While many industries — notably medical devices companies — have had to continually adjust their supply chains, or even delay production, to deal with an international shortage in semiconductor chips these past three years, that situation seems to be abating. Bain & Company, for example, recently reported that “some companies are starting to see relief.” And many observers were encouraged by the passage this past summer of the CHIPS and Science Act, which calls for the investment of more than $52 billion in U.S. semiconductor manufacturing, research and development, and workforce training, as well as another $24 billion in tax credits for chip production over 10 years.
This investment is intended to protect overall manufacturing. At present, only 12% of chip factories are in the U.S., while 75% are in East Asia. Reducing microchip imports will help stabilize medical device supply chains, which have been vulnerable to suppliers based in only one part of the world.
Looking forward to the implementation of the CHIPS Act, the Advanced Medical Technology Assocation (AdvaMed), the world’s largest trade association representing medical device manufacturers, is advocating that the U.S. government prioritize the delivery of chips to the medical device industry. World leaders outside of Asia are also playing their part. Having seen the threat that the microchip shortage had on products that protect their own citizens’ health, the European Commission recommended its member states address the chip shortages immediately and work with chip manufacturers to prioritize producing semiconductors for healthcare.
Preparing for Future Shortages
But those developments, while positive, don’t mean medical device manufacturers — nearly 80% of whom have reported production delays — no longer have to worry. Lessons from the past three years indicate not only a need for vigilance, but also for preparation.
Given the importance of chips used in medical devices, which must be reliable and able to handle power spikes, maintain security, and comply with privacy regulations, finding alternative vendors remains an issue, especially when the chips in question are “mature” — older and not as cutting-edge as the latest chip designs. Chip manufacturers would prefer producing newer microprocessors with a greater profit margin, and may not be interested in the medical technology market, which only uses about 1% of microchips sold.
One such manufacturer, Baxter International, which has several products that use multiple semiconductors, has lobbied its suppliers to prioritize manufacturing chips for the medical device industry in order to keep up with the demand from patients and healthcare providers. Other companies, such as Hologic, which uses only a few hundred chips per month in its production process, have had to reduce their use of microchips while working with their technology vendors.
The message: Given the experience of the past three years and despite encouraging signs, maintaining readiness remains critical in order for medical device companies to reduce the impact of another supply disruption. Here are some suggestions for how to prepare:
Reduce Supply Vulnerability – A survey by Deloitte showed that 70% of medical technology companies received more than half of their semiconductor chips from one vendor. Buying large volumes from one supplier can provide significant discounts, but it obviously leads to problems when that vendor can’t deliver their promised shipments. Regular supply risk assessments can help find developing issues before they become problems, as well as increasing supply inventories and finding alternative vendors before they’re needed.
Maintain End-to-End Visibility Throughout the Supply Chain – According to Gartner, supply chain forecast accuracy has improved as more companies incorporate analytics into their production. But a deeper, end-to-end visibility helps get an accurate picture of both future customer demand and component inventories. Supply reliability solutions that align with a vendor’s system may not have prevented the chip shortage but they could have alerted medical technology companies earlier in the crisis.
Partner With a CMO – Original equipment manufacturers developing partnerships with contract manufacturing organizations (CMO) closer to target markets can simplify inventory management, according to Ralph Tricomi, director, market development for Web Industries. Ideally the partner CMO has the market knowledge and supplier relationships to acquire the microchips needed to continue production.
Increase Awareness of Medical Technology – As AdvaMed has shown, advocating for medical device manufacturers to receive its supply of microchips is critical. Maintaining communication with governments whether through trade groups or individually about the essential nature of microchips in medical devices and the impact of the shortage on public health is essential, even as the shortage eases.
With chip manufacturers building more factories and capacity, and the CHIPS Act boosting U.S. production, the worst of the recent shortage is probably over. This microchip crisis may not be the last one to impact medical device manufacturers but it’s probably safe to say that the industry is better prepared for the next one.