Semiconductor shortage, Automotive, Supply chain, Supply chain management

In our blog last month, we discussed how the automotive industry must learn this time from yet another semiconductor shortage by improving management of essential supply chain processes or we will find ourselves in another shortage crisis. One of the reasons cited for the shortage was insufficient forecast information to provide adequate planning for the 22 week lead time, which is typical of semiconductor manufacturing. In order to minimize the impact of similar future supply chain disruptions, organizations must ensure they implement and sustain the lessons learned from this disruption. The starting point is recognizing and managing long lead times and critical parts.

Identifying Long Lead Times to Drive Accurate Forecasts

OEM planning horizons typically range from 26 to 52 weeks of forecast information provided to Tier 1 suppliers from their automotive OEM customers. Unfortunately, the full horizon of planning information rarely gets communicated to the lowest tiers of the supply chain. Tier 1 and 2 suppliers typically pass on only a portion of the full OEM horizon which can be as little as 8 weeks. Why? We have found that these organizations don’t trust their planning data for several reasons:

  • Manual processes are often used to analyze changes in customer-provided forecast data
  • Poor inventory management and lack of full inventory visibility, including inventory held by next tier suppliers
  • Concern of having enough parts on-hand to avoid production disruptions (no one wants to be the function that shuts down production!)
  • Slow, manual communication of demand requirements to suppliers

In short, organizations are not leveraging ERP or using electronic communications with their suppliers down the chain. Long-term planning information is critical for the lower tier suppliers to plan and purchase their materials wisely. Without the full planning horizon, suppliers are left guessing what to order and how to best allocate their production resources. When the supply chain guesses incorrectly at any level, parts shortages will inevitably lead to costly premium freight and potential production disruptions up the supply chain.

Why does it take so long for information to move down the supply chain today?

First, the longest lead time in the supply chain needs to be determined. Overall supply chain lead time is the aggregate of lead times at each tier. In the case of semiconductors, lead time was reported anywhere from 22 to 26 weeks. Determining these lead times is an essential supply chain process requiring review and updates regularly to adjust lead time information based on current market conditions. We find that most organizations don’t have a clearly defined process within their management systems for lead time determination. In addition, risk-triggered review of lead times is often not performed systematically.

Next, if EDI is in place at each tier of the supply chain, it can take one day per supply tier to communicate demand requirements. This was proven many years ago in an AIAG report entitled the Manufacturing and Assembly Pilot Project. As an example, in the case of a four-tier supply chain, it can take four days in the best case to communicate requirements if EDI is in place at each tier. However, if EDI is not in place and forecast information is sent manually, it typically requires at least one week per tier to communicate requirements down the supply chain. In the case of the semiconductor shortage, if EDI was only in place between the OEM and Tier 1, in this six-tier supply chain, it could take 4½ weeks to communicate demand down to the semiconductor manufacturer. When demand information is not communicated quickly, it will be out-of-date by the time it arrives at the lower supply tiers. Some suppliers may carry excess inventory in anticipation of unknown demand, while others will allocate their limited production capacity to other customers or markets, as is the case in the semiconductor shortage.

How can we use lead time as an essential supply chain process to prevent the next disruption?

Let’s explore in more detail the type of review your organization should perform not only on your processes, but also within your supply chain for critical or long lead time parts. Here are key questions, derived from MMOG/LE, you should be asking your organization related to long lead time and critical parts. More importantly, ensure your answers are documented in management system processes and that employees are trained on these topics to prevent production disruptions due to long lead time and critical parts.

  1. Transmission frequency and planning horizons are adequate for the total lead time of the part or commodity (MMOG/LE 6.3.2.4).
    1. Does your organization have a process for ensuring communication and alignment of forecast information for critical/long lead time parts at all levels of the supply chain? For example, if it takes 22 weeks to obtain semiconductors, is the entire supply chain passing down the complete 22 week forecast from the OEM to the relevant levels of the supply chain?
    2. Do you take your organization’s lead times and include them in your operational parameters when calculating your MRP demand?
  2. The Supply Chain Management (SCM) agreement includes procurement and inventory policies based on customer requirements for long lead time and critical components (MMOG/LE 6.2.1.7).
    1. Do you have a customer inventory policy for long lead time and critical parts?
    2. Has this policy been communicated to your suppliers along with the requirements that they communicate such information to their suppliers (e.g. via terms and conditions)?
    3. Does your automated quality management system remind your organization to review customer policies/requirements periodically and take actions to deploy these requirements as necessary throughout your supply chain?
  3. A risk assessment process shall be in place to identify areas within the supply chain process that could affect the ability to meet the customer’s requirements in the event of a deviation from the normal business process. This could include EDI, transportation, packaging, equipment failure, natural disasters, geopolitical events, etc.
    1. Does your organization have a process for continually monitoring and assessing the risk of potential internal and external supply chain disruptions?
    2. Do your organization’s contingency plans specifically address actions to prevent and/or react to disruptions in long lead time and critical parts?
  4. The capability to electronically exchange materials and logistics information (e.g. planning releases, delivery schedules, ASNs) with suppliers, subcontractors, and service providers using web based tools such as EDI, Web EDI and Web Portal (MMOG/LE 6.3.2.1).
    1. Does your organization ensure electronic communication of requirements for long lead time/critical parts are passed down to the entire supply chain via EDI or the Web?
    2. Is your organization leveraging your ERP’s EDI/Web EDI functionality with 100% of your suppliers to quickly communicate demand down to your suppliers?
    3. Do you confirm the number of weeks of forecast being sent to sub-suppliers’ covers, at a minimum, the longest lead time for the part?
    4. Are you periodically auditing your suppliers to ensure they are passing requirements down the supply chain and verifying each tier is doing the same?
  5. A process is in place to assess the capability of supply chain partners utilizing a formal evaluation tool which is leveraged during new product launch and performance review (MMOG/LE 6.7.1.2).
    1. As a part of your supplier monitoring process, is your organization verifying that critical/long lead time part suppliers are reviewed during performance reviews to ensure the process for planning and communication of these parts are being followed as required?
    2. Does your company have an automated quality management system that reminds you it is time to audit/review suppliers, especially those providing long lead time/critical parts, track audit results and issue supplier corrective actions, as necessary to a web portal for prompt communication?

Next Steps for Manufacturers

Long lead times and critical parts must be systematically identified and managed by organizations throughout the automotive supply chain to prevent recurrence of the current semiconductor shortage crisis and other significant industry-wide disruptions in the future. The roadmap and tools already exist; these only need to be systematically implemented and maintained by automotive manufacturers throughout the supply chain.

To find out how to overcome systemic deficiencies and avert disaster before the next disruption hits, download our latest eBook: “Delivering on the Promise of Delivery: Toward a Resilient, Sustainable Supply Chain”.

This article was co-written by Cathy Fisher, founder and president of Quistem, LLC.

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