The Electronics Supply Chain Has Short-Circuited: A Tactical Guide to Navigating Disruption

THE ELECTRONICS SUPPLY CHAIN HAS SHORT-CIRCUITED A TACTICAL GUIDE TO NAVIGATING SUPPLY CHAIN DISRUPTION

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the production of electronics and electronic components reached a standstill in early 2020.

Electronics are integral to the functioning of our society, and the demand is rising every year. As electronics increasingly become more advanced, so will the complexity of the materials and components required to produce them.

For example, the production of 2017’s Apple iPhone X doubled the number of needed Multilayer Ceramic Capacitors (MLCCs) compared to the iPhone 6 (released in 2014).

Less than five years since the iPhone X made its debut and the introduction of 5G has that number rising yet again. A report by Bloomberg indicated that 5G phones use around 30% more transistors than standard 4G ones.1 While rapid innovation is exciting for consumers, it presents new challenges for the market. Getting the latest technology into customers’ hands requires a supply chain that allows fast sourcing, production, and delivery.

The speed of electronics innovation has upended nearly every aspect of the supply chain, and

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the consumer electronics category has been struggling with a shortage of components since late 2017.2 With consumer demand consistently increasing, so is the need for raw materials.

As a result, a growing scarcity of raw materials and parts is further straining the already challenging supply chain, prolonging lead times and driving up prices. In late 2019, as experts stated predicting a supply chain comeback, a new complication emerged—COVID-19.

The devastation of the pandemic rocked global supply chains, presenting unprecedented challenges. Combined with global social and economic turmoil and a climate of fear and uncertainty, the production of electronics and electronic components reached a standstill in early 2020. Nearly two years later, the market continues to feel an impact. Consumer demand is strong, prices are high, but supply is still inadequate.

The Electronics Supply Chain Has Short-Circuited: A Tactical Guide to Navigating Supply Chain Disruption

Setting the Scene China is the largest producer and exporter of consumer electronics in the world. The country was the first to experience an outbreak of the disease in late December 2019, with its Wuhan province identified as the pandemic’s original epicenter.

Racing to contain the deadly virus, China was the first to impose drastic measures in response, including lockdowns, travel restrictions and mask mandates. As the virus quickly spread throughout China and the rest of the world, pandemic restrictions forced production facilities to shut down, spelling disaster for the supply of consumer electronics.

Supply chain expert Gary Newbury explained that supply chain disruption starts from the source, at production factories, many of which are operating at limited capacity due to continued pandemic restraints in some countries. This disruption causes a chain reaction of issues that travel through to the retailer and ultimately the consumer. With production issues come transportation and capacity issues, then container shipping becomes a challenge.

“Whether their factories are on or off, we have to fit ourselves into China’s production schedule.

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Then we have to find a truck, a driver and a skeletal frame. Once the container is filled up, assuming we can find a container, we send it to a boat where it waits for about 20 or 30 days off the coast of North America waiting to dock.”

And once the goods reach the dock, COVID outbreaks and labor shortages have hindered the ability for ports to process the exceptional level of volume coming in.

Jason Stuckey, General Manager of Linnworks, an e-commerce automation platform, echoed Newbury when he explained that shutting down production, even if only for a few weeks, has caused cataclysmic supply chain rifts that electronic brands and retailers are still facing today.

“The supply chain is an assembly-line that, ideally, should never be paused,” Stuckey said.

“Shutdowns created a catastrophic series of events that we will be feeling for a number of years.”

Simply put, the COVID-19 pandemic overloaded an electronics supply chain that was already nearing its limit. More than a year later and production is still being put on hold.

No Hands on Deck Due to mandatory lockdowns, many production facilities were forced to furlough or layoff the majority of their workforce and those that remained online struggled to get raw materials and/or ship their finished products. Now with the easing of pandemic-era restrictions, companies are ready to ramp up production. Unfortunately, many laborers are not interested in returning to work at their previous employers.

In the twilight of the pandemic, the economy is booming, creating a demand for labor. But, workers are reluctant to return to stressful retail jobs with low pay and unreliable hours.

Now consumer demand is rising faster than manufacturers and retailers can hire employees.

In the US alone, nearly 4.4 million people quit their jobs in September 2021, equating to 3% of the nation’s workforce. According to the US Department of Labor, this number is up from 4.3 million in August 2021, pointing to a historical level of turmoil in the job market.

As the phenomenon dubbed the “Great Resignation” continues to pick up speed in the US, other countries are experiencing their own labor pains. In China, fear of COVID-19 and changing priorities among young people leave factory owners struggling to find workers. Not only are young people shunning factory jobs, more migrant workers are staying home. Many migrant workers face tough working conditions as laborers in factories and lack access to affordable

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4.4 million people quit their jobs in September 2021, equating to 3% of the nation’s workforce. according to the US Department of Labor

city housing and healthcare. Now this aging population of workers, concerned about COVID exposure, have little incentive to return to factory work and are choosing to stay closer to home and look for work within their province.3 As a result, many retailers and manufacturers are left with a severely understaffed and undertrained workforce that is unable to mitigate customer grievances related to supply chain challenges.

The impact of a fragile workforce on sales was underscored by Bob Phibbs, a retail training expert and small business consultant who has transformed thousands of businesses over the last 30 years.

“Our supply chain problems have exposed how little training retailers have given employees,” said Phibbs. “If a consumer is met with, ‘We’re out of stock,’ they’ll still spend that money somewhere maybe even not on electronics.”

The Electronics Supply Chain Has Short-Circuited: A Tactical Guide to Navigating Supply Chain Disruption

“

Moving forward, global leaders should prioritize shipping lines and services in the event of a global event like a pandemic,” Jason Stuckey // General Manager of Linnworks

Shipping In March 2021, the Suez Canal blockage held $57 billion of world trade goods hostage as cargo ships were forced to reroute or wait for the blockage to clear. Not even two months later in China, the Yantian Port, which exports over 90% of the world’s electronics, was partially shut down as crew members tested positive for the virus.4 By the time the port reopened, its backlogs were overflowing with more than 23,000 containers were waiting to be exported.5

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In the months since, the port continues to suffer delays due to operational constraints and strict decontamination guidelines.

“While it’s hard to nail down a single piece of the supply chain as the “most important,” shipping has to be near the top of the list,” said Stuckey.

We are a global economy and need to address decision-making for global industries, especially shipping accordingly.

The Electronics Supply Chain Has Short-Circuited: A Tactical Guide to Navigating Supply Chain Disruption

Disasters Strike While COVID-19 certainly played a key role in the current supply chain crisis, the pandemic isn’t the only disaster to strike during this time. Fires, storms, and freezing temperatures care little about logistical struggles and have not been shy in showing how merciless they can be.

In March 2021, a fire at a Japanese semiconductor manufacturing plant owned by Renesas Electronics Corp, which produces a third of the chips used in automotive vehicles, damaged more than half of its product on-site and halted production for three months.6 Meanwhile, a historic drought in Taiwan impacted the production of wafers for semiconductors, which require 2 to 4 billion gallons of water per day to produce. During the winter and spring of 2021, the world’s largest thirdparty semiconductor manufacturer, Taiwan Semiconductor Manufacturing Co, had to resort to trucking in tanks of water from the island’s greener south side to maintain production.7 In the United States, several semiconductor manufacturers including Samsung Electronics Co, NXP Semiconductors, and Infineon Semiconductors had to stop production during the 2021 Texas Power Crisis.8 The list goes on and there is sure to be more in the future. Port delays, labor and transportation shortages, and various natural disasters have caused delays throughout the supply chain and continue to keep lead times for electronic components high, ranging anywhere from 16 to 52 weeks.

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Rising Prices From aluminum to copper to polyurethane, the prices of raw materials required to make electronics and their components have surged to levels not seen in years.9 And if that was not challenging enough, even the prices of the materials used for electronics packaging products have increased.

In 2021, materials and services prices paid by U.S. manufacturers reached a record high with an index of 92.1 from May’s level of 88.0, according to the Institute for Supply Management.10 Between the rising cost of raw materials, increased shipping prices, and skyrocketing demand, electronic component prices are up by 40%.

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For the last few quarters, the troubles have been on the shipping side, especially with raw materials for assembly, and the delivery of goods to the countries where they are to be sold.”

Jason Stuckey // General Manager of Linnworks

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The Electronics Supply Chain Has Short-Circuited: A Tactical Guide to Navigating Supply Chain Disruption

Manufacturing at a Glance Aug Index

July Index

% Point Change

Direction

Rate of Change

Trend* (months)

Manufacturing PMI®

59.9

59.5

+0.4

Growing

Faster

15

New Orders

66.7

64.9

+1.8

Growing

Faster

15

Production

60.0

58.4

+1.6

Growing

Faster

15

Employment

49.0

52.9

-3.9

Contracting

From Growing

1

Supplier Deliveries

69.5

72.5

-3.0

Slowing

Slower

66

Inventories

54.2

48.9

+5.3

Growing

From Contracting

1

Customers’ Inventories

30.2

25.0

+5.2

Too Low

Slower

59

Prices

79.4

85.7

-6.3

Increasing

Slower

15

Backlog of Orders

68.2

65.0

+3.2

Growing

Faster

14

New Export Orders

56.6

55.7

+.09

Growing

Faster

14

Imports

54.3

53.7

+0.6

Growing

Faster

14

Overall Economy

Growing

Faster

15

Manufacturing Sector

Growing

Faster

15

INDEX

*Number of months moving in current direction Manufacturing ISM® Report on Business® data is seasonally adjusted for the New orders, Production, Employment and Inventories Indexes.

A tangible example of rising prices and supply chain issues is the current computer graphics card market. With components scarce and in high demand, as well as disrupted supply chains, getting your hands on a high-end computer graphics processing card (GPU) can be like striking gold.

In June 2021, gamers and crypto miners were reportedly camping outside of Best Buy stores just for a chance to snag a good graphics card.

Prices of PC components were already rising as Chinese import tariffs pushed prices up by as much as 25%. This is not to mention the markup resellers are applying which can reach 200%. With supplies low and in high demand, camping out for a graphics card ends up being the only option for many.

Across categories, even retailers with strategic advantages had to rethink logistics. One example is David’s Bridal, which is the largest American bridal-store chain with 300 stores across the US, UK and Canada. RETHINK Retail spoke to Jim Marcum, chief executive officer of David’s Bridal, who told us about the advantages of its vertically-

integrated supply chain, “ …we control and curate our own designs, our own product development, our planning, our production, the purchase of raw materials and then the coordination of when we move it into the ports and/or when we get it into the stores. And that is a great advantage for us because we can be nimble.”

But even still, Marcum told a story of “producing dresses overnight because we knew they were stuck on a boat.” In fact, multiple sources have discussed the skyrocketing logistics costs and portcongestion issues. In a RETHINK Retail interview, supply chain expert Rosemary Coates said, “Previously I would get a container from Shanghai or Shenzhen China to the US west coast for about $1,500. And today’s price is six, $7,000, maybe more for the same container, if you can get it.”

According to Marcum, he’s seeing a container cost “as much as 19 or $20,000 to move.” But luckily, teams at David’s are “tracking every event, where the dresses are and status” of customers orders.

Tactics for Managing Current and Future Disruptions

HARNESS DATA

SET LIMITS

COMMUNICATE

While experts are predicting semiconductors and other components to be scarce going into 2023, technology companies are working hard to create solutions that will alleviate the supply chain strain. Intel, for example, is reportedly starting a foundry business that would sell chips to other companies. As unpredictable as the current supply chain is, there are some measures electronics retailers can take to try and combat its challenges.

SET LIMITS

HARNESS DATA

OPTIMIZE WAREHOUSES

Use your data to make informed inventory and distribution decisions. Prioritize items in high demand and shift them to locations where transactions are high in volume. This will keep items that would normally be high in demand from sitting in locations where they could become dead stock.

As bottlenecks at manufacturing plants and ports begin to ease in 2022, the next challenges will be felt in warehousing. Warehouses in and around U.S. ports are running out of room with vacancy rates for industrial properties nearing an all-time low.11

“Sellers are overbuying stock, which will lead to a whiplash from an undersupply to an oversupply late in Q1/Q2 2022,” said Stuckey. “Focusing too much on the immediate problems can lead to future problems. It’s best to now take a longerterm view on the supply chain and prepare accordingly.”

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OPTIMIZE WAREHOUSES

You can set up measures to limit merchandise per person as well as set up bot screening software to limit the number of bots buying products in bulk for individuals to resell at exorbitant prices. In the GPU example, this was one of the measures companies took in to combat stock from being bought almost before it could touch a shelf or be updated on a webpage.

“Unbuilt warehouses are already being spoken for,” said Stuckey. “We’re also seeing sellers take dramatic approaches, including apparel giant American Eagle’s recent acquisition of multiple warehousing and logistics providers.

Following warehousing, Stuckey says you can expect to see an explosion in the need for

The Electronics Supply Chain Has Short-Circuited: A Tactical Guide to Navigating Supply Chain Disruption

multichannel order management technologies as sellers look to find ways to move the excess inventory quickly.

“For the last 20 months, sellers have been heads down addressing one issue into the next, but now is the time to try to get ahead of what’s coming down the pike,” said Stuckey. “Sellers should maintain close personal contact with their suppliers for the immediate term, but look to put dedicated resources on future quarters, focusing specifically on warehousing and multichannel.”

COMMUNICATE It’s not all about controlling stock and combating resellers. You also need to look at how you are communicating with consumers. This means giving employees the training to effectively communicate and meet customers’ needs even if their specific product isn’t in stock. The key is to keep an open dialogue.

Shep Hyken, a customer service and experience expert, recommends informing customers of delays, out-of-stocks, and restocks regularly through email or text communications.

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“While the delays are still eminent, the ongoing flow of information can relieve anxiety and give the consumer a sense of control,” said Hyken.

“The communication must be continuous, it must express empathy, and must make the customer feel that company communication is key.”

CONCLUSION Although these measures will not solve all your delays and inventory challenges, they can help ease some of the stress as you navigate around a struggling electronics supply chain. The real test will be who can best pivot and offer consumers alternative solutions when products aren’t readily available.

“Retailers will need to work a lot differently,” said Newbury. “You need to outthink this problem quicker than your competitors. I think there’s going to be a big change in how we think about our supply chain and leaders will need to have a more open mind.”

The Electronics Supply Chain Has Short-Circuited: A Tactical Guide to Navigating Supply Chain Disruption

Endnotes

1. https://www.bloomberg.com/news/articles/2019-12-27/apple-supplier-bullish-on-2020-as-china5g-phone-demand-kicks-in 2. Jeong, E.-Y., & Strumpf, D. (2021, April 19). Why the chip shortage is so hard to overcome. WSJ. com. Retrieved November 16, 2021, from https://www.wsj.com/articles/why-the-chip-shortage-is-sohard-to-overcome-11618844905.

3. Cheek, C. (2021, October 20). Four things we learned about the resignation wave–and what to do next. Outsmart. Retrieved November 16, 2021, from https://www.visier.com/blog/trends/four-things-welearned-about-the-resignation-wave-and-what-to-do-next/.

4. Person. (2021, June 3). Major shipping firms warn of worsening congestion at China’s Yantian Port. Reuters. Retrieved November 18, 2021, from https://www.reuters.com/world/asia-pacific/majorshipping-firms-warn-worsening-congestion-chinas-yantian-port-2021-06-03/.

5. Freightos. (2021, November 3). Shipping delays & freight cost increases 2021. Freightos. Retrieved November 18, 2021, from https://www.freightos.com/freight-resources/coronavirus-updates/.

6. Update 10 - notice regarding the Semiconductor Manufacturing Factory (naka factory) fire: Production capacity recovery status. Renesas. (2021, June 25). Retrieved November 18, 2021, from https://www.renesas.com/us/en/about/press-room/update-10-notice-regarding-semiconductormanufacturing-factory-naka-factory-fire-production-capacity.

7. Barrett, E. (2021, June 12). Taiwan’s drought is exposing just how much water chipmakers like TSMC use (and reuse). Fortune. Retrieved November 18, 2021, from https://fortune.com/2021/06/12/ chip-shortage-taiwan-drought-tsmc-water-usage/.

8. King, I. (2021, February 17). Texas Power Failures Shut Chip Factories, Squeezing Tight Supply. Bloomberg.com. Retrieved November 18, 2021, from https://www.bloomberg.com/news/ articles/2021-02-17/texas-power-failure-shuts-chip-factories-squeezes-tight-supply.

9. Spence, E., & Durisin, M. (2021, May 1). The Price of the Stuff That Makes Everything Is Surging. Bloomberg.com. Retrieved November 18, 2021, from https://www.bloomberg.com/news/ articles/2021-05-01/the-price-of-the-stuff-that-makes-everything-is-surging.

10. Jorgensen, B. (2021, July 28). Component prices rise 10% to 40%. EPS News. Retrieved November 18, 2021, from https://epsnews.com/2021/07/28/component-prices-rise-10-to-40/.

11. O’Neal, L. (2021, October 22). Tighter warehouse space adds to the supply-chain squeeze.

The Wall Street Journal. Retrieved November 18, 2021, from https://www.wsj.com/articles/tighterwarehouse-space-adds-to-the-supply-chain-squeeze-11634896801.

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