Navigating the Semiconductor Supply Chain: Strategies and Actions for Success...in your own supply chain

The semiconductor industry is facing unique challenges when it comes to supply chain disruptions and shortages. Many sources have created those challenges: Demand variability, Raw Material Shortages, Transportation constraints, Geopolitical tension, Climate uncertainty. This industry is facing significant risks at every stage of the supply chain. In this article, we'll explore the semiconductor supply chain, what can be leverage from the situations faced to optimize one’s supply chain (as touch of humor, I would be glad to advise the whole world about how to optimize the overall semiconductor industry, but I am sure that the industry does not need me to make it happen!)

Understanding the Semiconductor Supply Chain

Before diving into the strategies and actions, it's important to understand the semiconductor supply chain and the challenges associated with it. Semiconductors are the fourth most traded product after crude oil, motors vehicle & parts, refined oil (source: SIA). The semiconductor supply chain typically involves multiple players, including chip designers, wafer fabs, assembly and test facilities, and distributors. Each stage of the supply chain poses unique challenges, such as capacity constraints, quality issues, and delivery delays. Here are the steps

• Design: Semiconductor chip designs are created for specific or general device usage.
• Manufacturing (Front End): Silicon wafers are processed through an extensive series of manufacturing steps then diced into multiple chips (also called dies or devices).
• Manufacturing (Back End): Chips are layered and assembled into packages that can be mounted onto circuit boards. Packaged chips are then tested under different electrical and temperature conditions.
• End Product Integration: Chips are integrated by electronics and equipment manufacturers to create end products for consumers.

What can we learn from the semiconductor supply chain crisis??It is one key word which became famous in the post pandemic time: R E S I L I E N T. This word defines the main moto for all the supply chains of the word. To reach resilience, there are many steps to be considered: visibility, forecasting, capacity management, supplier diversification, digital capabilities, and risk & monitoring.

Let us navigate in the seas of the supply chain challenges that semiconductor companies need to focus on.?

Visibility

The above picture speaks by itself. The semiconductor supply chain is highly complex and involve more than 50 touch points before arriving the finished product which will go into an equipment. It is important to develop partnership with the tier 1, 2, 3, etc.… suppliers and customer, to be able to anticipate and pivot the strategy in the right directions.

It is then true for all supply chains leader. To take decisions on increasing the safety stock, finding alternate suppliers, increase or decrease manufacturing and warehousing capacity, anticipate geographical reduction, expansion or diversification…It is key to understand what is happening along the full chain so that the right decision can taken at the right time, knowing that any decision may require time to be implemented (involving most probably budget discussion). Ask yourself a question a practical case, do I know what is happening in the supply chain of my suppliers and customer, at least for the tier 1 and tier 2.

Coming back to the semiconductor industry, given the high importance in today`s world there are associations like the Semiconductor Industry Associations, European Semiconductor Industry Association, SEMI… who are keeping an eye on the industry and bringing part of the visibility required. If you are in this industry, it is important to be part of some of those associations and develop a governance within the company where one can get regular update but also decisions can be taken accordingly (receiving a newsletter and talking about it in front of the coffee machine is not enough!).

Forecasting

In the world of supply chain management, forecasting is a crucial component for success. But let's not get bogged down in the endless array of methodologies available for this task - the real magic happens when we use the right parameters to inform our forecasts. Since Semiconductor industries is highly strategic in pretty much everywhere in the world, we have so many factors at play, from consumer spending to the latest defense budget, there's no shortage of data to incorporate into our predictions. And don't forget about those curveballs, like pandemics, that can throw a wrench into the best-laid plans - but hey, we can turn those erratic patterns into "sensing factors" too, right?

All the supply chains in the world requires the same exercises. To truly succeed in the supply chain game, we need to find the right parameters for our specific product and segment and establish proper governance to integrate regular forecast reviews into our management processes. I've even heard of companies dedicating entire departments to this crucial task - because let's face it, a solid forecast can provide a rock-solid baseline for strategic decision-making. So, let's get forecasting, people! (Not aside: forecasting is not the same as building demand, be careful on that. It may worth another article on the topic!).

You can read the “the Semiconductor Industry Demand Forecasting Using Customs Model” by Russ Elias and Tony Alvarez or “Forecasting the Semiconductor Industry Cycles by Bootstrap Prediction Intervals” by Wen-Hsien Liu, that will give some good insight on the topic of forecasting in semiconductor industry.

Capacity Management

In today's turbo-charged semiconductor industry, capacity management has become a make-or-break component for companies to outpace their rivals. To stay on top of this game, it's crucial to have a comprehensive understanding of your capacity requirements at each stage of the supply chain. This involves nailing down demand forecasting and partnering with suppliers to ensure you have enough capacity when you need it.

But let's be real; investing in additional capacity can be both pricey and time-consuming. Capital expenditures (CAPEX) can take ages to deliver any fruit, so it's essential to jump on every opportunity to optimize capacity utilization. That's why, after establishing visibility and forecasting, companies must focus on developing a kick-ass capacity management strategy. By skillfully managing capacity, semiconductor companies can sidestep overproduction, minimize costs, and meet customer demand, all while trouncing their competitors.

And check this out, folks - the exhibit below shows that CAPEX value along the chain, and a whopping 77% comes from manufacturing (both front-end and back-end), even though it only creates 30% of the added value. That illustrates the crux of understanding and managing capacity for any industry, am I right?

So, remember, Sales and Operations Planning (S&OP) should always be followed by Master Production Scheduling (MPS) to draw up the industrial strategy. Now go out there and own that capacity game!

Supplier Diversification

Behold! Feast your eyes upon the map above showcasing the multitude of suppliers across the value chain of the semiconductor industry. The key takeaway is not just about the fancy names, but also about the importance of diversifying your sources. The more diverse your suppliers, the less likely you'll get whacked if something adverse happens to one of them. Diversification means having different suppliers for different parameters, like price, geographical footprint, and size. If a component is critical, then you better have a diverse base! And if you can't diversify because of the uniqueness of the product, that's when joint or in-house development should be evaluated. It's all about supply chain strategy management, folks!

Oh, and let's not forget about the suppliers of minerals which are crucial for semiconductors. As shown in the exhibit below, we must go down to every upstream step in the supply chain. We can also define a strategy of investment to secure the initial raw materials (refer to that map again in the risk and monitoring paragraph).

So, what's the plan of action? Check out your supplier risk, classify them by criticality, and start evaluating how secure you would be if your supplier couldn't supply you. It's time to embark on a journey of diversification, my friends!

Digital Capabilities

Listen up, folks! If you're not using technology to build a resilient supply chain, then you're playing a risky game of Russian roulette. Take semiconductor companies, for example. With data analytics, they can spot potential risks and disruptions before they even happen. And don't even get me started on automation - it helps reduce the risk of human error, which, let's face it, we all make mistakes. But let's not forget the pièce de résistance - the digital twin. It's like having a crystal ball that shows you all the relevant data points, such as inventory levels, production capacity, supplier lead times, and transportation costs. This tool can simulate different scenarios, so you can identify bottlenecks, optimize inventory levels, improve supplier relationships, and reduce transportation costs. And let's be real here, with so much at stake in the world economy, any player in this industry should be hopping on the digital twin train ASAP.

For anyone else in other industries, you should go for it too. Sure, you can try to scenario plan using Excel, but for complex warehouse or production facilities, you'll need something more robust. There are plenty of tools out there to make your work easier, so why not take advantage of them? Trust me, your supply chain will thank you for it.

Risk & Monitoring

Let me come back to the map showing the different minerals per country. With all the political unrest, the different natural disaster, the climate change impact, the economic “war”, the supply situation of those minerals can become under stress, which makes yourself vulnerable. Let s list down some event which impacted the semiconductor industry (Source: Supply Chain Magazine and SEMI association):

Natural Disaster - In 2011 a major earthquake struck Japan, followed by a tsunami and, nuclear power-plant melt down. 25% of the global production of silicon wafers and 75% of the global supply of hydrogen peroxide was affected by the disaster. Several fabs were shut down for several months.

Geopolitical tensions - In 2019, geopolitical tensions between Japan and South Korea rose sharply. Japan imposed export controls on semiconductor materials to Korea, impacting approximately $7 billion in semiconductor exports per month.

Trade War USA, China – late 2020, the US Department of Commerce imposed restrictions on China's largest chip manufacturer, Semiconductor Manufacturing International Corporation (SMIC), which made it harder for them to sell to companies with American ties.

Climate impact and Accident – in 2021, Widespread power failures following a polar vortex in Texas, and a fire in a Renesas fab in Japan in early 2021 further exacerbated the global chip supply shortage, especially for the automotive market.

Climate impact – in 2021, Taiwan is the leading producer of chips, faced severe droughts in the summer that affected output. The droughts affected production due to the lack of available ultra-pure water that is needed to clean the silicon wafers used in microprocessors.

Human Risk – the next 3 years, 77% of the semiconductor executives agreed that the industry faces a critical talent shortage due to low number of graduates entering this field because of lack of awareness or no long-term career potential.

The above event shows that there should a constant risk evaluation to anticipate any adverse effect. This should be built with an overall monitoring to continually evaluate the supply chain performance of the company. Defining the right Key Performance Indicator and defining the proper governance to reviewing it and draw improvement action plan will be an essential element of the monitoring.

Conclusion

In summary, the semiconductor industry's triumph hinges on constructing a robust supply chain that can weather the toughest storms. In order to conquer the hurdles that come with managing a supply chain, semiconductor firms must adopt the appropriate tactics and take action. By keeping an eye on the big picture, accurately forecasting demand, skillfully managing capacity, broadening their supplier network, investing in digital technologies, and maintaining a stringent risk-monitoring process, semiconductor companies can construct a supply chain that can stand up to any challenge that comes their way.

Of course, this is only the tip of the iceberg when it comes to fortifying the supply chain. There are also larger factors at play, such as geographical concentration, government strategies, and subsidies, which require further consideration to improve the overall supply chain. But let's leave those topics to the experts - we're just here to draw parallels between the semiconductor supply chain and other supply chains that can also benefit from these improvements. And hey, if we can do it with a touch of humor, why not? After all, laughter is the best semiconductor...wait, no, that's not right. But you get the idea.

I hope you would have liked it and do not hesitate to comment