The Semiconductor Crisis Should Change Your Long-Term Supply Chain Strategy

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Summary. The auto and other industries have been brought to their knees by the scarcity of a tiny, and normally ubiquitous, piece of technology: the semiconductor. Plans for millions of cars have been cancelled and the damage will continue for years to come. How can business...

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“It takes 2,500 parts to build a car,” Peter Hasenkamp, former head of supply chain strategy for the Tesla Model S, once said, “but only one not to.”

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How automakers must wish they had listened to this wise observation. But, as we know, they didn’t. The auto industry has been brought to its knees by the scarcity of a tiny, and normally ubiquitous, piece of technology: the semiconductor. In 2021, automakers were obliged to cancel plans to build ten million cars. We forecast that they will cancel a further seven or eight million in 2022 and four million in 2023, as demand for semiconductors outstrips supply by 10 per cent. And what goes for automakers also goes for many industrial companies because they too rely on semiconductors in their products. As the U.S. government noted in its “Briefing Room” blog, the paucity of semiconductors has not only been affecting the automotive industry, it has also been “dragging down the U.S. economy” and “could cut nearly a percentage point from GDP growth.”

How can business leaders prevent this from ever happening again? Very simply, they need to transform the way they interact with their suppliers. We don’t just mean their direct or “Tier 1” suppliers, but also the suppliers of their suppliers: the companies that design and make semiconductors; the companies that provide those manufacturers with silicon wafers; and the companies that package the semiconductors — basically every mission-critical company in their supply chain. And not just the semiconductor supply chain — while the shortage of semiconductors may be keeping them awake at night right now, in the future their sleep may be interrupted by a shortage of some other critical components — such as, batteries or tires.

Today, CEOs spend, on average, just 1 percent of their time with suppliers. In other words, they spend next to no time either thinking about or being actively involved in how their companies spend more than half of their budgets. That’s a mismatch with potentially existential consequences for companies and goes some way toward explaining why so many companies are struggling in the current crisis.

Something has to change.

As we argue in our new book, in a fast-changing world business leaders need to put suppliers at the core of the business, empowering the Chief Procurement Officer and procurement function to elicit maximum value from these crucial relationships. If they do this, they can ensure that suppliers help them tap all the key sources of competitive advantage: not just cost savings, but also innovation, quality, sustainability, speed, and risk management.

To do this, we recommend that business leaders take a leaf out of the playbook of the Big Tech companies who think about suppliers and procurement in a very different way to most other companies and whose approach has helped them prosper during the pandemic.

The Big Tech Approach to Surviving the Semiconductor Crisis

When the semiconductor crisis struck, Apple, Dell, and the rest immediately swung into action, operating a 24/7 procurement and supply chain war room. Unlike the automakers, they had learned from the last semiconductor crisis in 2017 and left nothing to chance. To fix their current situation, the leaders of automakers (and other companies impacted by the crisis) should take a series of urgent Big Tech-inspired steps:

• Establish their own bill of materials for semiconductors (it is extraordinary to think that many companies don’t know where their components come from — at least, they didn’t at the start of the crisis)
• Make a non-cancelable and non-returnable commitment to suppliers for an 18-month to 24-month time horizon
• Ensure their suppliers earmark specific components for their sole use
• Collaborate with suppliers to track and trace every order

Beyond this, they should take the once-in-a-generation opportunity to reengineer the way their companies collaborate with direct and indirect suppliers.

One of the counterarguments we hear is that as soon as some kind of normality returns, all the anxiety over supply chains — and the associated need for an expanded role for procurement as the vital link with suppliers — will fade. We think this is a forlorn hope.

We do not expect the current semiconductor crisis to abate until 2023 at the earliest. After that, it will only be a matter of time before the next crisis disrupts global supply chains. There have been seven semiconductor crises in the past 28 years (including the current one), and by our calculation, there are some 50 choke points in the global supply of these crucial pieces of technology (such as the Suez Canal and the dominance of Taiwan-based TSMC, the world’s biggest maker of semiconductors). Any one of these could be the cause of the next semiconductor crisis, and while President Joe Biden has created a supply chains disruption task force to address some of these choke points for US companies, there can be little hope of immediate solutions to what are long-term problems.

So, if company leaders want to be masters of their own destiny, they should act now.

How to Get Ready for the Next Crisis

The leaders of all large companies should consider taking a series of steps that are built into the way the Big Tech companies do business. Ultimately, these steps are about rebalancing the relationship between the buyer and the supplier. During the semiconductor crisis, many companies have been so anxious to secure future supplies of semiconductors that they instinctively play the role of supplicant, catering and submitting to suppliers. This is not a sustainable position for global companies. They need to wrestle back control.

In the medium-term, company leaders should press the reset button with their most important suppliers. The Big Tech companies treat their suppliers of mission-critical components as cherished business partners rather than companies that can be dropped as soon as times get tough. To follow their example, you should:

• Initiate one-to-one conversations between the CEO and the top suppliers’ CEOs, so that the relationship is raised from a transactional to a more strategic level
• Invite suppliers to develop ways that their joint business can be more mutually profitable
• Make commitments about loyalty during future semiconductor and other crises

In the long-term, you should build on these steps to develop an integrated, symbiotic relationship with important suppliers. Again, the Big Tech companies work incredibly closely with their strategically significant suppliers. It was the steady income from Apple that allowed TSMC to leapfrog its great rivals by investing in the creation of the first 5-nanometer microchip that lies at the heart of Apple’s latest products. This, in turn, allowed Apple to take the opportunity to book out most of TSMC’s manufacturing capacity, meaning that its rivals were unable to get the latest technology.

Here are some additional Apple-like steps that automakers and other companies can take in the current semiconductor crisis:

• Take responsibility for owning everything that goes into your core technology — your tech stack — including the design of the printed circuit board
• Align your product roadmap with the product roadmap of the semiconductor companies
• Offer to become the launch customer of a supplier’s new, experimental technology
• Develop a measure of independence by developing your own semiconductor capability.

If you read the news, you probably know that there is one automaker that has already used the Big Tech companies’ playbook: Tesla. Early on, it understood that if it designed the silicon microprocessors inside the computers that control the new generation of electric cars, it could not only safeguard the supply of the critical components but also dominate the entire auto industry. And so it has come to pass. So far, Tesla has come through the semiconductor crisis relatively unscathed: in 2021, the year when the rest of the automotive industry lost ten million vehicles, it grew by 87%.

Belatedly, harder hit companies are waking up to the need to control their own supply. In November 2021, Ford and General Motors announced new relationships with some of the big foundries — Global Foundries, in Ford’s case, and Qualcomm and NXP Semiconductors, in GM’s case — which may lead to the co-production of semiconductors in the future. But these, and most industrial, companies will have to go much further. It is not enough to act on one or two of these recommendations. Indeed, some of the specific prescriptions are not new. What’s new, and what’s important, is that companies take a systemic approach. That’s because while the next crisis may impact the supply of semiconductors, it may equally impact the supply of some other critical components.

An enduring solution for ensuring greater company resilience and sustained performance will only come when leaders truly put their suppliers at the core of their business.