Five fixes for the semiconductor chip shortage

You can’t prevent a shortage, but you can lessen its impact

The table below summarizes five possible actions, and which players are most involved with each action (figure 2). Our research suggests that no single one of these is a panacea, capable of fully mitigating the next shortage. All are important to some extent, with breaking the bull whip, in particular, requiring unprecedented global teamwork and coordination. All of the various players need to do all of their respective parts, work together, and at the same time not create a glut. Additionally, these recommendations are not meant to be absolute. Rather, companies should choose a specific action or a combination of actions depending on what role they play in the broader semiconductor ecosystem and value chain.

Build overall capacity

The global industry is committing to increasing overall output capacity at an unprecedented level. Capital expenditures from the three largest players will likely exceed US$200 billion from 2021 to 2023, and could reach $400 billion by 2025.⁴ Governments have committed hundreds of billions more.⁵ We expect annual global 200mm-equivalent wafer capacity to increase from about 80 million in 2020 to 120 million by the end of 2024. Capacity will grow at both the 200-mm and 300-mm wafer size, at about the same rate for each.⁶

To be clear, growth in 200-mm is mainly from increasing capacity in existing fabs, rather than the construction of entirely new plants, which account for nearly US$12 billion of capital equipment spending between 2020 and 2022.⁷ From a technology perspective, capacity at mainstream nodes and the more advanced 300-mm process nodes (under 10 nm, mainly at 3 nm, 5 nm and 7 nm) will grow more rapidly than more mature process nodes (figure 3 and figure 4 below). It is worth noting that demand is growing for both wafer sizes, and at all process nodes, not just the most advanced.

Almost certainly, distributing manufacturing capacity to more regions and decreasing extreme local concentrations will reduce geographic-specific supply risk and help alleviate the severity of future supply shortages … to some extent. It will likely not solve the problem entirely:

1. Moving the needle on the geographical concentration of chip supply is hard. There are over 400 semiconductor manufacturing facilities globally, and there are announced plans to add 24 new 300-mm fabs by 2022, but only 10 new 200-mm fabs in the same period.¹⁰ Some of those are in South Korea and the Taiwanese region. Adding a couple of dozen in new locations outside these clusters may help. As per our estimate, new locations will only cause concentration in East Asia to drop a few points, meaning it would still produce more than half of all chips by 2023.
2. The chip industry has a natural tendency to form highly concentrated clusters, based on talent and resource availability (figure 6). Having all parts of the manufacturing process (making the chips, testing the chips, and packaging the chips) close to each other offers many benefits in terms of cost and speed. Clusters create strong pools of talent and skills. Prior attempts to build more geographically distributed manufacturing capacity (such as Silicon Glen in the United Kingdom in the late 1970s) came to naught.¹¹

Become strategically lean

Chip buyers (demand side) and their wholesale distributors and retailers have multiple levers to become more or less lean. Being less lean is about buying early and building buffers or slack. Being leaner is about buying later with limited buffers or slack. Buyers and distributors can have a purely just-in-time supply chain management system or opt for a hybrid model. They can stockpile. They can single-source or dual-source.

They can be more or less aggressive on pricing. They can have purely quantity-based pricing or have non-cancellable, non-returnable (NCNR) options for extended periods: During the current shortages, some companies are giving firm NCNR orders for the next 12 months, and others are giving five-year projections for their chip needs to suppliers, up from 12 months prior.¹² Most companies or industries use a mix of these approaches, but two things jump out:

1. There is such a thing as too lean. Those buyers with less lean supply chain models fared better with the chip shortage, at least at first.
2. Ask not “for whom the [shortage] bell tolls; it tolls for thee.” Although some industries and some companies within hard-hit industries did relatively better than others in late 2020 and the first half of 2021,¹³ by summer of 2021 the shortage was affecting almost every industry and every company. As one example, the smartphone industry was generally unaffected for months, but multiple smartphone manufacturers were announcing delayed new product launches or possible shortfalls in mid-2021.¹⁴ Several auto manufacturers, who had also been seemingly immune, announced they were cutting capacity too. Being strategically lean can buy time, but a severe and prolonged enough shortage seems to hit everyone.

Breaking the bullwhip

Still on the demand side, most OEMs, distributors/suppliers and customers have not adopted systems or processes to enable real time information exchanges. Hence, large fluctuations in production planning volumes happen at sub-tier levels in response to even small shifts in customer demand. This is typically known as a bullwhip effect where delayed communication between stakeholders at each tier in the supply chain is often amplified by judgments placed on the demand signals received (figure 7).¹⁵

Semiconductor companies can transform their traditional supply chains by developing and bolstering six key digital capabilities, which can allow them to transcend the physical-digital boundaries to include people, processes, and technologies (figure 8). Using a digital capabilities model, they can redesign their traditional organizational silos into one that is more connected and integrated, encompassing their customers, talent, suppliers across all tiers, channel partners, and internal facilities.¹⁶

1. With connected customer mindset at the core, chip companies have a more accurate and granular view of future customer demand trends to reduce the bullwhip effect resulting from demand swings. Beyond the supply chain implications, product tracking technology is enabling leaders to resolve quality issues more quickly.
2. Digital development embedded in every aspect of chip companies’ product design process allowscompanies to make, build, and assess prototypes and proofs of concept more efficiently. The effciencies and agility of digital development address the semiconductor industry expectations related to fast-moving innovation and product release. 
3. Synchronized planning capabilitiesaddress the challenges that are characteristic of the complex semiconductor value network. They facilitate both long-range manufacturing capacity planning and near real-time demand and supply alignment, across a complex mix of internal and external suppliers.
4. Intelligent supplycapabilitiessupport the continued expansion of outsourced manufacturing through enhanced supplier collaboration, development, and monitoring. They can mitigate the risks inherent in the global semiconductor supply network when integrated with synchronized planning systems.
5. Smart operations capabilities are vital to semiconductor manufacturing, which is complicated and sensitive in nature, largely automated, and enabled by capital-intensive factories. Capabilities that facilitate digital process modeling (such as digital twins), operations monitoring, factory operations synchronized with materials availability, and responsive factory scheduling adjustments, allow the factory operations teams to operate efficiently and with high asset utilization.
6. Dynamic fulfillment capabilities support the multiple sales channels, production paths, and fulfillment service points in the semiconductor industry. Products ordered through various sales channels can be adaptively manufactured by multisourced supplier networks, and delivered through internal and third-party logistics warehouses, distributors, managed consignment hubs, and more.

Adopting some or all of these facets of a digital capability model could help semiconductor companies transform their traditional, linear supply chains into digital supply networks (DSNs).

Moreover, companies across the chip industry value chain can benefit from the distinct operating characteristics of a digital supply network by sensing, collaborating, optimizing, and responding (see sidebar, “The four digital disciplines of a DSN: Effective data-sharing to drive differentiated performance and value”). These digital disciplines could enable them to gain greater visibility and insight into demand, and to have a more granular and timely view of both the external and internal events across the supply network—allowing them to make timely decisions and adjustments.

Digital transformation

According to Deloitte’s Semiconductor Transformation Study conducted in collaboration with the Global Semiconductor Alliance, most semiconductor companies that participated in the study had already embarked on some type of digital transformation journey by the spring of 2021 (figure 9).¹⁷ Moreover, chip players have proven to be adept at innovating across the organization.

Taking a combined approach toward digital transformation by addressing business, technology, and workforce and operational considerations can enable them to be more adaptive to future supply chain-driven business disruptions.¹⁸

Semiconductor companies should consider keeping the end-customer demand patterns and buying experience at the core of their transformation approach, which requires working with supplier tiers (both upstream and downstream), distribution channel partners, and third-party logistics and transportation providers. By collaborating with their supply network partners, they can implement the advanced technologies they need such as blockchain, sensors, AI/ML, mobile, and broadband tech. These technologies can advance their business processes and enhance data access and analytics across their extended supply network.

This strategy-based digital/tech-enabled transformation can help them gain greater visibility and insight into demand patterns. That can enable them to proactively manage capacity, production, inventory, and shipments, which in turn lets them build measured slack into their supply chain, allowing them to adapt and thrive in the face of any future disruptions.

Conclusion

As semiconductor companies navigate through this period of shortages and prepare for future shortage events, leaders should consider the following questions:

• Can I add incremental or bulk capacity in the near term?
• Can I geographically shift my capacity footprint to reduce risk in my supply network?
• Can I adjust supply arrangements and strategic inventory buffers to improve service levels?
• Can I leverage digital supply network capabilities to achieve the agility and visibility I need?
• Will my transformation effort address this and future shortages?

The semiconductor supply volatility which we are experiencing today will likely not be the last. To better prepare and deal with such future disruptions, companies in the broader semiconductor industry supply chain should build some measured slack into their overall supply chain to become more strategically lean. By doing so, chip players can be on a much better footing to be more agile and sustain and expand their competitive advantage in the long term.