There’s no doubt that the pandemic has had an extraordinary impact on the semiconductor industry. Still, it’s important to remember that this disruptive event actually amplified existing issues. Long before news about the current chip shortages hit the headlines, several major industry changes had been brewing that will have long-term implications, particularly for supply chain professionals.
Take 5G and electric vehicle infrastructure developments. Requirements were driving semiconductor demand up in the years before 2020. Then, when automakers tried to catch up on orders after a wave of cancellations at the outset of the pandemic, it created a ripple effect across the entire product lifecycle.
The semiconductor industry is complex and cyclical, and supply chains are inherently vulnerable to the vagaries of supply and demand. To assume that issues such as these will quickly go away after the pandemic recovery would be a mistake. They’re here for the long-term—and that’s not necessarily the worst news.
Higher Prices Will Accelerate Innovation
Given the current imbalance in supply, the recent increases in price for some electronic components are no surprise. But even when parts become more readily available, it’s unlikely that we’ll see a return to pre-pandemic prices. That’s due to the simple fact that it’s costing more to produce parts. Labor costs are on the rise, as is the price of raw materials. Exacerbating the situation: Semiconductor companies are not expanding their production to the degree seen in previous cycles, primarily because they’re concerned about capex and the speed of technological change.
With enduring pressure to keep costs in check, OEM design engineers will keep striving to optimize the footprint and number of components in their designs on both the board and systems level. In response, suppliers will be stepping up their innovation efforts.
There will be ongoing advancements in the integration of semiconductor devices. And the development of systems-in-a-package will continue apace, driven by the same imperative to pack more capabilities into smaller footprints and the desire for “smarter” everything. Impressive levels of integration are popping up today in almost every type of device.
For example, companies that develop sensor technology are moving beyond mere smart sensors, which combine sensors and processing capabilities into a single device. We are now beginning to see capabilities like AI processing incorporated into a single sensor package, which might house a DSP dedicated to AI signal processing, memory for the AI model and a conventional image sensor circuit. By including AI processing and sensor algorithms as part of the same package, suppliers view this level of integration as not just a means to reduce the number of components or add fancy features, but as a true competitive advantage.
As engineers seek to find less costly ways to add features and capabilities to their products, the number of software-driven features and capabilities also will continue to proliferate. One noteworthy early example is software-defined radio, where the work of filtering by a multitude of tuned circuits is mostly all done in software. Emulators, which enable one computer system to behave like another system, also use software in place of complete sets of hardware.
Supply Chains: Challenging the Status Quo
These ongoing technological changes will bring a new level of uncertainty into the mix. How fast will these changes evolve? How will they impact a BOM? Will there be fewer components moving through the supply chain? The only certainty is that innovation will drive more change, which will have a ripple effect across the entire product lifecycle.
The importance of the design chain leading the supply chain has never been more important, as amplified by the parts shortage. In many applications, there simply isn’t a perfect, drop-in replacement part. At Avnet, we’ve already been helping engineers who are being forced to redesign their boards to accommodate parts with better availability. In some cases, they’ve been having to go through an entire recertification process to ensure the final product performs to specifications.
Companies are now seeing that if you’re not putting multiple sources onto the BOM, it’s really going to sting them on the back end, especially given time-to-market pressures that are on the rise.
Companies are also rethinking the status quo when it comes to inventory. For example, companies are realizing that they can no longer manage to order exactly when they need the part and that there are serious drawbacks to relying solely on a just-in-time inventory strategy. This shift in perception of inventory as a liability to inventory as an asset is happening as OEMs recognize that when they don’t have a $2 part, they won’t be able to ship their $70K product. That’s where the role of the distributor, whose job it is to hold inventory for customers, comes in. We serve as a buffer for the industry.
The focus is also shifting from price to assurance of supply, and the need for a supply chain strategy that has the resiliency to quickly respond to the unexpected. Companies are looking to rearchitect their supply chains, taking advantage of insights obtained from data and market intelligence to get greater visibility across the entire product lifecycle.
We’re already hearing from more customers needing trusted partners with the expertise in distribution to help them with planning, forecasting and development of risk management strategies. This is going to drive significant advancements in supply chain and enable businesses to be better prepared to manage future disruptions. Most importantly, it’s going to keep them more focused on technological development, and less on sourcing issues.
About the Author:
Peggy Carrieres leads the global sales enablement efforts across Avnet business teams and champions the company’s global IP&E supplier development efforts, which represent approximately $4B sales per year. As part of her enablement and development programs, Peggy is the executive sponsor of Avnet’s business intelligence and market research teams, as well as global demand creation and Avnet’s customer experience feedback systems. She recently led the integration of Farnell, a high service distributor; as part of that, she serves as the executive sponsor for joint selling efforts between Avnet and Farnell in order to provide end-to-end service for Avnet’s global customers.
Peggy boasts over 25 years of supplier and channel experience working in the electronics components industry in strategy, supply chain, pricing, forecasting, sales, and customer program management. Previous roles include global positions with ON Semiconductor, Trax Technologies, and NXP (formerly Freescale Semiconductor). Peggy has a BA and MA from ASU and is completing an MBA from LSU.