offering. Or reach out to us at: [email protected]

    Mitigating by collaborating 

    The COVID-19 pandemic has greatly impacted the global supply chain in many industries.
    We all remember the
    toilet paper shortage that occurred in its early stages. Anxious customers
    began hoarding toilet paper in a shopping frenzy, which led to empty shelves in stores for days.
    This is a simple example of how sudden fluctuations in demand cause a
    bullwhip effect. Variations
    in demand, at the retail-end, tend to dramatically amplify themselves upstream through the supply
    chain toward the production end. This coordination problem causes inefficiencies such as high or
    low stock levels, poor customer service, and delays in production schedules. 

    This is also true in regards to the semiconductor manufacturing industry. The problem here is not toilet
    paper shortages, but the astoundingly wide range of items we rely on today that require chips. Due to
    the chip scarcity, the global
    automotive industry for example could make five million fewer cars this year
    than expected, and buying a big SUV could cost at least 20% more than it did last year. Supply constraints
    on i
    Pads and Macs will cause Apple to lose as much as $4 billion in quarterly sales, and Samsung cited an
    imbalance between global supply and demand for chips while warning it might delay the launch of its next
    phone. And the list goes on.

    Initially, the pandemic caused a relatively minor decrease in consumer demand – as consumer spending
    plummeted. Then, some months later, demand for all sorts of chip-dependent gadgets suddenly rose as
    people set up home offices or looked for electronic diversions. The companies that manufacture these devices
    then sent a wave of semiconductor orders rippling up the supply chain, which quickly overwhelmed the few
    fabrication plants that apparently manufacture all of the world’s computer chips. Shortages were quick to follow.
    Concerned about the chip shortage, all companies are stockpiling chips in order to make it through the crisis.
    But hoarding further distorts the demand signals that are rippling through the supply chain, making it look like
    companies need a lot more chips than are truly required to meet consumer demand.

    The War in Ukraine Disrupting Supply Chains

    To further complicate things, the conflict between Russia and Ukraine has exacerbated the semiconductor
    manufacturing supply chain. 

    Neon, a colorless and odorless gas, plays a critical role in producing chips. It operates the highly accurate
    lasers used to turn silicon — the primary ingredient in chips — into the miniature circuits that make computers
    operate. Manufacturers use these lasers to etch tiny, delicate patterns onto the glass, transforming a sheet of
    silicon called a wafer into a sheet of chips. Because these chips are so small and intricate, though, the wavelength
    of light emitted by their lasers needs to be in exact control. That’s what neon is for. Until recently, the source of
    neon was mostly Ukraine, where only two companies purify enough neon to produce devices for much of the world.
    They did until Russia invaded.

    The neon shortage is unfortunately only the beginning of the chip industry’s problems. Even if new sources of
    neon are found, the ongoing war could still lead to a shortage of other crucial supplies used for chips. Russia
    owns a large portion of the US’s supply of
    palladium, a metal that’s used in chipmaking. It also provides much
    of the world’s
    nickel, a critical material for creating C4F6, another gas used in chipmaking. Helium, another noble
    gas required for semiconductors, is also in deficit worldwide.

    The Challenge

    The reality is that making a single chip takes an incredibly long time. At the same time, building more chip
    manufacturing plants (or fabs) requires years of engineering and construction and a budget of billions of dollars.
    Chip suppliers need to carefully plan their expansion, otherwise they risk creating a semiconductor glut in the
    next few years, which may be followed by another shortage.

     

    What can companies do to mitigate the crisis?
    Here are some ways through which the bullwhip effect conundrum may be substantially alleviated.

    • Improving flow of communication –  increasing flow of information within the company (top to bottom, bottom to top) – that way fluctuations in stock are being reported and taken care of on time.
    • Vendor Managing Inventory (VMI) – a supply chain agreement where the manufacturer or supplier takes control of the inventory management decisions for the seller or retailer. In supply terms, this means the upstream agent is responsible for the inventory of the downstream agent. This policy can prevent stocking undesired inventories and hence can lead to an overall cost reduction.
    • Adjusting lenient policies on order cancellations and returns.
    • On the B2C side, sellers can offer constant everyday low prices (EDLP) instead of temporary promotion
    • Horizontal collaboration – The various global shortages in semiconductor manufacturing materials have brought worried companies to hoard and overbuy, leaving others with no supply. Many contractors may have excessive stock levels of one material while having a damaging deficit of another. The uneasy situation might wrongly encourage policymakers to become more competitive and secretive within the industry. The present need, however, calls for collaboration. Focusing entirely on ourselves will lead to stagnation. It has become clear that better communication between companies and sharing/collaboration is the key. 

    This looming shortage is a harsh reminder that technology manufacturing is distributed around the world where different companies can be concentrated in a single country.

    What can we do?

    We (Lesico Process Piping or LPP) help fabs get their chips done earlier by providing piping. And we do this with passion and precision. Moreover, we are on the lookout for business partners willing to collaborate. As we are open to changes, we can support our partners with design, subcontracting, project oversight, parts manufacturing and inventory supply.

    Surely, a single company cannot mitigate the disrupted supply chain by itself. Collaboration is a group effort. With this in mind, can the semiconductor industry collectively collaborate to navigate out of the supply-chain crysis, despite being highly competitive and devoted to secrecy?

     

    Interested in a collaboration with a reliable supplier?

    We have capabilities and domain expertise from serving the semiconductor industry for the past 15 years. Furthermore, we are serving some of the biggest players in the industry. In addition, we are working with large inventories and have strong relationships with suppliers from around the world. To learn more, check out our services and material-supply offering. Or reach out to us at: [email protected]