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Understanding Component Shortages and How They Affect TPRM

June 29th, 2021
Hannah Tichansky

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As new companies release the latest and greatest electronic gadgets – whether it be a new smartphone, car, or other hot ticket items – and demand rises, the need for additional electronic critical materials rises as well. Due to the market’s dependence on electronic parts such as multilayer ceramic capacitors (MLCCs), any disruptions or component shortages to the manufacturing and distribution of these materials can have significant, lasting effects.

Component shortages started to become a consistent issue in late 2017, and these issues arise from anything like price increases, parts shortages, geopolitical issues, and the huge increase in demand for these critical materials. The market did improve in 2019 when original equipment manufacturers (OEMs) created and deployed new, multi-source plans to decrease supply risks and delays. Despite this, global parts shortages have still been experienced, exacerbated by the concentration of manufacturers in single locations, as well as the COVID-19 pandemic. For companies who use electronic components manufacturers as a third party (such as an automotive company), any delays or disruptions can severely impact operations, finances, and reputation.

The Great COVID-19 Supply Chain Disruption

When the COVID-19 pandemic first started to make itself known in late 2019, it was clear that global supply chains would face massive disruptions. The pandemic center, Wuhan China, is the headquarters for many mechanical and electronic components suppliers. As they went into lockdown it began to create significant delays, shortages, and the market capacity shrunk quickly. As other countries started to shut down in early 2020, these disruptions spread and OEMs could not manufacture the needed products.

While the demand for automobiles and smartphones dropped during the COVID pandemic (two of the main uses for these types of parts), there was not an area in the world that did not experience supplier or supply chain disruptions. During the height of lockdowns, the lead time for semiconductor chips doubled to 36 weeks, severely disrupting what demand there was. At the same time, demand for life-saving ventilators and parts used in these devices outweighed the supply – another example of the importance of these products.

According to Aravo’s research, 75% of businesses reported experiencing a supply chain disruption related to the pandemic. With the average cost of a single supply chain disruption to many organizations being $100 million, these issues can be devastating. Despite the severe consequences, 51% of organizations are not assessing the business continuity risk of their vendors. This lack of foresight and understanding can play a huge role in disruptions to manufacturing and supply chains. This is further exacerbated by the fact that 62% of organizations are not assessing the financial viability of their third parties and 52% are not assessing the operational risks of their third parties.

Component Shortages and Market Impacts

As mentioned, the automotive and smartphone industries are two of the biggest industries using electronic parts and components. Each smartphone model contains about 1,000 capacitors and smartphone manufacturers use about half of global MLCCs produced each year.

Due to enforced lockdowns around the globe, automotive sales dropped during the COVID pandemic, but things are starting to turn around. McKinsey reported that the global automotive market will grow 1-5% in 2021, but if governments offer incentives (which multiple countries are), that can grow 36% compared to what it was in 2020. Due to the impacts of the pandemic, many semiconductor manufacturers are reworking their supply chains to make them more resilient. These efforts include working to avoid concentration risk and increasing their stock of materials.

How Component Shortages Affect TPRM

An increase in demand after COVID shutdowns is not the only reason to reevaluate supply chains. The nature of manufacturing is changing as well. Companies are increasing automation and Industry 4.0 within manufacturing processes. This is being seen through remote operations, continuous monitoring, machine learning, and smart workplaces. Due to the need for electronics components and the trends in supply chain disruptions we’ve seen in recent years, there is a critical need for better, proactive crisis management.

While companies that manufacture electronics parts such as semiconductors are affected by unbalanced supply and demand, so too are companies that depend on these parts to create and distribute their own products. Effective understanding and management of third parties is critical to avoiding massive delays, and/or mitigating the effects of shortages in order to reduce their effect.

How Companies Can Mitigate Component Shortage Risks

Aravo surveys revealed that only 17% of businesses feel that their third-party risk management (TPRM) processes are effective, and 65% acknowledge that they don’t have the resources to tackle third-party risks. While global supply chain disruptions (as seen with the pandemic) cannot be entirely avoided, there are steps companies can take to build as much resilience as possible.

Understanding your supply chains:

Gaining a thorough view of every step of your supply chain is critical; this includes each third party that is involved. Understanding the complexities of your supply chain allows you to build resilience against potential disruptions by:

  • Staying on top of potential risks originating from your suppliers
  • Making timely, better-informed decisions based on data
  • Taking action to protect your business operations and avoid financial or reputational consequences

Avoiding concentration risk:

This type of risk can be the result of over-dependence on a geographic area, single vendor, or fourth parties. Concentrating vendors in a single location, or over-relying on a single vendor can leave companies vulnerable if the region or third party should suffer from disruptions. Concentration risk can be mitigated or avoided altogether by managing where third parties are located, and that a variety of vendors are utilized for operations.

Screening and due diligence:

Due diligence involves conducting an initial and/or periodic review of a third party to determine the suitability of the vendor to provide the required products or services, the risks that the relationship may bring, and the controls that they have to mitigate risks. Performing due diligence during the screening process helps determine potential risks before contracting with them, and ongoing due diligence helps manage risks or changes as they occur.

Understanding fourth parties and beyond:

Fourth and nth parties are your third parties’ subcontractors (i.e., their own third or nth parties). Without a clear understanding of fourth-party relationships connected with their vendors, companies leave themselves vulnerable to issues such as cyber-attacks, supply chain disruptions, and shortages. Tools such as TPRM software help companies understand the complexities of their vendor relationships and supply chains so that if an issue were to occur with a fourth or nth party, companies are made aware of it and can take steps to manage it.

Internal and external collaboration:

Before entering into any new contract with a third party it is important to make sure that all internal stakeholders (risk domain experts, compliance, legal, procurement, etc.) are involved and on the same page. Agreed-upon TPRM tools will help determine if the vendor fits into your organization’s risk threshold and project scope, helping to ensure that third-party resilience is in place in case of any potential incidents. In addition, component shortages specifically can be avoided through external collaboration between buyers, third parties, and design teams.

Learn more about Aravo’s TPRM solutions, and how to build resilience against components shortages and supply chain disruptions.

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