Supply Chain Impact of the Global Chip Shortage

While supply chain disruptions are nothing new, the last year has brought no shortage of events that have affected the flow of goods in different ways. The COVID-19 crisis has of course had a major impact on companies around the world: a survey published in December by Euler Hermes found that 94% of the companies surveyed reported a disruption to their supply chains as a result of the pandemic, with 26% of companies in the US reporting a ‘severe disruption’. More recently, the grounding of the Ever Given held up global trade worth around £7bn a day for six days in March.

While goods may once more be moving through the Suez Canal, many companies around the world are continuing to face another challenge in the form of the ongoing global shortage of semiconductors. Fuelled both by factory shutdowns caused by the pandemic and by soaring demand resulting from changes to consumer habits during lockdowns, the chip shortage has affected multiple products, including cars, consoles, smartphones, televisions, washing machines and even toothbrushes. Firms including Toyota, Ford and General Motors have had to halt production, while the launch of the iPhone 12 was delayed by two months.

The impact of the shortage is significant: the automotive industry alone is expected to lose US$110bn in revenues in 2021 according to consulting firm AlixPartners, which expects the crisis to hit the production of 3.9 million vehicles. Gartner, meanwhile, has predicted that the shortage will continue until the second quarter of 2022, disrupting supply chains and constraining the production of electronic equipment.

As a result of the challenge, some carmakers are looking to build relationships directly with semiconductor producers – and the Financial Times recently reported that carmaker Tesla is taking action by paying for chips in advance, as well as exploring the possibility of buying a plant. An article published by McKinsey, meanwhile, suggests a number of short and long-term strategies that may help carmakers weather the current shortage, from establishing ‘war rooms’ that combine supply and demand intelligence to investing in supply chain resilience.

“This is just the most recent significant disruption to supply chains that businesses are facing; as a result, over the past couple of years, the need for flexibility, agility and resiliency has been demonstrated pretty consistently,” comments Nathan Feather, CFO of working capital financial technology provider PrimeRevenue. “As supply chains have become more global, and as businesses have increasingly shifted to just-in-time models, it certainly feels as though the frequency of these types of events is on the rise.”

In this challenging landscape, Feather says that some companies are beginning to rethink their just-in-time inventory models. He adds that supply chain finance can help suppliers accelerate their receipt of cash, which in turn can help them speed up the purchase of key products such as semiconductors. “From the buyer’s perspective, when they start to build inventory, that can be a drain on cash flow and working capital – and supply chain finance can help them mitigate that too.” Last but not least, Feather argues that by offering suppliers the ability to get paid on their chosen date, buyers can position themselves as preferred customers – which can be beneficial when certain products are hard to come by.

This article was originally published by Treasury Today.