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The Chip Shortage Explained

Chip shortages continue to escalate as manufacturers are unable to meet demand. The backlog of supply chain issues began pre-pandemic due to an increased demand for technology, only to exponentially worsen during the pandemic.

What’s in the article:

  • What is causing the chip shortage?

  • What industries are being affected by the shortage?

  • What does the future look like for the shortages – Is there an end in sight?

Chips, often called semiconductors or microchips, are what make our electronics “smart”. The rise of digital everything from smartphones and automobiles to washing machines has created a growing demand for processing chips. Even prior to COVID, manufacturers were often challenged to meet the rising demand.

As demand for chips has continuously increased, COVID, labor shortages, and shipping delays have created a backlog that will take time to overcome. In the meanwhile, manufacturers are making every effort to reduce the backlog and businesses are finding methods to cope with the shortfall as well.

What is Causing the Chip Shortage?

Before the pandemic, the demand for chips was already growing. So, when factories shut down to slow the spread of COVID, an immediate production backlog was created.

As office workers started working from home, the demand for laptops and printers for home offices as well as televisions and gaming systems for entertainment, further increased chip requirements.

As office workers started working from home, the demand for laptops and printers for home offices as well as televisions and gaming systems for entertainment, further increased chip requirements. Some people also relocated or started home improvement projects, causing them to purchase small appliances.

All these products require semiconductor chips to operate, but the chip manufacturers were already behind due to shutdowns or employee shortages. Add delays in the logistics industry to this scenario and it’s a recipe for disaster.

What Role Does Logistics Play in the Chip Shortage?

More than 75% of semiconductor chips are imported from overseas, so logistics plays a significant role in the chip shortage. Since the start of the pandemic, we have seen lengthy transit delays, a worldwide container shortage, and a personnel shortage at ports and warehouses.

The port of LA/Long Beach has been backlogged, taking several weeks for vessels to be allowed to dock and offload before the freight becomes available. This pushed quite a bit of freight to move by air but there are just as many issues. Travel restrictions over the last two years has led to fewer flights, resulting in limited freight capacity on passenger airlines. Further aggravating the situation, staffing shortages at airports are causing transfer and loading delays.

What industries are being affected by the shortage?

The automotive industry has taken a hit along with consumer electronics of all types. For the auto industry there has been reduced vehicle production with some models ceasing production and plant closures.

There has been a spike in the cost of electronics and many businesses are still struggling to get proper equipment in place.

There has been a spike in the cost of electronics and many businesses are still struggling to get proper equipment in place. Construction has also been impacted, with homes taking longer to build due to an LED light shortage that is also affecting consumer electronics.

What is being done to resolve the chip shortage?

Chip manufacturers are taking a multi-pronged approach to address the chip shortage. They are:

  • Increasing production staff to accelerate manufacturing.
  • Asking customers to commit to long-term contracts to simplify production planning.
  • Building new factories to increase manufacturing capacity, but these new facilities won’t be operational until sometime in 2023.

So, chip companies are making efforts to recover, but how long will it take until the shortage is over?

What does the future look like for the shortages – Is there an end in sight?

The only way for the chip shortage to end is for production to match chip demand and shipping issues to be resolved. This is further complicated by the fact that there is a growing demand for this commodity due to continuous technological developments in everything from TVs and mobile devices to automobiles.

According to Pat Gelsinger, CEO of Intel, the global chip crunch may drag on due to limited availability of key manufacturing tools. This obstacle restricts manufacturers’ ability to dramatically expand production capacity to meet the growing chip demand. So, he expects the semiconductor shortages to continue into 2024.

What can individual businesses do to cope with the chip shortage?

Lead times, from order entry to fulfillment, for some chips are up to 52 weeks. And the average chip has a front-end production cycle of 12 to 24 weeks with an additional four to eight weeks post-production to package and test before finally shipping to the customer.

So, the best thing businesses can do to mitigate the impact of the shortage on their businesses is practice proper production planning and forecasting.

So, the best thing businesses can do to mitigate the impact of the shortage on their businesses is practice proper production planning and forecasting. This ensures proper staffing and raw materials meet their long-term goals. Planning of this type helps keep chips consistently on hand instead of ordering based on current demand and risking running short.

Another proactive step businesses can take to prevent chip-related supply chain issues is to work with a logistics provider that offers a broad range of services. It’s especially important to select a logistics partner that knows what kind of modal mix could help the chip supply chain operate more evenly than in the past.