The worst of the supply chain woes brought on by the pandemic are largely in industrial automation’s rearview mirror, but microelectronics remains a sore spot. The supply and demand imbalance for electrical components was reaching another critical point earlier this year, but industry largely redesigned its way out of the crunch. The U.S. government continues to support domestic semiconductor manufacturing for those all-important microchips, but those efforts will take time to produce real results. Many vendors have highlighted their success stories from making it through the supply-chain shutdown, bolstered by strong relationships and new partnerships. Many continue to innovate and update their businesses with a renewed sense of agility and value.
How the supply chain broke
With the economy humming and the global supply chain in sync, many manufacturers had moved toward just-in-time and lean-manufacturing practices in lieu of more traditional statistical methods for inventory control. The development and success of the global supply chain allowed companies to keep fewer products on-site, which had its benefits.
“These new approaches reduced costly stockpiles of inventory and coordinated flows of components across multiple locations to meet demand as close to the predicted time as necessary,” says Steve Fales, director of marketing at ODVA. “At the same time, offshoring was kicking into high gear, making supply chains both longer and leaner. As a result, it became normal for components to be overnighted or even flown directly to plants to keep lines running, given, it was argued, that the inventory savings far outweighed the cost of expediting.”
When COVID-19 shut down this complex global supply chain, it drove widespread product shortages, hampered by worker shortages, delivery-equipment breakdowns and border challenges. “The aftermath of the pandemic led many companies to question continued use of outsourcing since global wage differences were lessening and supply chain localization opened up the possibilities for flexibility, enhanced sustainability and higher delivery certainty,” says Fales. “Additionally, greater reliance on industrial automation kicked into high gear to help reduce the pandemic-related impacts of a lack of available workers across industries.”
Fortunately, demand for industrial automation products increased during the pandemic, but unfortunately this further strained the industrial supply chain. “Not only were companies heavily relying on existing automation, driving spare device orders, but also the scarcity of employees made adding more automation very desirable for end users,” Fales says.
Across all industries, the global demand for electronics to support remote workers also increased demand substantially. Likewise, the semiconductor industry under strain, Fales says, began to focus on producing the most complex, and most profitable, chips, “leaving the supply of simple and low-cost microcontrollers lagging,” he adds.
This led many industrial automation companies to redesign electric circuit boards to consolidate the number of components used as much as possible. “Additionally, system-on-a-chip (SoC) designs that could support EtherNet/IP and other leading industrial automation networks reduced the need for automation vendors to stock multiple chips for different networks,” Fales adds.
The dependence on microelectronics
Pepperl+Fuchs, which works in nearly every industry, didn’t see one that wasn’t affected by global supply-chain issues following the pandemic, says Perry Hudson, market manager, packaging at Pepperl+Fuchs. The fundamental issues of COVID-19 compounded supply-chain issues because states had different policies across different industries, combined with policies from companies and countries around the world. “The result was that the production of materials and most importantly electronic components came to a standstill,” says Hudson. “Countries closed their doors, shipping came to a halt, and nothing moved from A to B.”
Food and essential-goods manufacturers were affected first during the pandemic, and Hudson says many factors culminated in creating the supply-chain crisis. With consumers at home, working remotely and shopping online, some panic led to product hoarding, and those manufacturers struggled to meet demand early on in the pandemic. Low interest rates and more mobility from remote work led to people moving and increased new home construction, which eventually put a strain on construction materials. At the same time, cryptocurrency was increasing its use of electronics for mining; and gaming systems, new phone development and media technology for remote workers all demanded more and more microelectronics, right when the pandemic slowed production. Eventually, the automotive industry suffered its own supply chain-crisis because it didn’t have enough microelectronics to produce the cars consumers demanded.
“We live in a world today that is largely based on electronics,” says Hudson. “At the heart of all electronics are microchips. If you shut down a microchip plant due to a global pandemic, you stop producing microchips. But the orders kept coming 200 times faster than before because of panic and impulse-buying. It takes time to get a chip factory up and running, and, as the order book grew, so did the crisis. Over time, the demand for all things—precious metals, petroleum, plastics, wood—was affected.”
As an example of the microprocessor supply chain issues, Hudson points specifically at application-specific-integrated circuits (ASICs) and field-programmable gate arrays (FPGAs). “FPGAs are very popular because they are reprogrammable and can be configured to implement various digital circuits and functions,” he says. “ASICs are custom-designed and have a fixed function, so they are used for a specific application. Both were in short supply and had an incredible backlog because they are used in all industries in all fields. This being said, FPGAs were used by far more in most industries.”
This made FPGAs harder to find as production slowed and demand increased. FPGAs could not be easily replaced with something else in current designs, so many industries that made automobiles, CAT scans, programmable logic controllers (PLCs), PS5s, missile controllers, blood analyzers and more all needed FPGAs. Hudson says the FPGA problem first came to light around April 2022, and by October 2022 the current supplies were taken. By the beginning of this year, the situation was critical, he says. Many plants that had shut down were back up and running, but production takes months to restart and more to reach the needed production levels.
“Companies, once again looking ahead, began to redesign their circuit boards,” says Hudson. “This single but monumental task helped lead the world out of the microprocessor crisis.”
Demand also declined post-pandemic, which has helped microprocessor supplies. Hudson says, for companies that took the necessary steps early on to secure multiple microprocessor suppliers so that they’re not dependent on one single source, “the crisis is over.”
The CHIPS and Science Act progress
Microchip production has rebounded from the crisis, but it has yet to return to pre-pandemic levels for many. The U.S. government has taken many efforts in the past few years to shore up domestic production for semiconductor chips and support new production facilities for microelectronics.
In August 2022, the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act was enacted, which planned to make a nearly $53 billion investment in U.S. semiconductor manufacturing, research and development, and workforce development. It also created a 25% tax credit for capital investments in semiconductor manufacturing. The Biden Administration says the United States produces about 10% of the world’s global supply of chips, and none of the most advanced chips, and it wants the CHIPS Act funding to change that. One year after enactment, the administration says that companies have announced more than $166 billion of private investment in semiconductor and electronics manufacturing. At least 50 community colleges in 19 states have announced new or expanded programming to develop the semiconductor industry workforce.
The first round of funding applications was launched in February 2023 by the Department of Commerce at $39 billion and focused on companies already making large investments in semiconductor facilities or larger supply-chain projects. On September 29, 2023, the Commerce Department’s CHIPS for America program released another funding opportunity, seeking applications for projects for the construction, expansion or modernization of commercial facilities for semiconductor materials and manufacturing equipment with capital investments less than $300 million.
In July 2023, the Department of Commerce and Department of Defense also signed a memorandum of agreement (MOA) to strengthen the U.S. semiconductor defense industrial base and facilitate close coordination on the CHIPS for America’s incentives programs. “Advancing U.S. national security is a top priority,” says CHIPS Program Office Director Michael Schmidt, who signed the MOA on behalf of the Department of Commerce. “Our departments must work together and align on where and how we are making investments to strengthen the U.S. industrial base. This agreement will enable our teams to coordinate the national security review of applications, produce semiconductor chips in America that our military relies on and bolster our domestic supply chain resiliency.”
The CHIPS Act also includes $11 billion for semiconductor research and development. This effort includes the development of the National Semiconductor Technology Center (NSTC), a National Advanced Packaging Manufacturing Program (NAPMP) and up to three Manufacturing USA institutes to advance research and commercialization of semiconductor technologies. Research-and-development (R&D) efforts also include the CHIPS R&D Metrology Program to advance measurement science, standards, material characterization, instrumentation, testing and manufacturing capabilities, established by the National Institute of Standards and Technology (NIST).
In September 2022, NIST published a report: Strategic Opportunities for U.S. Semiconductor Manufacturing, which identified seven challenges that need critical attention from a metrology perspective, including 32 elements for the path forward. In October 2022, the CHIPS R&D Metrology Program consolidated the 32 elements into 20 programmatic focus areas, and by November 2022, had narrowed the priority focus areas. The 10 metrology focus areas include:
· advanced materials and devices
· nanostructured materials characterization
· 3D structures and devices
· materials characterization for advanced packaging
· verification and validation of advanced models
· advanced modeling for next-generation manufacturing processes
· advanced measurement services
· interoperability standards for equipment and software
· standards for automation, virtualization and security
· supply chain trust and assurance.
Approximately $3 billion will fund NAPMP, designed to drive U.S. leadership in advanced packaging. In November 2023, the Department of Commerce said an initial funding opportunity for this program is expected to be announced in 2024. At this time it also published The Vision for the National Advanced Packaging Program, defining advanced packaging as a cutting-edge design and manufacturing method that places multiple chips with a variety of functions in a densely interconnected two- or three-dimensional “package.” According to the report, this design paradigm can help the sector achieve the ever-denser, smaller dimensions that the most advanced semiconductors require. Advanced packaging brings together chip designers, materials scientists, process and mechanical engineers and measurement scientists to expand both conventional and advanced packaging capacity in the United States.
The Department of Commerce has received more than 550 statements of interest and almost 150 applications or concept plans for CHIPS incentives. One of the first preliminary agreements was announced December 11, 20223, with BAE Systems Electronic Systems. The non-binding preliminary memorandum of terms will provide about $35 million in federal incentives under the CHIPS and Science Act to modernize the company’s Microelectronics Center, a mature-node production facility in Nashua, New Hampshire. The project will replace aging tools and quadruple the production of chips necessary for critical defense programs including the F-35 fighter jet program.
Pepperl+Fuchs’ Hudson notes that the CHIPS Act has both economic and political motives, as well. The CHIPS Act prohibits recipients from expanding production in China and in countries that pose a threat to national security, “so it is both an economic incentive and a political countermeasure.”
“The success of the program is that more than 600,000 jobs have been created since 2021, and construction has increased by 116%,” says Hudson. “To date, companies have invested $166 billion in manufacturing, so they are doing what they are supposed to do. The problem is that building plants takes time, so we won’t see the actual results of these investments until 2024.” He thinks the investment efforts could reduce costs, but long-term supply issues for all microelectronics might persist beyond these initial efforts.
Multi-source strategy and partnerships
The biggest challenge for human-machine interface (HMI) manufacturers were extended lead times from their suppliers, particularly for plastic compounds. They also experienced the supply crunch from electronics and surface-mount devices (SMDs). Increased expenses and lowered profit margins would eventually lead to major revenue losses, so HMI manufacturer EAO sought additional sources and a multi-sponsor strategy for the most critical materials.
“EAO built up inventories, which is not ideal, but this works well for the short-term for small companies with little purchasing power,” says Max Bänziger, chief operating officer at EAO. “In some areas, we built up second sources or changed suppliers.” The company examined its standard practices looking for more flexibility, including a group-wide review and supplier audits.
“The positive result of these issues is that it has transformed our supply-chain management to become a more robust and dynamic organization. As a company, we are better prepared to handle shortages and disruptions in our supply chain,” Bänziger says.
Microchip production has increased and supply demands have eased in 2023, but lead times still remain longer than pre-pandemic, says Bänziger. Increased inventories across industry reduced the availability of special components and in many cases resulted in last-time buys, when a supplier stops producing a certain part or component, which have largely subsided. Long-term, Bänziger forecasts lowered volatility for microchips from Asia production coming to the west. The company has also seen a recovery in supply for the plastics industry.
Pepperl+Fuchs says the industry is still experiencing a backlog for motors, but on the whole, the crisis is over. “As already mentioned, no industry and no manufacturer was immune to component issues during this crisis. To make matters worse, it was impossible to rely on information about when manufacturers would receive components. The manufacturers who were honest and in constant communication with their customers survived best. Communicating delivery times in years rather than weeks was a situation that everyone got used to,” Hudson says.
Gray Solutions, a system integrator, mostly felt the supply-chain crunch on PLC components and variable-frequency drive (VFD) shortages, notably premium VFDs with specialized chips for motion control.
“This led to long lead times, which caused long project delays and forced us to choose the lesser of two evils—delays vs. re-design—both of which are costly and time-consuming,” says Jeremy Reed, instrumentation manager at Gray Solutions. The system integrator also saw supply-chain issues with Ethernet modules, analog cards, IO-Link modules and PLC safety modules, but, overall, supply-chain issues have largely been eased this year.
During the pandemic, the integrator saw many manufacturers shift away from their specified products in lieu of what was available. “In many cases, customers found that some of the lesser-known suppliers were just as good as the big-name competitors, which eventually caused a shortage for those brands, as well,” Reed says. “It was beneficial for some of the manufacturers, as they were able to sell to new customers and foster new relationships.”
As with many crises, the best rise to the top. Strong companies find agility fast when faced with no other choice. Like Gray Solutions, many companies came out of the other end of tragedy with some powerful insights into how to build stronger supply chains and production processes. Here are three more lessons learned from industrial automation supply-chain woes.
1. Supply chain management is more robust.
“The positive result of these issues is that it has transformed our supply-chain management to become a more robust and dynamic organization. As a company, we are better prepared to handle shortages and disruptions in our supply chain. This assures consistent supply to our customers which further strengthens our position as a global partner, combining both added value and increased dependability to our customers,” says Bänziger of EAO.
2. Crisis led to forging new long-term relationship, partners and customers.
“If you offer technology, there is no way you’ve made it through the supply-chain crisis without entering into new relationships or partnerships. If you haven’t, you most likely still have supply-chain issues. This goes both ways. There are many new companies that we are working with as a supplier, thanks to the proactive measures and decisions we have taken in the past 24 months. There are also many new companies that we are working with as a customer, thanks to the same forward-thinking decisions made by our management team,” says Hudson of Pepperl+Fuchs. “The lessons we have learned and the investments and changes we have made have resulted in a more agile company that is ready to face the future.”
3. Industrial automation became even more foundational to the global economy.
“Industrial automation has become an even more critical piece of the global economy that houses, feeds and transports billions of people daily. New technologies like single-pair Ethernet, 5G wireless, and data models that enable edge and cloud infrastructures to optimize production with the help of artificial intelligence are set to further accelerate the value that industrial automation provides to both industry and the world. While my forecasting days are behind me, I’ve found that the foundational statistics are just as relevant today as they are driving the advances in artificial intelligence that are set to enhance worker productivity through coding acceleration, content development for emails, meeting notes and reports, and production-loop optimization,” says Fales of ODVA.
Vendor supply chain solutions and case studies: warehouse automation and vertical integration
Despite supply-chain issues, Beckhoff Automation has seen soaring demand for its products the past few years, with 33.4% revenue growth in 2022 alone. To automate and streamline its own supply chain, the technology provider partnered with Opex to install an automated storage and retrieval system (AS/RS) at its Minneapolis-area warehouse. The overhaul and other investments returned the company to pre-pandemic lead times by November 2023.
The AS/RS expands Beckhoff’s warehouse capacity by 60%, leaving room for growth, and the project was implemented without disrupting current customer shipments. “Considering the scope of this project and the pace of our warehouse, we knew we’d be essentially changing a tire at 100 mph. But we pulled it off, and that’s a testament to our amazing team,” says Beckhoff USA President Kevin Barker. “The AS/RS helps free up our growing warehouse team from repetitive tasks to tackle more interesting challenges.”
The system uses multiple mobile robots to pull totes of product and bring them to operators. Additional conveyor systems send the components to packing stations before being sent off to customers. Multiple Beckhoff technologies, including EtherCAT, TwinSAFE I/O terminals and an operator interface, are used throughout the AS/RS and conveyance systems.
The upgrades in Minnesota coincide with other Beckhoff efforts around the world. The company’s global headquarters in Germany has invested significantly in new production infrastructure and a new central 750,000-sq-ft warehouse, where Beckhoff will handle shipments for European customers and process orders to Beckhoff subsidiaries worldwide.
Vertical integration has been a successful supply-chain strategy for Alio Industries, a manufacturer of motion control technologies. Vertical integration, says Alio Industries President Bill Hennessey, is a strategy where a company expands its business operations into different stages along its production path, effectively controlling the key steps from design to marketing a final product. “It's a powerful approach that allows for enhanced quality control, streamlined processes and greater market dominance,” Hennessey says. The stringent quality and performance standards of ultra-precise motion control systems makes vertical integration even more crucial, he says.
“By controlling the entire production process, with design, machining, metrology, manufacturing and assembly teams all working together under one roof, cross-company collaboration can be nurtured every day,” Hennessey adds. Vertical integration can also enhance a manufacturer’s product innovation and customization.
“By overseeing every stage of the manufacturing process, companies can more effectively integrate research and development efforts into production. This integration fosters a seamless feedback loop between design, testing and manufacturing teams, allowing for rapid iteration and improvement of products. Additionally, vertical integration reduces dependence on external suppliers, which can be critical in managing supply-chain risks and ensuring timely delivery of products,” Hennessey says.