Posted: 07 Oct. 2021 10 min. read

Semiconductor chip shortage hits medtech: Strategies to build resilient supply chains

By Bill Murray, specialist executive, and Stephen Bradley, specialist leader, Deloitte Consulting LLP

The global semiconductor chip shortage1 is becoming an acute issue for some medtech companies. However, bolstering supply chain resilience could help those organizations mitigate current and long-term risks.

Hypergrowth in semiconductor chip demand is a reality. The global market is projected to nearly double, from $452.2 billion in 2021 to $803.1 billion in 2028.2 However, pandemic- and weather-related supply chain disruptions are causing critical chip shortages in numerous industries, including medtech. This could be a potential risk to millions of patients across the United States who depend on chip-powered equipment and devices including ventilators and defibrillators; imaging machines; glucose, ECG, EEG, and blood-pressure monitors; implantable pacemakers; and more.

So far, most government, media, and boardroom attention has focused on addressing chip shortages in the high-profile, economy-driving consumer electronics and automotive industries.3 There is a strong case for including medtech on the list of high-priority industries, to safeguard those patients who rely on medical technologies for lifesaving and life enhancing care. However, medtech companies cannot rely solely on external sources for relief and should consider strategies to build resilient supply chains to help manage and mitigate both current and long-term risks.

Chip shortage issue is industry-wide

The chip shortage isn’t affecting just one type of device or a single manufacturer. It’s becoming an acute, industry-wide issue for the hundreds of diagnostics, therapeutics, and capital-equipment companies that produce essential medical technologies. Total medical semiconductor revenue in 2019 was $5.1 billion,4 which represents about 1% of the $415 billion total semiconductor market.

We wanted to determine the extent of the industry’s semiconductor use and gauge how the shortage is impacting company supply chains. Deloitte and AdvaMed recently released a paper that combines survey data with insight generated during interviews with AdvaMed members. Here are a few key findings:

  •  About two-thirds of companies have semiconductors and firmware/embedded software in more than half of their products. In addition, 50% of survey respondents said their connected devices, which also require semiconductors, make up half of their product portfolio.
  • Second- or third-generation chips are most in demand. This places medtech companies in direct competition with automotive, industrial, and consumer industries for critical chips, rather than the high-tech sector.
  • All survey respondents have experienced some disruption to their chip supply chain (figure 1). The most common disruptions are delays, order cancellations, and short orders. Delays vary significantly, from two to 52+ weeks. According to one medtech procurement lead, “Initially we were told we need to issue purchase orders until 2023, but that doesn’t seem to be enough to secure supply anymore."

Five strategies to help build resilient supply chains

The semiconductor shortage is the latest supply chain challenge to hit the medtech sector, and it likely won’t be the last. Every company, therefore, should develop vendor-engagement and management strategies to mitigate risk and enhance resilience to existing and potential supply chain disruptions. Consider these strategies:

1. Manage supply risk: Sourcing strategy can have important implications for supply chain resilience. More than 70% of survey respondents indicated that more than half of their semiconductors are single source. While having one trusted supplier can result in cost savings with higher volume spend, a single supplier means there is no redundancy during a disruption. According to one interviewed medtech procurement lead, “We are trying to identify alternative sources, but qualifying new materials is time consuming and expensive. Even for a 30-cent part, it could take a year to approve the new material.” Providing working capital (e.g., upfront payments) could incentivize suppliers to prioritize their medtech customers.

Holding raw materials inventory to buffer variations in supply is another way to manage supply chain risk. During the first half of 2021, pandemic-induced supply chain disruptions prompted companies in other industries to build up their inventories by over-purchasing chips.5 Medtech companies might be able to mitigate the impact of potential supply disruptions by proactively managing supply risks, by conducting supply and supplier risk assessments, increasing supply redundancy, and developing regional supply sources where practical.

2. Enhance end-to-end (E2E) visibility through digitization: More than 60% of our survey respondents rated visibility into supplier risk as low to medium. Medtech companies often source device components (assembly, sub-assembly) from multiple vendors with whom they might not have direct contact. Better visibility into chip demand from other industries could help reduce the risk of supplier shortages or delays. Advanced web-scraping tools are being used to deliver market-wide visibility to component and commodity risks. Similarly, a supply network management solution could provide supply chain visibility, issue and risk identification, prescriptive risk management, and continuous monitoring.

3. Boost supply chain agility: Build redundancy into supply chain operations and stress-test business-continuity plans to prepare for the next crisis (because there will almost certainly be one). Proactive organizations can critically evaluate their supply risks and build redundancy into operations where feasible, prioritize critical products, develop inventory strategies, and pressure-test their systems to understand their ability to respond.

4. Use a patient-centric approach: Build digital capabilities to support changing consumer behaviors. Consider implementing risk-sensing solutions to gain a real-time understanding of consumer needs and pain points. These patient or consumer-centric capabilities can provide insights that help organizations improve customer service, delivery, and quality. It also can help companies identify changes in the market more quickly so that they can respond more and effectively.

5. Strengthen public-private partnerships: Suppliers often have a choice in allocating limited supply. Medtech companies should work with industry associations to heighten government awareness of the importance of medtech devices to public health, especially when critical manufacturing materials are in short supply. Company leaders should identify opportunities to collaborate with federal, state, and local governments to solve chronic product shortages.

Good news on the horizon?

While chip supplies remain tight—and lead times have stretched to 52 weeks for some semiconductors—supply conditions for buyers are expected to improve later this year and in 2022-2023. Companies from a variety of industries—including medtech—are over-ordering and building inventory to avoid being caught unprepared again. Once supplies reach certain levels, demand should decline and lead times for some chips will likely shrink. Also, major chipmakers have been investing heavily in new equipment and upgrading/building facilities to boost production capacity.6 Despite these encouraging signs, medtech company leaders should continue to bolster supply chain resiliency and advocate with industry and government influencers to support the continuity of chip supply for medtech in its role as an essential contributor to public health and well-being.

1. Chip shortage highlights US dependence on fragile supply chain, 60 Minutes/CBS News, August 29, 2021

2. Semiconductor market, FORTUNE Business Insights, May 2021

3. The great car-chip shortage will have lasting consequences, The Wall Street Journal, September 27, 2021

4. Semiconductors in medical electronics, Omdia, October 2020

5. Semiconductor midyear outlook: chip revenue will rise nearly 20% in 2021, Semiconductor Market Watch News, August 19, 2021

6. Semiconductor midyear outlook: chip revenue will rise nearly 20% in 2021, Semiconductor Market Watch News, August 19, 2021

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