The microchip shortage currently throwing the automotive industry into crisis was not directly caused by pandemic impacts on the supply chain. As Rick Wilson argues on the new Dragonproof Podcast, the real issue was a tactical failure on the part of auto dealers, who were faced with massive uncertainties at the start of 2020. Exploring how and why this shortage became a global inventory breakdown for auto sellers is valuable for all businesses facing the continuing questions around supply at the end of 2021.
Modern vehicles employ more than a hundred microprocessors, which govern most key functions. These chips are expensive to produce. The specially-designed “fabs” (a semi-conductor fabrication plant) which create the chips can cost billions of dollars and take years to be built. Typically, production technology evolves so quickly that fabs only have about a 4-5 year lifespan. As a result, auto manufacturers must place orders well in advance, and compete with all electronics manufacturers for a limited allotment of chips. At the beginning of the pandemic, most auto dealerships assumed that demand for vehicles would plummet, and thus reduced their vehicle orders. This assumption was wrong and, by the time this became obvious, the lack of available fab space meant it was too late to revise orders up.
“During the pandemic people stopped spending money on going out to eat and travel and they started spending their saved wealth on things like their house and cars,” Rick explains. “So there had been a predicted industry slow-down, but then boom...dealers started to overshoot their estimates. Meanwhile, other home electronics demand was also skyrocketing as everyone started working remote. When the auto companies tried to increase orders, they were at the back of the line because of excessive demand for every other product which uses the same chips.”
The movement of resources through a far-flung production line is rarely under the control of a retail seller, however the tactical decision-making process is always under a seller’s control. Gaming out the potential conditions and outcomes at every inflection point is the main job of any business leader, especially when schedules, prices, and demand are as in flux as they have been throughout the Covid era. Remaining nimble in the face of that uncertainty is crucial for effective tactics.
A seller anticipating a surge in demand might even prepare by raising prices, in order to ensure they will be financially able to acquire enough inventory when supplies are tight and costly. A seller facing a potential drop in supply might prepare by developing a business which repairs existing goods. The point is to think through all possible outcomes and not remain tethered to conditions or practices from a previous era.
“You must continually work through all of your business’ probabilities, think through each one to its likely outcomes, and practice the muscle memory of adapting to any outcome on the fly,” Rick says.
“Then, as developments arise in real time, you’ll be ready to adapt quickly to the breaking news of your industry. Use market feedback and your sales results as your gut check throughout, but don’t forget to always practice the most basic hack of all: taking a breath and just assessing your total business, because no one knows where your business should be better than you.”
To hear more of Rick’s analysis of what comprises healthy business tactics for 2022, please visit the Dragonproof website.
Miva