Supply Chain Gluts More Dangerous Than Shortages as New Technologies Emerge

Chip shortages dominated headlines during the pandemic as device manufacturers scrambled to find the necessary components for their products. Although shortages are a quick way to spark panic, they aren’t the only issue the semiconductor industry faces. Indeed, supply chain gluts may be even more problematic according to some experts.  

As technologies like artificial intelligence (AI) and electric vehicles (EVs) grow in popularity, addressing both of these concerns is paramount. Chipmakers are already starting to feel the pressure put on by terms like “infinite demand” and “unprecedented interest” in these sectors. Yet, as they rush to secure components, their approach must be a careful one to avoid a costly supply glut in the coming years.  

Costly Problem

In the U.S. alone, an inventory glut of advanced electronic components costs more than $250 billion, according to data from Kearney. Amplified across the globe, the cost easily reaches trillions. Clearly, this isn’t sustainable in the long term.  

Neither chipmakers nor device manufacturers benefit from having excess inventory go unused as it sits in a warehouse. A lack of foresight and panic buying around the pandemic has made this situation a reality for far too many companies in recent years. Notably, it’s a vicious cycle.  

Buyers place orders for a large number of components for a product. Then tech specifications change and a new component is needed instead. But chipmakers have already made, sold, and shipped the first chip, leaving device makers with a costly batch of unneeded inventory.  

From there, the options are limited. In some cases, the inventory can be sold to another OEM who needs it—a win-win for all involved. Other times, though, no one wants the components. In the chip industry, resources are precious. Wasting them so haphazardly is a recipe for disaster.  

Measuring Realistic Demand

When a technology like AI comes around, everyone is quick to proclaim it as the next big thing. Although AI might very well end up being one of the most revolutionary developments in recent memory, there’s still a ceiling to its potential. Businesses at every point on the supply chain are scrambling right now to source powerful AI accelerators and the many other numerous chips needed to support AI applications.  

But as the Harvard Business Review’s PS Subramaniam puts it, “Demand is never actually ‘infinite’ or fully predictable given technology changes. Every manufacturer must creatively collaborate with their customers to understand realistic demand for what they will manufacture.” The same is true for electric vehicles. Currently, a massive push to decrease reliance on fossil fuels is driving interest in EVs. But as technology rapidly advances, overordering components now only leads to an excess of unneeded inventory in the future when a better version comes along.  

Navigating inventory supply gluts is a challenge the entire chip industry must face. However, emerging sectors like AI and EVs offer a promising opportunity to start fresh. Without being bogged down by inventory mistakes of the past, manufacturers in these spaces can make strategic decisions to optimize their buying process and balance the needs of their operations with demand in the market.

Doing so will require collaboration between parties on all levels of the supply chain. From chipmakers to device manufacturers and all those in between, prioritizing a healthy flow of components should be an essential focus for the years ahead.