The sustainable silver lining to the Silicon Shortage
Controversial, I know. As businesses were hit by the semiconductor shortage, the world has continued to feel the shock waves. Now 12 months into major supply shortages, consumers haven’t been able to buy their favorite electronics, and businesses can’t sell. However, by increasing raw material inventory buffers and setting up excess component trading with other manufacturers, the electronic industry might just come out greener and more resilient on the other side.
As quarantine set in, demand for many electronics skyrocketed. Large manufacturers like Sony were caught empty-handed, missing valuable profits and suffering further losses as shareholders sold off their stock in droves.
Demand predictions, notoriously unreliable, help manufacturers attempt to meet supply in the shortest possible lead time and with the lowest inventory. However, in times like the middle of a pandemic, both demand and supply availability saw wild swings.
When tight inventory management combines with the effects of a global pandemic, even large influential companies find themselves needing to wait months for a restock. In other words, in search of extremely thin raw material inventory stock, businesses missed profit while consumers were unable to get their favorite PlayStation 5s and Teslas.
So given the risks, why do manufacturers cut their inventory so close? It was estimated that Sony’s average day inventory declined significantly through the pandemic, from Mar. 2020 (41.79) to Mar. 2021 (34.02)*. Companies often resort to this risky form of management because high inventory stock levels tie up cash from the rest of the business. But, what if you’re talking about a critical semiconductor that only costs <$.50 on a $10,000 product? Surely, the cash used in overstocking is outweighed by the potential threat of a line down?
That quickly brings us to the second issue — potential obsolescence. Traditionally, if a manufacturer were to buy parts they never use, there is nowhere to sell them and they would need to throw them away — sacrificing the entire value of the stock. In the face of the pandemic, stocking up on that $0.50 part is looking a lot more attractive. Manufacturers agree that traditional inventory management needs a facelift. A recent Peerless Research Group survey proves this, showing that 69% of respondents believed improving inventory control was a top priority since the pandemic.
We think the answer lies in a secondary market for components. Like the shocks on a car, a secondary market (think eBay for electronics components) can buffer sharp swings in the market. If manufacturers buy too much, they can resell it on the market without losing the full value to obsolescence. If they buy too little, they can buy excess inventory from their peers. This means waitlists at semiconductor companies don’t have to build up either, which contributes to many further complications during shortages.
Using this model, manufacturing networks can come together and work to combat the shortage while reducing the environmental footprint of wastefulness in the process. If this more resilient model is adopted moving into the future, toxic e-waste can be reduced significantly, fewer shortages will occur, and businesses can grow revenue even faster than before. Even amidst one of the worst shortages in recent years, the future of sustainable manufacturing looks bright.