Indian Institute of Management, Sambalpur

2021-2022

A
Business Report
On

A
Business Report
On

SILICON SUPPLY SHORTAGE

UNDER THE GUIDANCE OF
Prof. Sriparna Basu

Aditya Teja 2021MBA147

Manu Sarang 2021MBA156
Sowmya C F 2021MBA116 Section C
Yashika Goyal 2021MBA123
Yukti Jain 2021MBA124
WAC REPORT - SILICON CHIP SHORTAGE - Sec C Group 4
Executive Summary 1

Introduction 2

Background 3
Change in Electronics demand 4
Long Lead time 4

Industries Affected 6
FURTHER INFORMATION 7

Multi Echelon Distribution Network 9

Graph Database 10
Neo4J 11

ANALYSIS 13
LEAD TIME IN SUPPLY 13

RECOMMENDATIONS 14

Executive Summary

Ever since Covid 19 had made its entry, several industries have been impacted. Few Industries
which suffered the brunt of the supply chain shortage were the ones relying on semiconductor
devices. Due to the unforeseen disruption, semiconductor manufacturers were left to deal with
the erratic fluctuations in supply and demand and had to effectively manage their existing
business operations.

Supply chains will be constricted for the foreseeable future as chip demand continues to rise.
That implies everyone should construct a more resilient supply chain, including semiconductor
businesses and others who rely on chips. Re-examining near- and long-term strategies, as well as
acting on lessons learned from chip shortages that disrupted manufacturing for a variety of vital
industries around the world, is critical to being better prepared for the future.

The 2021 chip shortage triggered a global economic crisis. Apple, the world's largest chip buyer,
delayed the release of the iPhone 12 by two months; Samsung, the world's second-largest buyer
—and also the second-largest producer—will almost certainly have to do the same with its new
smartphone. In 2021, the global automobile industry is predicted to lose $60.6 billion in revenue.
The scarcity of semiconductors drew the attention of US President Joe Biden, who convened a
virtual meeting with CEOs from concerned sectors.

The approach is for supply chain and business units to agree on a product segmentation plan that
divides products into cost-to-carry inventory and cost-of-shortage categories. We'd put the PMIC
in the lower-right quadrant as having a low cost to carry inventory but a high cost of shortage.
This categorization then informs a plan for increasing safety stock.

Introduction

Semiconductors are essentially the "heart" of billions of items, ranging from cellphones, data
centers, computers, laptops, tablets, smart devices, cars, home appliances, life-saving medicinal
devices, agri-tech, ATMs, and more.
Silicon is used to make semiconductor chips because it is an excellent conductor of electricity.
These chips are installed in microcircuits, which power a wide range of modern electronic goods
and components. It should be mentioned that semiconductor materials construct all active
ingredients, integrated circuits, microchips, transistors, and electronic sensors.
They allow critical functions including high-end computing, operation control, data processing,
storage, input and output management, sensing, wireless connectivity, and more.

As a result, these chips are critical components of all upcoming technologies, including artificial
intelligence, quantum computing, enhanced wireless networks, blockchain applications, 5G, IoT,
drones, robots, gaming, and wearables.

Semiconductors chips are low-cost components that play an essential role in producing modern
technology goods and parts. Simply, semiconductor chips are the foundation of contemporary
computing.

The supply chain of the automotive industry

 Background

What caused the shortage?

The semiconductor shortage was not caused by a single incident or interruption. Instead, a series
of events contributed to the current state of the car sector.

1. Struggle during the Covid-19 crisis

The automotive sector saw a significant reduction in demand during the first half of 2020.
Furthermore, while new-vehicle sales increased in the second half of the year, the
relatively unclear sales forecast at the time meant that automakers did not significantly
raise their semiconductor orders. Simultaneously, as a result of the transition to remote
work and the resulting increased requirement for connection, consumer demand for
personal computers, servers, and wired communications equipment increased
substantially, all of which rely largely on semiconductors. As a result, although the car
industry substantially reduced chip orders, other industries saw rising demand.
Change in Electronics demand
During COVID-19, when working and learning from home became the norm and funds
shifted from going out for amusement to streaming and gaming at home, our habits
profoundly altered. This resulted in a surge in consumer electronics demand. As demand
for devices increased, so did the market for semiconductors. Every video game console,
TV, or tablet needs many chips for display, power, communication, and other functions.
 Long Lead time
Prolonged lead times Supply became unbalanced as a result of high demand. This meant
that supply recovery would be sluggish and costly in an industry with long manufacturing
lead times of 18 weeks—and where developing extra capacity needs 6 to 9 months and
billions of dollars of revenue.

Logistical obstacle
To make matters worse, chip supplies were delayed as a result of fewer flights and
airspace closures. Furthermore, global shipments of COVID-19-related equipment, as
well as the global grounding of dozens of B777s owing to engine issues, put further strain
on air cargo capacity. In sum, worldwide aviation freight capacity fell by a startling 20%
in 2020. Furthermore, substrates—the foundation upon which chip components and their
connections are built—were in short supply as a result of a factory fire in Taiwan, which
hampered chip manufacturing even further.

According to our examination of IHS Market data, real demand for semiconductors in the car
sector in 2020 lagged below a pre-pandemic projection by almost 15 percentage points (Exhibit
1). During the same time period, most other segments (with the exception of the industrial
sector) witnessed a strong rise, resulting in an average increase in semiconductor sales of 5 to 9
percent above the expected growth. As a result, when demand for automobiles recovered quicker
than expected in the second half of 2020, the semiconductor industry had already switched
manufacturing to fulfill the demand for other uses.
2. Geopolitical tension
Due to geopolitical concerns, certain consumer electronics manufacturers have significantly
expanded their chip inventories in order to navigate through a time of limited access to
semiconductor production. We estimate that such hoarding produced a 5 to 10% increase in
wireless semiconductor demand—the equivalent of one-third of auto-market chip sales.

3. Limited stock
Just-in-time manufacturing methods, which may reduce waste and boost efficiency by reducing
on-hand inventory, are commonly used in the automotive supply chain. In normal circumstances,
inventory reduction is financially advantageous; nevertheless, in the case of an unforeseen
shortage, the practise creates immediate disruption of the whole supply chain. Because many
players did not anticipate the chip scarcity in 2020 and 2021, they most likely have extremely
limited supplies on hand to withstand the storm.

4. Rollout of 5G networks and overlapping chip demand

The semiconductor industry's demand fluctuates according on node size. Smaller-sized chips, the
most advanced of which are seven and 14 nanometers or smaller, are frequently utilised in
cutting-edge technological applications but aren't needed by many automakers. Our study
highlights some unintended consequences of widespread technology adoption that the car
industry must address. A wide-scale 5G deployment, for example, necessitates a huge number of
radio-frequency semiconductors made at the same, bigger node sizes as vehicle chips. The same
may be said for the power-electronic components required to load up servers and PCs (Exhibit
3). Because of the amount of overlap, automakers may face a persistent scarcity of
semiconductors as 5G is rolled out over the next few years.

Industries Affected

Shortage strike automotive first

The automotive industry is the first to be affected by the shortage. Automobile sales began to fall
drastically in the spring of 2020 when shops closed their doors. With the automobile sector
facing a grim future as a result of the pandemic, corporations projected a persistent reduction in
demand for their goods and took choices to limit their need for semiconductors. The rise in
electronics and other areas swiftly seized this capability. However, contrary to expectations,
automobile sales returned astonishingly quickly, within a few months, as a V-shaped recovery
took hold (see chart below). Improper inventory planning resulted in chip shortages and a stop in
production. "The issue is that even if the 10-cent chip is missing, you can't sell your $30,000
automobile," said Gaurav Gupta, a Gartner semiconductor expert.
 INFORMATION

As discussed above the global shortage of silicon chips had slammed the entire process cycle in
the automobiles industry. This effect was estimated through the huge difference in the number of
cars estimated to be sold and the actual sales numbers. The forecast of this disruption led to
companies piling up for huge demand orders with the suppliers. Covid was just the last drop in
bucket of the disrupted supply chain.

The economic situation explains the case of excess demand given the limited supply. Currently,
the semiconductor industry is dominated by 3 key players which include Taiwan, Intel, and
Samsung. Given the situation of work from home, there was a huge increase in demand for
computers and laptops as well.

Performing analysis for forecasting the demand for automobiles given the effect of supply chain
issues with suppliers. This forecasting gives an estimate related to demand in the year 2022.
This forecast is based on taking 2014 as the base year and using the increase in sales of
automobiles from Statista.

ANALYSIS:

● The impact of decline in the supply of began from 2020 when the imbalance of
demand and supply came to effect
● Maruti Suzuki, the Indian automaker giant, has announced that it will slash the output
by 60 percent for September.
● Mahindra and Mahindra announced the shutdown of one of its plants for a week due to
the non-availability of chips.
● A report by Goldman Sachs reports that at least 169 industries which include
automobiles, electronics have been impacted by this disruption in supply.

LEAD TIME IN SUPPLY

Following a report from Bloomberg, an analogy can be drawn out with the increase in lead time
i.e, the time gap that is estimated for placing an order and the supply. In the year 2021, the lead
time has increased to 17 weeks.

 An increase in
the lead time means eventually huge stock orders with the suppliers
● Unfulfilled demands of the end customers
● According to the CIQ report, there has been a 75% increase in lead time on average
wherein the end customer received the product after the lead time of 52 weeks in 2021

INTERPRETATION
Multi-Echelon Distribution Network

A multi-echelon supply chain is a network topology used by massive organizations that operate
globally and must manage a huge number of products as well as large market zones with
numerous suppliers and subcontractors. The multi-echelon inventory optimization problem,
which deals with the positioning of stocks in time and space, arises at the tactical level once the
distribution network is set.
To analyze such hyperconnected data, we use graph databases and machine learning which can
scale up with an increase in data points without a huge increase in time complexity to calculate
optimum supply chain network.

Instead of tables or documents, a graph database maintains nodes and relationships. Data is saved
in the same way that thoughts are scribbled on a whiteboard. Your data is kept without being tied
to a pre-defined model, allowing you to think about and use it in a variety of ways.
Graph databases handle major issues that many of us face on a regular basis. Many-to-many
interactions with diverse data are common in modern data challenges, necessitating the ability to:
Navigate deep hierarchies,
Find hidden connections between items being far apart, as well as inter-relationships between
them.

When it comes to real-world questions, many of them are about relationships rather than
individual data elements.

SCM (supply chain management) strategy includes one of the most crucial activities: supply
chain planning, or SCP. As a result, having dependable tools for generating effective plans is
critical. Our supply chain decision-making processes can be considerably improved if you use
machine learning. We can manage demand and supply while also optimizing delivery procedures
by analyzing large data sets and applying sophisticated algorithms.

Apart from better supply decisions, another advantage is that human interaction is low. You
won't have to do any of the data analysis on your own. Artificial Intelligence (AI) algorithms will
take care of everything and prevent you from making any blunders. All you have to do now is set
the parameters.

Neo4J

Neo4j, Inc. created a graph database management system called Neo4j.

The database's developers describe it as an ACID-compliant transactional
database with native graph storage and processing. Neo4j is offered as a
GPL3-licensed open-source "community edition," with closed-source
commercial licences for online backup and high availability extensions.
It is the ideal tool for use like these
We try to analyse the chip demand of 4 wheelers and the supply end of
the silicon chips, the foundries in the graph database.
Once loaded the data looks like this:
We can now query the database for cost, time and other parameters between the nodes in the
supply chain.

For which we get a result as:

This method provides a novel approach to optimizing the supply chain of various industries with
highly connected nodes.
In our specific case, we run a betweenness algorithm which tells us where bottlenecks might lie
in a system, Dijkstra's algorithm to find out the shortest path between the supplier and end-user.

RECOMMENDATIONS -

● To find out the arbitrage, real-time market intelligence and primary research is required
● Speedy addition of new suppliers from distinct locations should be done
● Forecasting for the optimal demand of the chip quantity
● Work together with finance groups for quicker Payments
● Capacity allocation and management
● Collect sophisticated intelligence on the chip value chain and manufacturing locations to
make more informed decisions regarding factors such as contract terms and reassess the
landscape
● Leverage technology and analytics to match supply with demand, manage variants and
prevent manual errors in the longer run.
● The semiconductor value chain is interdependent and interwoven with several industries,
making it critical for governments to create policies that

address the three important dimensions in the longer run.

● Government policies should focus on ensuring & securing access to foreign technology
 providers through the means of trade and foreign policy

The major factors on which we derive our recommendations are mentioned below

The subfactors which add up to the recommendations for major factors

 EXHIBIT1
Automotive semiconductor sales lagged in 2020 but growth in most other segments is expected
to exceed pre covid estimates