Supply chain economics: shortage of car chips

Supply chain managers are concerned about many risks. Economic changes should now be added to the list, with the chip shortage in the auto industry being a shining example of a predictable economic risk that surprised purchasing managers.

The simple story is that before the pandemic, semiconductor manufacturers were stressed in their ability to supply chips for a variety of reasons, including production issues at Intel and US restrictions on sales by Chinese manufacturers.

When the pandemic hit, the auto industry braced for a recession and slashed orders from its suppliers. It would turn out to be a mistake, but to those responsible for purchasing in the old auto industry, it seemed reasonable enough. When business picks up, their suppliers ramp up production. Managers who used to order dashboards and bucket seats knew their suppliers had no one outside the auto industry to sell to, so they were always ready to restore production after a downturn.

Car sales returned, earlier than expected. Sales rebounded in May 2020 and then increased again in June, July, August, September and October. When auto purchasing managers called their suppliers to ask for larger deliveries, everything went well except for the computer chips.

The pandemic has led to remote working, with office workers needing laptops and webcams in their homes. Chipmakers have agreed to fill the increase in orders. When automakers called to increase their orders, chip vendors said, “Sorry, you’ve reduced your order, so we’ve turned our production capacity over to other customers. “

This was not only unfortunate for the automakers, but easily predictable. To see the timeline of chip shortages and auto shortages, check out Google’s trending data. Research into the ‘laptop shortage’ peaked in March 2020. Now would have been a good time for auto supply chain officials – who were likely scrambling to get laptops so they could also work from home. – to ask: “Can we get chips?” when we are ready to increase production. The smart answer would have been anxiety about flea access.

Although electronic assemblies account for around 40% of total car costs, according to a Deloitte Report, the semiconductors themselves cost just $ 400. The average price of a new car is now $ 40,768 according to Kelly Blue Book. Thus, the lack of components that cost only one percent of the total cost of the vehicle hinders sales.

An alternative strategy that some companies in many industries are pursuing is to identify low cost items that could delay production and keep a very large inventory. Just-in-time inventory management is a good idea when supply chains are reliable, but not so much these days. For parts that make up a large portion of total costs, maintaining high inventory can be costly. But for the relatively inexpensive components that are needed to sell the finished product, storage makes sense.

In the case of automotive computer chips, the economics of supply chains make a strong case for the new inventory policy.