The pandemic has increased demand for products worldwide, including electrical components. Anna Hayes writes about how it has affected chip and component supplies.

As the year draws to a close, experts and industry members have been reflecting on what has been a difficult year for businesses, particularly those relying on imports or exports.

On the home front, many parts of Australia were hit with lockdowns, stay at home and work from home orders – NSW and VIC in particular – which played their own part in hiking up demand for technology and entertainment components.

Internationally, lockdowns were ongoing as well and, in recent times, a number of Asian countries have been hit again with strict lockdown orders.

Why does that matter?

Because Asia is still the assembly workshop of the world and, over the course of 2021, a number of issues have arisen to create a ‘perfect storm’ of disruption in Australia, and the world’s electrical industry.

The global perspective

The pandemic has been one of the most disruptive times in recent history and there is no clear indication that it’s stopping just yet.

Dr. Mehrdokht (Medo) Pournader is a senior lecturer and senior academic adviser at University of Melbourne’s department of management and marketing, and faculty of business and economics, and she has been watching the situation play out over the past number of months.

She says that when there are shortages, they are usually down to one of three reasons: supply issues, demand issues and logistics.

In this case, she points out, all three reasons are in play, creating a ‘one of a kind’ type of impact that is making the entire world sit up and listen.

One of the big issues for this industry is in the area of computer chips.

“Obviously the pandemic resulted in many people getting to work from home, which resulted in the increase in demand for technology, and all of these items have chips in them,” Medo says.

“Supply has been impacted by the closure of factories and manufacturing in Asia which, on reopening, began to fill backlog orders. So, the demand has gone up, the supply has got issues and we know that, in our ports, we have logistics issues. Ships sometimes have to wait a week or more to get the green light to unload in the ports and that creates congestion.”

Couple that with some high-profile factory fires in recent times (AKM in Japan around this time last year), and the fact that many major manufacturers are stockpiling chips, and the situation is particularly challenging.

Medo says that it has particularly been an issue for the audio/visual industry as well as many industries across the world, especially those conducting lean operations or ‘just in time’ manufacturing, meaning that they would order components with the view to them arriving “just in time” to install into a device before moving onto the next step on the production line.

“Having such a lean operation is good because you save on cost of storage, but the downside is that once there is a shortage, the production line stops.”

Medo believes that it will take some time for the supply chain to get back to normal, particularly given the issues that China is currently facing in terms of its energy crisis. She expects that things will begin to straighten out in supply chains after Christmas and, particularly, after Chinese New Year.

High vaccination rates, she thinks, will be key as a return to normality in developed world countries will change the supply and demand relationship.

“We should see, for consumer goods at least, some sense of things getting back to normal. With vaccination in the developed world, the supply issues will drop. The demand also, with people going back to their normal lives, the surge in demand should subside. Even in the ports, there are reports that the huge backlogs are slowly clearing.”

One of the big problems, before we reach that point however, is the issue of stockpiling and creating a ‘bullwhip effect’ in markets.

Medo remarks: “Companies will hedge against any uncertainties to meet the backup demand. So, currently, most industries have been or are over-ordering but once you have the stock and once things go back to normal, you’re definitely going to order less supply. That means the prices might drop suddenly or result in recession.

“Right now, the global economy is being hit by a one-of-a-kind scarcity of commodities but once there is overabundance of commodities then there is another issue.”

She points to a bullwhip where the movement of the whip close to your hand is limited but towards the end of the whip there is huge movement and impact, and this is what is happening in the supply chain at the moment.

“There is volatility in demand and this is being oscillated as it goes through different suppliers in a supply chain. If you order an extra 1,000 units/components from a supplier in Taiwan, they might order 3,000 of a component they use to hedge against that demand from their supplier in Japan. Then the supplier in Japan hedges against that demand by ordering 6,000 of something they need. And it can go on and on and on.

“So this type of effect harms everyone in the supply chain; it increases the cost of storage, it increases the cost of inventory, it causes inflation/deflation.”

For this reason, Medo is hopeful that businesses might be able to hedge their risk across different tiers of supply chains so as not to put pressure on them by ordering too much in the short-term. She also suggests looking to alternative markets for commodities if possible, though she acknowledges that this is easier said than done.

JH Market says that it has seen a huge impact in product delays and increased costs directly related to COVID.

“The availability of containers and shipping vessels has been heavily impacted,” JH Market chief commercial officer Damien Cummins says.

“Factories have been closed down due to staff being effected from COVID overseas and also local closures of industry and manufacturing.

“Additionally, the shortage of timber in the building industry has impacted the local residential builders which has pushed out supply for electrical building products.”

Medo encourages those involved in importing products or commodities to seek better understanding of the supply chains they are relying on, pointing out that many supply chains have a very longtail from tier one to tier two and beyond.

“So, it is good for us and suppliers to have clarity of how the suppliers in the different parts of the world are affected and how that might eventually affect their manufacturing capacity of service provision capacity. The biggest weakness of supply chains overall is this lack of transparency.”

She points out that only a small number of ports globally are equipped for the use of basic technologies like RFID tags.

“I think there should be policies, hopefully mandated by governments or courts, proactively looking into having those technologies in place so that suppliers can track inventory as they go from port to port, and be informed about possible delays, etc.”