Business Resiliency and Lessons Learned from the Global Chip Shortage

A lesson business leaders have been reminded of over the last 12 months is that disruption begets disruption. Businesses were first faced with unprecedented slowdowns and shutdowns stemming from the global pandemic, followed by a historic shortage of one of the most integral pieces to modern technology: computer chips.

It’s difficult to pinpoint exactly where disruption stemming from the pandemic ends and disruption stemming from the global chip shortage begins. In either case, businesses of all sizes have been hammered with unanticipated roadblock after roadblock, and many are struggling to come up with contingency plans to respond to prolonged shocks to the supply chain.

One of the most recent examples is the ongoing global shortage in computer chips and semiconductor parts. It started as a temporary delay caused by factory shutdowns at the start of the pandemic. Within several months, production ramped back up. By that time, however, demand had exploded. Remote workforces needed new laptops and smartphones. People bought new gaming devices to pass the time. New car sales soared as consumers gained more confidence in the economy.

Supply continues to be dwarfed by demand. Several large auto manufacturers were forced to idle production and it’s expected profits of some companies will take hits in excess of $2B this year. The world’s two biggest purchasers of semiconductors, Apple and Samsung, have had to delay (or are projected to delay) highly anticipated product launches.

In effect, we’ve moved from one global crisis to another. Chips and semiconductors are embedded into everything from home appliances to automobiles to medical devices and the global shortage is far from over. This underscores another valuable lesson – the importance of resilience and risk management in the financial supply chain.

Companies are buckling up for a chip shortage that is far from over.

Gartner predicts the chip shortage will plague supply chains until the second quarter of 2022. Countless industries are feeling the effects whether directly or indirectly, but the automotive industry in particularly is being held hostage by the chip shortage. Global automobile production could fall by up to 3 million cars this year, and some manufacturers are rethinking production models as they look to solve systemic issues in the supply chain. Toyota, for example, broke the rules of its own just-in-time production philosophy (now used by manufacturers around the globe) by stockpiling months’ worth of computer chips and semiconductor parts.

While we have seen the chip shortage impact our buyer and supplier clients on an individual level, we have yet to see sweeping trends in our data – though we expect the scale to tip eventually if the shortage keeps its current pace. Our conversations with clients have mostly revolved around having the financial resources to secure supply where it is available and plan for prolonged shortages moving forward. We will continue to work closely with our clients to meet their cash flow needs and report on any findings in our data as they materialize.

Business leaders seek new ways to survive sustained disruption.

As some companies rethink production cadence and philosophies, it’s important to point out there is only so much contingency planning that can be done. Some business leaders are already planning for the next global pandemic or massive supply chain disruption – as they should – but those events will likely have new challenges and therefore new and unique disruptive side effects. With that in mind, companies must also consider broad-stroke, strategic measures that can be put in place now to improve supply chain and financial resiliency despite sustained disruption.

One measure is adding a layer of security and agility into the financial supply chain. How can you make sure your business is able to respond adequately when faced with industry-wide or global disruption? How can your business be a more desirable customer to get first dibs on limited supply? Supply chain finance is purpose-built to meet these demands. It allows buyers to optimize cash flow so they have more liquidity on hand to pivot, make changes to their supply chain, and withstand extended periods of disruption.

Supply chain finance provides additional financial security and agility to suppliers as well. It gives suppliers the cash they need to expedite and/or boost production to meet surges in demand or, alternatively, to keep them afloat during shortages (whether a shortage in demand or a shortage in parts, e.g. computer chips).

Large-scale disruption is rarely a single event. The ripple effects are often just as consequential as the initial cause as evidenced in what we’re seeing today and what we’ve witnessed during other times of economic crisis. It’s up to business leaders to fortify their companies for sustained disruption including strengthening the financial supply chain. Supply chain finance is one lever to pull. It has played a critical role in helping buyers and suppliers withstand the last 12 months of uncertainty as well as position themselves to be even stronger and more competitive in a post-pandemic business climate – and it will continue to provide the same insulation for the challenges ahead.