This month we are going to move away from manufacturing technology and talk about something that is affecting the entire manufacturing industry – the lack of silicon for producing computer chips. Everything from the phone you’re most likely reading this on, to the wireless keyboard I’m typing this on, is comprised of computer chips. We all rely heavily on chips and more specifically semiconductors that make up those chips.
What is the bullwhip effect?
The demand for silicon is far beyond the current supply and it’s affecting almost every industry causing the bullwhip effect. (I’m going to refrain from any Indiana Jones allusions here.) The bullwhip effect is a phenomenon within manufacturing that shows that distortion in the supply chain can multiply, meaning that small standard errors can compound as you move up the supply chain causing massive shifts in demand. Recent events (i.e., Covid and the shift of work and school at home) have created a massive demand for chips in computers and hardware inside the home. This demand has put stress on the entire supply chain, spiking prices, and generating greater lead times, thus the bullwhip effect. So, grab your fedora, and let’s dive in -ok, I couldn’t resist.
When did this start?
Despite the once in a century global pandemic. This shortage did not start in 2020 and X never, ever marks the spot. As developing nations have become more developed, the need for more chips in those regions have increased. Economists had starting taking note of the silicon shortages all the way back in 2018.
The hits just keep coming.
As we have discussed so far, the bullwhip effect has caused a bulk of our silicon shortages. However, a once in a century global pandemic is also more directly to blame. While the United States is returning to business as usual, other countries around the world are still being devastated by the Covid-19 pandemic. North America only makes up a small portion of the total silicon production in the world. Those facilities are currently being slammed with orders that they simply can’t fill. Countries like China and India are still having issues with the virus and are unable to keep up with silicon manufacturing.
When will things return to normal?
This could be a new norm for a little while. Some companies have announced a push to add to their silicon manufacturing facilities; however, this may take as long as 2 years to finish construction of these new facilities. This could cause more of a bullwhip effect in reverse. And so, the cycle continues. But if you can look on the bright side, there’s no snakes. At least this time, It didn’t have to be snakes.