Is the supply chain broken?
By Colin Bodbyl
The supply chain crisis is affecting every industry, but technology has been one of the hardest hit, alongside automotive and medical supply.
Experts say it could take years for the supply chain to get back to normal. To understand why it will take so long, we need to dive into three key factors that are driving the crisis: demand, supply and shipping.
Demand was the catalyst for this whole collapse, largely because of how manufacturers handle it. Most manufacturing companies operate on a just-in-time inventory model, which means they aim to carry very little extra inventory, and instead attempt to time new inventory purchases to be as close as possible to when they need them.
This model has worked well for decades. Manufacturers knew what their run rates were on certain products, and even knew how to anticipate changes based on a multitude of different factors — but not a pandemic. When the pandemic hit, manufacturers using the just-in-time model were forced to guess at how the market would react, and most of them got it wrong.
The belief was that, out of panic, consumers would stop spending and instead hoard whatever money they had. Manufacturers cut back on inventory purchases which caused a ripple effect through the supply chain forcing everyone in the system, all the way down to the raw material mines, to scale back production.
It took weeks, and in some cases months, before suppliers could see how consumer demand would change. Rather than cutting back on spending, consumers were forced to purchase products to support a move to home offices and virtual schooling. Once settled into their daily routine, consumers who would typically spend their extra earnings on services or experiences like vacations, restaurants, movies, etc. suddenly found themselves with extra money. Stuck at home and with little to entertain them, consumers started spending on products instead of services through purchases like renovations, TVs and gaming consoles.
As demand grew, a major bottleneck occurred on the supply side. Almost all electronics require microchips and there are only a handful of companies, all based in Asia, that make the bulk of the world’s chips. To produce a microchip can take six months from start to finish. To build out additional manufacturing space to support increased demand takes 12 to 15 months. Therefore, to catch up with the surge in demand could take almost two years. This is where the supply side of the process is stuck and will not improve anytime soon.
Even if the supply side of the equation is solved, there are ongoing issues with shipping. Most of the containers coming into the U.S. and Canada come from Asia, and since Asia was the first to be impacted by the virus, they were also the first to recover. As a result, while North America was only beginning to deal with lockdowns and quarantine measures, Asia was ramping back up and shipping containers to countries that were not ready to receive them. This created an imbalance where U.S. and Canadian ports received more containers than they could ship out, leading to a shortage of containers in Asia and an excess of empty containers in North America. Even today, the U.S. and Canada are receiving more containers than they ship out, which is blocking ports and warehouses, further slowing down the shipping process and driving up costs by as much as 400 per cent.
There is no end in sight for the supply chain issues. Chip manufacturers have ramped up production by moving to 24/7 models, but even with that change, many are already fully booked through 2022. Governments have implemented incentives for shipping companies to speed up their processes, and there is hope that with the lockdowns ending, consumer spending will shift back to services, but it could take a year or longer before we see the supply chain recover.
For those in the surveillance industry, 2022 is likely to be a difficult year for locating products. Regardless of where a manufacturer is based, they will be impacted by the chip shortage. Even parts that do not require chips, such as mounting brackets or housings, will need to make their way through the shipping backlog. Integrators and end users will need to be flexible with their requirements, because 2022 will likely be the year we switch from using what we want, to using what we can get.
Colin Bodbyl is the chief technology officer of Stealth Monitoring (www.stealthmonitoring.com).