A view from Gordon Thomas, BDM, Global Fire Detection Products, Johnson Controls

Since the start of the year 2022, people may have started noticing that the supply of various technologies including fire detection has become more and more difficult to obtain.

Why has this happened?
Let's start by looking at two market effects behind this global shortage of raw materials and finished products. There are many factors to consider consisting of several key events creating market effects. The two market effects that have come into play in these circumstances are known as the “Bull Whip Effect” and the “Snowball Effect”. The Bull Whip Effect occurs when a shift in demand impacts previous forecasts. The changes fluctuate rapidly creating a ripple effect along the supply chain likened to the movement of a whip passing through the air when it struck.

The Snowball effect is best likened to a scene from Fawlty Towers. A small and seemingly insignificant issue occurs which then rapidly escalates with other small issues each compound on top of the previous till the result is too difficult to overcome. Like rolling a snowball down a hill it grows out of control very quickly.

For technology products there are several global supply issues affecting raw materials and components buts let’s just focus on one. Semiconductors are at the core of every technology product in existence and the semiconductor world has seen supply issues due to external forces and suffered from the bullwhip effect in the change in demand by consumers during the start of the Covid pandemic. It is not all down to Covid, in fact, it’s evident that effects occurring alongside the impact of Covid also contributed to the Snowball Effect.

In September 2020 the US-China trade war started with the Trump administration-imposed restrictions on China’s largest chip manufacturer. The restrictions placed here by the US Department of Commerce made it extremely hard for the Chinese chip manufacturer to supply chips to any company with American ties. It also quickly resonated with other governments around the world that also imposed similar restrictions (both explicit and implied restrictions). Manufacturers were forced into souring semiconductors from the other manufacturing plants around the world in places like Taiwan, Japan, Central Europe, and America. These other companies were now seeing demand exceed their manufacturing capacities.

When Covid hit us, consumer demand changed from components used in industries such as Fire and Security, Automotive, Building Management, etc. Projects and needs for these technologies declined in part due to the rapid increase in the need for more computing power, network infrastructure, and telecoms to adjust for the rise in working from home following the onset of the Covid pandemic.

Environmental Impacts during 2021 also had major impacts on production
A severe winter storm in February 2021 took place in Austin, Texas, USA. This storm forced the closure of two plants due to the loss of electrical power supplies which impacted them for several months. In Taiwan, in 2021, the country recorded its worst drought in the last 50 years. The production of semiconductors requires vast amounts of pure ultra-clean water one plant alone would require 63,000 Tons of water a day which was just not available. And to compound the impact of these issues two manufacturing plants; there were also impacts on one in Germany and one in Japan caused by a fire outbreaks closing production of not only semiconductor production, but also the lithography equipment used in chip production.

The Russian - Ukraine war is also an ongoing factor to consider as Russia is one of the largest exporters of raw materials such as Neon and Metal Palladium. Ukraine is a leading supplier of Krypton and Xenon. With the Western world placing trade restrictions on Russia and the impact on the conflict taking place further in Ukraine the global chip manufacturers are forced to look at alternative sources for these raw materials which will take time to ramp up as defined in the bullwhip effect.

What is being done about it?
So, you can see the impact that’s taken place on our industry, but that’s not where it ends the supply and demand v price ratio has also kicked in with difficulties in obtaining raw material, forcing price increases of said material through the roof in some instances. Manufacturers have had to resort to spot buying, purchasing at higher rates than the norm and eventually this must be passed on. Fuel and energy costs have gone up over the last few months as well so the cost of production and transporting the goods at the component and finish goods stages has massively increased.

Manufacturers have had to overcome these supply and demand issues and several techniques have been deployed. Re-engineering finished products to allow more resilience in alternative components. Surcharges to cater to pricing variations. And the inevitable price increase to sustain production capability.

These price increases and delays in availability pass along the supply chain so integrators, distributors and end-users/contractors need to adapt practices to prevent the snowball effect from impacting companies’ profitability and delivery of projects that are needed to stabilise the global shortage pandemic. Some simple strategies such as sticking with your original supplier, providing better long-term forecasts, and building resilience to projects in delivery times and removing penalties for late delivery all will benefit and prevent the snowball effect from having a major impact on the backend of the supply chain.

When will it end?
There is no crystal ball as to when we will see an end to these production shortages. But industry analysts are predicting the impact on the global market will be here till at least mid-2023. Micro changes have been made by manufacturers to counteract their impacts, but the next stage of the supply change must act now.

Gradually we will see supply improve following the changes manufacturers have implemented but to prevent the effect of the snowball further down the supply chain integrators/distributors to end-users need to reflect on the impacts their actions will have on the ultimate stabilisation of the global shortage. Stick with your original supply channel swapping to alternatives is how the bullwhip effect starts. Contractors and end users need to be aware that the integrators and distributors are not at fault. Penalising them contractually for late delivery is just going to drive the behaviour that starts the bullwhip effect. An alternative solution that benefits all parties is to plan earlier andallowing partial shipments of components when they are available will help reduce the burden a single delivery has on the ability to supply.