Semiconductor companies are asking their customers for patience as the industry works through a sharp increase in demand from makers of everything from cars to consumer electronics. But there is no quick fix to the situation. As we point out in Supp. 7, Capacity and Constraint Management, adding new chip-making machinery is expensive and slow. And some of the deepest supply problems are taking place with older production lines that are less lucrative for manufacturers. In the whole semiconductor industry there is very little spare capacity right now, reports The Wall Street Journal (Jan. 15, 2021).
Demand for laptops has skyrocketed, and remote work during the Covid-19 era has increased appetite for cloud-computing and their data centers. Plus a surge in demand for chips that go into new 5G phones has put a squeeze on capacity. This chip shortage will likely last through 2022.
With chip plants effectively running all out already, auto makers and consumer-electronics manufacturers are competing for every bit of limited manufacturing capacity. The car industry was among the first to be hit. VW is reducing production at its factories in China, Mexico, Tennessee and Germany. And in the face of the shortages, GM just asked suppliers to stockpile a year’s worth of chips.
The auto industry bears some responsibility for failing to place orders early enough in anticipation of the demand recovery. Over the past 2 decades it has become one of the largest consumers of computer chips, rivaling the PC industry, as cars become increasingly powered by software. Chips now power everything from engines and emissions control to brakes, A/C, windows, and a growing array of sophisticated safety features such as automatic lane control and crash avoidance.
The production cycles for chips are long, and the development cycles are even longer. Lead times across the chip industry have risen to 6-10 months, from 8-10 weeks before the pandemic.
Classroom discussion questions:
- Which time horizon in Figure S7.1 is impacting the chip industry’s capacity options?
- What tactics might the industry employ to adjust capacity to demand? (Hint: see p. 312 in your Heizer/Render/Munson text).