Strong Supply Chains Through Resilient Operations

CHAPTER 2Principle 1: Build Resilience Against Supply Shocks by Empowering Your Supply Base

Vanishing Semiconductors Demonstrate Supply Chain Breakdowns

The story of semiconductors in automobiles may be the best example of how the pandemic revealed broken supply chains. Most people know the basics: when COVID‐19 hit, demand for new cars came to a virtual standstill. To save money and protect workers, automakers closed factories and canceled orders. Their suppliers thus did the same, and so did their suppliers—all up to the foundries manufacturing the base silicon wafers needed for computer chips. After they closed, the foundries needed time to ramp back up their capacity. And as they did so, they focused on their highest‐margin products. In particular, they saw increased demand for home appliances and expansion of 4G/5G networks. Then, when demand for new cars suddenly shot up in the fourth quarter of 2020, automakers couldn't find the semiconductors they needed. Nearly all automakers had to curtail production. New car inventories dropped by as much as 70%; with too little supply to meet demand, sales dropped by as much as 54%.¹

The situation smacked all the weaknesses of lean manufacturing methods. Automakers reduced costs by reducing inventory; then they ran out of inventory. They squeezed suppliers for every last penny; then they found themselves squeezed. They pushed risks ever‐farther upstream; then they found those risks had flowed everywhere downstream.

The fault lay ...