Supply Chain Signals for 2023: Feast or Famine?

The big story of 2021 and 2022 has been the ongoing and persistent semiconductor shortage. We’ve heard less about the problem in the back half of 2022 as inventories have started to recover, and the narrative in the financial markets has shifted towards recession rather than shortage. The conventional belief is, now that US and European governments have passed subsidies targeting domestic semiconductor production, and with inflation driving reduced demand for goods, we can expect greater inventories going forward and possibly a surplus by 2024.

The semiconductor industry behaves less like a hyperscaling technology company and more like the traditional industrial sector. And because of this new investment coupled with strong consumer demand, it is difficult to project what inventories and lead times will look like going into 2023 and beyond.

Semiconductor Industry Projections

Most of the news in the electronics industry over the past year has focused heavily on supply chain, or rather the problems in procurement and inventories for chips used in consumer products. With these products being such large drivers of economic activity in industrialized nations, we should not have been surprised that public assistance measures led to a temporary boom in economic activity that brought on a major supply crunch of semiconductor inventories.

Major Projections for 2023

The table below summarizes some of the major supply chain projections released over the course of 2022. These come from well-known names in the financial world, supply chain/logistics, and in the electronics industry.

No matter who you ask from the electronics industry or the financial world, everyone seems to have settled on the end of 2023 as being the point where inventories and lead times turn around. Of course, it’s possible that the analysts have it wrong, and they certainly have gotten it wrong in the past; for example, the analysts at JP Morgan predicted an end to shortages much too early, originally calling for a return to normalcy in 2022. It is clear that inventories for some chips have started to recover, but there remains persistent inflation due to remaining lower supply and higher demand.

What’s Happening Today?

What’s driving these projections now? It appears to be a mix of reduced consumption from consumers, possibly driven by a mild to moderate recession, as well as new manufacturing capacity beginning to come online to serve projected greater demand for semiconductor.

These suspicions are reflected in industry sales data. In particular, IPC has noted the demand decrease has led to lead time reductions beginning in Q3 2022, and ECIA made similar remarks in a recent report. ECIA’s data shows declining sales throughout the component industry and end markets, which is consistent with the macroeconomic picture.

North American sales data provided by ECIA in their Electronic Component Sales Trends (ECST) Report.

So how do we square these competing ideas of fixed production capacity with falling sales and incoming manufacturing capacity? It appears the simplest answer is probably correct: sales just aren’t falling fast enough for current production capacity to replenish inventories, especially in mid-range chips that see the most usage in end devices.

In the Short Term, Find What Drives Value

Without any certainty, companies are probably stuck with a just-in-case approach to procurement and supply chain management. A just-in-case supply chain strategy focuses on holding inventory over the initial projected product lifecycle, with the goal of ensuring repeat production runs within some extended time frame. It’s an acceptance that the just-in-time approach, where companies did not need to hold inventory, does not make sense where there is no semiconductor surplus.

Just-in-case supply chain management should be implemented for the component that create the most value in an end product. Things like processors, displays, critical DSP chips, and specialty ASICs all drive the primary value creation mechanism in a product, which is the user experience. This means designers and procurement professionals should work together to find what drives the most value in a product while also ensuring it can be sourced reliably.

Some of the strategies being taken today to ensure sustained production for the most at-risk components include:

1. Identifying at-risk components and finding 2nd sources
2. If there are no 2nd sources, identify replacements
3. Explore the use of FPGAs as a substitute for at-risk parts
4. Order parts once a design is commissioned and the front end engineering has received signoff
5. Secure allocation from semiconductor vendors in smaller, extended batches
6. Be prepared to use design variants that can accommodate multiple part number options

Anytime you need to source and manage components for your electronic products, use the complete set of system analysis tools from Cadence to ensure your designs meet performance targets and ensure sustainable production. Only Cadence offers a comprehensive set of circuit, IC, and PCB design tools for any application and any level of complexity.

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