Knowledge is Power in the Ongoing Chip Shortage

What you’ll learn:

• The importance of creating redundancies in your supply chain.
• Trends in semiconductor lead times and pricing.
• How to protect your company against the growing risk of counterfeit chips.

The last year has left a lot of people wondering about the current state of the supply chain. To be frank, there’s no simple answer, with each electronic part having a different lead time and price, and manufacturers and distributors alike scrambling to source the components they need. I discussed the situation with Todd Snow, VP of Global Purchasing for Smith, a global independent distributor of electronic components.

With no definitive end in sight to the market volatility, is it possible to project where pricing trends and shortages will be in the future?

Going forward, we expect companies to work on building greater resiliency strategies to address the semiconductor shortage. Over the past year, we’ve seen what can happen when companies rely on single-source procurement for semiconductors and other electronic components—shortages and delays occur when demand outpaces supply. For companies with limited experience in sourcing products, the complex nature of the semiconductor supply chain has created challenges when their regular suppliers run out of stock.

In 2022, we will see companies across multiple industries, including the auto industry, start to build greater resiliency in their own supply chains by sourcing products on the open market. They will also explore additional options such as vendor-managed inventory and custom solutions that meet their specific needs.

By working with an experienced partner, such as an independent distributor, to create redundancies in their supply and obtain authentic, high-quality products more effectively, companies can better weather the cyclical nature of semiconductor supply and demand and prepare for future disruptions that may occur.

Following up, do you see any timeline for conditions to return to pre-pandemic ways?

With so many shifts and disruptions happening in the supply-chain industry due to the pandemic, we may not ever see a return to pre-pandemic conditions for supply. Since manufacturers are diversifying their supply chains, cross-matching parts, and getting more directly involved in the sourcing process, supply constraints seem to wax and wane based on individual procurement strategies. There continues to be elevated demand for MOSFETs and IGBTs, and lead times for selected devices can run up to 52-plus weeks, while pricing is elevated and changing daily.

AMD and Intel are leaders in this space, but many of their lead chips are being hit by the current shortage. Has there been any worsening of lead times for these companies or for other chips in the server and embedded-chip market?

Overall, we continue to see struggles in lead times across the market, especially for the leaders who are most in demand. The availability of AMD EPYC CPUs has worsened over the last month, especially for large quantities of products. Lead times range from four to six weeks. Despite the limited supply, pricing has remained stable.

Specifically, demand for Intel’s Skylake CPUs has intensified in recent weeks, and product availability has seemed to tighten very quickly. Lead times have more quickly extended, with back orders stacked up into Q2. As of now, pricing is stable, but we expect to see it creep up and lead times to extend out further if demand continues to hold over the coming weeks.

Recently, we have seen a price drop in some memory, especially in PC and consumer DRAM. Is there a specific reason for this change?

There has been a combination of declining procurement activities dating back to Q4 2021, which is creating a slight oversupply in this area. Deliveries of all types of computing modules were down in the last month. PC modules like SO-DIMMs and UDIMMs have been especially impacted and have had a price decline of 8% to 10% month-over-month (MoM). Pricing on RDIMMs for the enterprise and cloud-computing market is also down by about 6% MoM for the same reasons.

Mobile DRAM and eMMC NAND have had the added difficulty of lower consumer demand for end products during Q4 2021, which is causing some chip inventory to accumulate on memory manufacturers’ shelves. However, pricing remains flat MoM due to these parts’ proprietary nature, and, while there was a small dip at the start of the year—as is normal for that time of year—we expect pricing for mobile products to stay flat steadily throughout Q2 2022.

Some people are worried about a potential oversupply in the market once the demand slows down. We continue to see companies building new fabs across the country and the world. What are the chances that we will see an oversupply in 2023 or 2024?

Personally, I do not foresee this being the case. Looking at how much capacity has been added and how much demand has increased over the past five years, even a slight correction in demand will not result in an oversupply. Overall memory sales are up by 282%, and, with CPUs up by 100%, the demand continues to increase, promoting more chipmakers in the market.

In addition, the demand from trends like work from home (WFH), IoT, autonomous vehicles, sustainability, and digital transformation will utilize the additional supply being created. Lastly, the additional capacity being added is not something that will create an oversupply. Rather, it will bring a stronger, more dispersed supply chain that will help protect against localized disruptions such as earthquakes and other national disasters.

The pandemic has amplified many supply-chain issues across all industries. One risk that has popped up is counterfeit chips. How prevalent of an issue is this?

Because of the length of this shortage, the prevalence of individuals or groups creating these counterfeit chips has increased. You pile that upon the rise in prices, and, unfortunately, some companies are going to go for the deal without fully understanding the supplier.

It may seem like there are plenty of chips out on the market, even at reasonable prices, but this comes with severe risk. The damage caused by these chips can be irreversible. In the best-case scenario, these chips do not function to the expected output, making your clients unhappy and damaging your company's brand. But, in the worst-case scenario, a chip malfunction in a moving car or other vehicle can cause loss of life.

To mitigate this risk, companies should aim to partner with trusted distributors. Distributors are of the utmost importance to delegate the high level of quality control that’s needed. Most now track the supply chain of products and go further to ensure authenticity through sourcing, inspection, and testing processes, making sure that your company is safe from any potential fraudulent chips.

As co-leader of Smith’s global purchasing division, Todd Snow is currently focusing on supplier development, Smith’s global PPV program, and improving the efficiency of the company’s existing processes. Fueled by the company’s success as an industry leader, Todd puts emphasis on being able to balance a strategic, structured approach to Smith's business model with dynamic market conditions that can change daily.

Before joining Smith in 2016, Todd spent nearly 20 years in franchise distribution, where he held management roles in sales, sourcing, and product marketing.