Here’s how companies could have prepared for the microchip shortage

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Michael Boguslavsky, Head of Artificial Intelligence, Tradeteq

• Billions have been wiped from balance sheets across the world as a result of the shortage of microchips.
• Some of the most sophisticated tech companies in the world failed to forsee this weakness in their supply chains.
• AI could provide one solution, helping companies to identify risks and act on them more quickly.

This was supposed to be the year of recovery for global trade, but it hasn’t quite worked out that way. For thousands of companies across the globe, the economic damage caused by the COVID-19 pandemic has been exacerbated by a global shortage of microchips (also known as semiconductors).

Two seemingly innocuous and unconnected events – a fire at a warehouse in Japan and severe winter weather in Texas, US – occurred during the COVID-19 pandemic, and resulted in a temporary pause in the manufacturing process for microchips. Their timely delivery was essential to companies across the globe, which are now reeling from the lack of availability. Manufacturers of automobiles, personal computers, refrigerators and tumble dryers, and their peers in more than 150 other industries, were caught out.

There is a unanimous view that this shortage will set back the global economic recovery. It has become almost impossible to buy a PS5 games console – a Christmas favourite in many countries – while global car manufacturers including Ford, Toyota and Volvo have had to either slow or temporarily halt production at their factories.

Billions of dollars in profits have been wiped from balance sheets. Ford quantified the cost of the microchip shortage at a $2.5 billion. Meanwhile customers are frustrated by the delays and the ramifications are likely to be felt for another 12 months, at least.

Hard questions

The list of blindsided companies includes some of the most advanced technological companies of our generation with a collective value of multiple trillions. How could they not have the foresight to be prepared? Hard questions need to be answered in boardrooms around the world.

These companies cannot blame a lack of resources. They have access to, or in some cases have developed, advanced technologies and world-leading operational and risk management systems. And yet, these systems failed to foresee the microchip shortage and the effect on their operations. This is a moment of self-reflection and humility for the global business community. It needs to learn the lessons from this debacle and put improved supply chain risk monitoring protocols in place.

Integrating modern AI advances into the supply chain

There are numerous systems operating today that allow businesses to track how consumers engage with them, send payments to their counterparties and partners thousands of miles away, and communicate with people across the world. Surely the technology exists to monitor risks in their supply chain more effectively?

Artificial intelligence could be part of the answer. This technology has made significant advances over the past decade and can identify and monitor risks in the supply chain before they become a systemic issue. If, for example, a supplier has a cash flow problem, unexpected weather patterns affect a supplier’s ability to manufacture a product, or an incident takes place that affects companies of a similar size and profile, an AI system could send an early warning to businesses that they should investigate what happened and how it might affect them.

This would enable businesses to stay ahead of potential risks and systemic events, rather than react to them. It is an example of technology making the global trade and supply chain ecosystem more responsive, agile and efficient.

Future-proofing the supply chain

The former CEO of General Electric, Jack Welch, once warned that companies should change before they have to; the past few months have bourne this out. Global trade is interconnected and businesses are more reliant on one another than ever before. This is why the impact of the microchip shortage has been, and continues to be, so significant.

Technology has been one of the biggest drivers for change in global trade in recent years. It can be used to speed up how information is shared, and to improve communication across supply chains. AI models can be used to manage and mitigate the negative impact of events, and to help companies to respond more quickly.

In the future, when the global microchip shortage becomes a case study in business schools, colleges and universities, will your company be consigned to the history section or acknowledged as a trailblazer? It’s a question that executives should address sooner rather than later. Otherwise, the nature of global economic and market forces mean it will be answered for them.