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Critical Subsystems – From Just in Time to Just in Case

COVID-19 has forced all the players in the semiconductor manufacturing supply chain to reassess how much inventory they need to hold.

Critical subsystems suppliers are well-experienced in managing the whiplash effect of the semiconductor equipment supply chain – their businesses are optimised to survive and thrive in this environment. Additionally, they need to be always on guard to check if their customers are panic buying, hoarding, or double ordering as these can amplify swings in demand.

COVID-19 just further complicated their operations management. The disruption of the supply of raw materials and components is driving a reassessment of how much inventory needs to be held to keep their businesses running smoothly. This change is inevitably raising questions about what the appropriate level of inventory should be, and how to know when customers have excessive inventories. Knowing the answers to these questions is vital, especially as we are in the middle of a strong growth phase.

From the critical subsystems suppliers’ perspective, securing a sufficient stock of raw materials and components has been a priority and resulted in inventories growing from around one month to somewhere between three and five months. On the output side, inventories of finished goods are relatively low as they are currently running at near-record quarterly production levels and shipping right off the production line. Historically, critical subsystems suppliers keep an inventory of around 17 percent of sales, often on consignment for customers. In recent quarters this has been nearer 13 percent as they struggle to keep up with demand (Figure 1).


Sales of critical subsystems in the first half of 2020 grew significantly faster than sales of semiconductor equipment over the same period. This is raising a red flag on whether customers are ordering too much.

Historically, OEMs have kept inventories of critical subsystems and components at 22 percent of their sales. Figure 2 shows that at the beginning of 2018, inventories of critical subsystems and components jumped up to 27 percent of sales. This was due to over-ordering during the 2017 boom in the semiconductor equipment market. So, when the market dropped quickly in the first quarter of 2018, they were left with excess inventory, which persisted until the end of 2019. The recovery in the equipment market in the fourth quarter of 2019 saw these inventories drop. In normal circumstances, the percentage would have trended back down to normal historical levels. However, there is nothing ordinary about 2020, and the OEMs response to COVID-19 has kept inventories at very high levels.



In these challenging times, the semiconductor industry has clearly moved away from a just in time system of inventory to a just in case system. And while it is still not certain what the right amount of inventory the OEMs should be holding, for now it makes sense to keep track of the value as a percentage of total revenues. If this metric stays flat or falls, then this should be viewed as healthy. If it grows, then this should be a trigger for concern and further investigation.

For more information about critical subsystems and the VLSI Research Critical Subsystems database, please visit VLSI Research.

John West is managing director at VLSI Research Europe. 

Topics: Critical Subsystems , semiconductor industry , VLSI Research , semiconductors , VLSI Europe , Coronavirus , pandemic , COVID-19 , critical subsystem suppliers , OEMs , original equipment manufacturers , inventory




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