10 ways IT can navigate the chip shortage

Exacerbated by the pandemic, the chip shortage neared crisis proportions at the start of the year. Network vendors calculated the impact on their businesses in recent earnings reports: Cisco’s current product backlog is at nearly $14 billion, Juniper reported a backlog of $1.8 billion, and Arista said that lead times on sales are 50 to 70 weeks.

Then Russia invaded Ukraine, putting even more stress on the global supply chain. Ukraine manufactures 70% of the world’s neon gas, which is needed for the industrial lasers used in semiconductor manufacturing, according to research firm TrendForce.

Semiconductor manufacturers also need C4F6, a gas used for etching, and palladium, used in sensors and memory. Russia is a crucial source of both, according to a report by research firm Techcet.

Even worse, if Chinese semiconductor manufacturers fail to comply with sanctions against Russia, the U.S. could cut off their access to critical technology they need to manufacture chips, U.S. Commerce Secretary Gina Raimondo told the New York Times in early March.

Moving the U.S. to a self-sufficient, local semiconductor supply chain won’t be easy. According to a 2021 report by the Semiconductor Industry Association, it would take a decade, cost a trillion dollars, and raise chip prices by up to 65%.

That doesn’t mean it’s not worth pursuing. Local production will help alleviate shortages, decrease shipping delays, and help provide some stability to the global semiconductor supply chain.

Congress is currently looking at approving the $52 billion Bipartisan Innovation Act, which includes billions of dollars for incentives for domestic semiconductor production. “There is perhaps no production more important than reclaiming America’s leadership and owning our future than semiconductors,” President Biden said at a roundtable for CEOs and governors on March 9.

The act will also fund the creation of a new office at the Department of Commerce tasked with monitoring and strengthening critical supply chains. “It will mean that we aren’t overly reliant on other countries from risks like wars and pandemics,” Biden said.

In his State of the Union speech on March 2, Biden said that Intel already planned to invest $20 billion in a “mega-site” fab complex in Ohio – and is ready to increase the investment to $100 billion if the Bipartisan Innovation Act passes.

Meanwhile, in Europe, the proposed EU Chips Act plans to mobilize more than 43 billion Euros (about US $47 billion) of public and private investment to double European semiconductor production by 2030.

But these investments will take years to play out. Until then, here are some ways to navigate the chip shortage.

1. Design based on availability

In the electronics industry, 78% of engineers report significant challenges getting components, according to a global survey by Avnet Insights released in March.

In the telecom industry, 83% of respondents reported significant challenges. Impacts included delayed production schedules and higher prices. In addition, 96% expected lead times to get even worse and prices to rise even higher in the next year and a half.

As a workaround, 64% of companies now design around component availability more than preference, the Avnet survey found. In the past, engineers would have looked for components that optimize ease of manufacturing, performance, cost, or other key business metrics. 

Another engineering option is to design for flexibility or have backup designs ready if supply chain issues derail preferred designs.

Designing for flexibility isn’t just for electronics engineers. IT executives designing technology architectures may also need to rethink some of their assumptions about the critical building blocks of those architectures, says Sam Mourad, CIO at SHI International, an IT solutions provider based in Somerset, N.J.

With modular and flexible architectures, organizations can more easily deal with supply uncertainty, he says, while still meeting near- and long-term business requirements.

2. Reuse old components

CDS is a company that partners with original equipment manufacturers, such as Dell, IBM, HPE, and Cisco, to provide maintenance and support services for their products. That helps enterprises get more life out of their technology, says company CEO Dan Newton.

To maintain all this equipment, CDS has more than 95 warehouses globally stocked with spare component parts for data centers. Stockpiling may not be a practical solution to the chip crisis for enterprises – it’s hard to accumulate stockpiles in the middle of a supply shortage. But there’s something else that CDS does that could be relevant.

When customers migrate to new infrastructure and use CDS to decommission old equipment, CDS strips down the units and puts the components back in its warehouses. “We reuse something like 90% of the components in any networking or storage device,” Newton says.

He suggests that every company should check what they already have on hand. “Many organizations don’t fully understand what’s in their data centers,” he says.

3. Get more life out of what you’ve got

There are also steps that companies can take so that their existing equipment lasts longer, Newton says. “Don’t run it too cold, don’t run it too hot,” he says. “Maintain the infrastructure appropriately.”

And the most significant shortages are in new equipment. “Most of our OEM partners are seeing three to six-month delivery delays,” Newton says. Older equipment can be easier and faster to get.

4. No more “just in time” ordering

“Just in time” was a great strategy when supplies were reliable. It saved companies money, reduced warehousing costs, and made operations more efficient and streamlined. Those were the old days.

“If we have learned anything from the automotive industry in the last two years, it is that just-in-time supply combined with inelastic supply chains spells disaster,” says Steven Zhou, CEO and co-founder of Moov, an online, real-time data powered marketplace for used manufacturing equipment.

Smart companies are revisiting those supply strategies, he says.

As a result of the shortages, many companies have switched from “just in time” to “just in case” purchasing, agrees Shiv Tasker, global head of semiconductor and electronics at Capgemini Engineering. Doing so isn’t always easy. “It puts pressure on working capital,” he notes.

5. Increase supply chain visibility

Companies are upgrading their IT systems and pulling in data from suppliers to get updated information about the availability and delivery of critical components.

“They are building systems that allow them to keep watch over every single part required to produce their product,” Tasker says. “They’re also implementing alerts to identify issues before they become critical.”

That increased visibility is extending into distribution to ensure that products are not being stockpiled in one location when another set of customers might need those products sooner, he says.

6. Plan ahead

It might seem counterintuitive when a company is dealing with one unpredictable crisis after another, but long-term planning can actually help a company deal with emergencies.

Companies should strengthen and lengthen their technology roadmaps, says SHI’s Mourad, and the more comprehensive the roadmap, the easier it is to plan ahead. “This avoids rushed or last-minute planning and allows you to proactively adapt depending on changing market conditions,” he says.

Planning pays off in the form of reduced risk of exposure and greater flexibility.

7. Be open minded about alternatives

When the preferred option isn’t available, it might be time to be more open minded.

“Equipment in your hand is often worth more than equipment on backorder, regardless of the price,” says SHI’s Mourad. “The key is to act early and be open to looking at alternative equipment models and manufacturers.”

Mourad says that price is becoming a less important factor in buying decisions, compared to forecasting, logistics, and project management.

Companies can also consider buying used or refurbished equipment, says Moov’s Zhou. Used equipment may be more readily available and buying used is also better for the environment.

“Device manufacturers have for years promoted buy-back and refurbishment programs as end devices get updated so frequently, they are often not used until end of life,” he says.

8. Use cloud more aggressively

According to recent research from Insight and IDG, 91% of IT decision makers say that they are being impacted by IT supply chain disruption.

In response, 43% say that they are avoiding last-minute, ad-hoc purchases, 42% are improving their forecasting capabilities to get more long-term visibility into their equipment needs – and 44% say that they plan to shift processing to the cloud. (Read more: Supply chain woes forcing more workloads to the cloud)

“Looking for options where hardware can be leased or operationalized on an as-you-need-it basis, such as cloud or SaaS models, can help you alleviate the pressure caused by chip shortages,” says Servaas Verbiest, director of product field strategy at Sungard Availability Services.

There might be downsides to moving to the cloud prematurely, but those may well be outweighed by the costs of lost business or halted operations.

Sungard Availability Services has also used cloud deployments for customer projects when standard approaches weren’t feasible.

“That ultimately allowed their business to continue on track,” Verbiest says. “At the same time, they worked on securing the resources required for standard deployments if they wanted to return to that model.”

9. Use AI and ML to add intelligence to supply chain management

Legacy systems, manual processes and dispersed data make it difficult for companies to react to supply chain emergencies, says Prakash Harihan, SVP for CFO consulting and advisory at New York, NY-based Genpact, a technology consulting firm.

But once companies have digitized their supply chains and integrated real-time updates from partners and suppliers, then they will get data that they can use to further improve those supply chains.

For example, scenario planning can be used to identify the risks of having too much cash tied up in stock and inventory. That allows companies to make better decisions about whether to buy components in advance. “Predictive analytics can help forecast demand, supply shortages, and price increases in materials,” Harihan says.

10. Use dual sourcing strategies

Buying everything from one supplier offers advantages. With higher volumes come cost savings. And it’s easier to work with one supplier than to juggle multiple ones.

But the war in Ukraine has highlighted the danger of doing this, says Mirko Woitzik, senior manager EMEA, intelligence solutions at Everstream Analytics, a supply chain risk analytics company. “Semiconductor makers have been very exposed to the supply of neon and other industrial gasses from Ukraine,” he says.

Finding multiple suppliers is not a quick fix. “Qualifying new materials and suppliers can take up to 12 months,” Woitzik says. “So dual-sourcing should be part of a long-term strategy.”