Smith: Understanding the Supply Chain Rollercoaster

The semiconductor industry has been experiencing a notable memory shortage, causing concern across dependent sectors.

This scarcity has disrupted production schedules, increased manufacturing costs and highlighted global supply chain vulnerabilities.

Despite these issues, other segments like logic chips and analogue devices are largely continuing business as usual, avoiding the severe disruptions seen in the memory sector. 

This latest shortage in the semiconductor market has spotlighted supply chain challenges, leading many to overlook its cyclical nature. The industry regularly alternates between periods of surplus and shortage, driven by technological advancements, shifts in consumer demand and global economic conditions.

Here, Jennifer Kabbara, President of Americas at Smith & Associates, explains why understanding this cycle presents an opportunity for strategic adjustments and preparedness. 

Tell us a bit about yourself and your role

I'm Jennifer Kabbara, President for the Americas at Smith. My responsibilities are overseeing our trading offices throughout North and South America and collaborating closely with counterparts in Europe and Asia to manage our extensive global network of suppliers and customers.

With three decades of experience at Smith, I have held pivotal roles such as Director of Global Sales, Trader Development Manager and Director of Trading Operations. My mission is to provide supply chain solutions to our valued customers by equipping our diverse trading force with critical market insights and cutting-edge tools that enhance customer engagement.

For those unfamiliar with Smith, what are the company's main activities? 

Smith is a leading independent distributor of electronic components and a provider of supply chain solutions.

We source, manage, test and ship billions of components to partners worldwide in every industry and vertical. We also offer a comprehensive suite of flexible and scalable supply chain solutions to support our customers’ success.

Founded in 1984 by brothers Robert and Leland Ackerley and their wives, Smith has flourished over the last four decades. Today, we have employees in more than 20 cities around the globe helping our customers overcome supply chain challenges. 

To what extent have recent memory shortages in the semiconductor industry spotlighted supply chain challenges? 

One thing it highlights, which is a running theme in many shortages, is the difficulty integrated device manufacturers (IDMs) face when trying to forecast the success of end products to prepare themselves for the resultant demand increases. What is the next big thing, and how will it propel specific chips?

In this case, Open AI’s successful launch of ChatGPT initiated a burst of demand for large-language modelling (LLM). The servers running LLM use leading-edge memory technology. While memory makers were sitting on plenty of inventory of mature products, awaiting demand comebacks for them, they didn't have sufficient inventories on hand or enough extra capacity available to react to the surge of demand driven by the growth of AI. They quickly found themselves behind the eight ball.

It seems it is much easier for IDMs of all types to forecast their broad portfolios for ten years down the road than it is to prepare for tomorrow’s problems due to 'the next big thing'.

What wider impacts are being seen as a result of the shortages? 

All three memory manufacturers are using large proportions of their capital expenditures to increase production capacity of wafers and end-packaging lines for the items with the most demand – in some cases by converting DDR4 lines because of the lower demand for those products.

Within the AI-server application segments, the effects of the supply constraints are more an inconvenience than a huge problem. That is mainly because the shortages for the high-end Nvidia GPUs are so severe that it is limiting the amount of memory currently needed by end users. 

Why have other segments like logic chips and analogue devices been able to continue business as usual?

Most production capacity increases that were announced or began in 2021-2022 were for advanced-die nodes. Perhaps 20-25% of the expansions were for mature nodes.

The automotive and industrial segments have been the steadiest segments of electronics manufacturing for the last two years and those rely heavily on mature products. This increasing demand, especially from the automotive sector, and the fewer number of expansions for mature nodes, have helped IDMs keep some stability of business while they await other markets to return to normalcy.

However, even those markets have not been able to establish stability for IDMs. Utilisation rates for consumer and commercial ICs are low. In many cases, IDMs are maintaining production rates below demand rates to force consumption of excess inventories. Many IDMs have moved away from a build-it-all model to focus their production allocations on products that have higher profit margins. And many IDMs have been increasing their works-in-progress to give themselves more flexibility and maintain short lead times for new order fulfilment.

How crucial is it for businesses to understand the cycle between periods of surplus and shortage? 

With 40 years of experience in the semiconductor supply chain industry, our team profoundly understands market dynamics and we've been able to adapt to the up-and-down cycles with agility.

During a shortage, our advice for businesses is to strengthen their supply chains and invest in added semiconductor manufacturing facilities that could be protected from potential disruptions.

Additionally, preserving a long-term partnership with a reliable distributor with networks of suppliers worldwide can diversify a company’s supply chain, which will help avoid being caught off guard during the next supply chain deficit.

When it comes to surplus, some think of that as being negative, but we feel every downturn paves the way for new opportunities and growth. During this time, companies can recalibrate and revamp their internal processes. A couple of helpful suggestions would be setting up a purchase-price variance (PPV) model to mitigate risks and ensure customer cost-savings or turning excess inventory that accumulated during low demand periods into a new revenue source.

Having a partner like Smith can help businesses navigate these market shifts and provide strategic supply chain solutions.

What benefits can be drawn from the semiconductor industry's resilience and adaptability? 

History has shown fluctuations of surplus and shortage will never be in balance. One important thing to highlight is the need to be proactive rather than reactive.

At Smith, we're constantly looking for ways to grow and assist our customers. We recently launched SmithTrade, an online marketplace for buying, bidding on and selling excess components, peripherals and equipment. This is one way we help our customers recoup value on their unused inventory.

Predicting where the supply chain is going is difficult, but the industry is rapidly changing. Modern technologies like automation and AI will continue progressing in the supply chain. For companies to become stronger and more successful, they must prioritise innovation and resilience and maintain close cooperation with certified and vetted supply chain solution providers. 

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