PHYTEC establishes solution approaches for the still difficult market situation.
The war in Ukraine and the associated sanctions by Western countries against Russia could worsen the chip crisis, which is not yet over anyway: Ukraine exports neon gas, Russia the raw material palladium. Both substances are used in the production of microchips. Other supply chains and transport routes have been affected or interrupted. In this difficult situation, we regularly receive inquiries from customers regarding PHYTEC’s ability to deliver. Marcus Lickes, Head of Development at PHYTEC, will inform us today about the measures taken by PHYTEC.
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Mr. Lickes, to what extent is PHYTEC affected by the current crisis?
Very widely. In principle, the procurement crisis affects every assembly that we manufacture. Not all of them to the same extent, but there is actually no electronic assembly in the world that is not affected.
To understand this, you have to dig a little deeper and understand where the bottlenecks are occurring. You quickly find out that the entire production and supply chain is affected. It starts with raw materials, goes to wafers, and ends with manufacturing and test capacity. So even if semiconductor manufacturers get the base material, they have to find free manufacturing capacity. Manufacturers with their own fabs are better off, but even their fabs are completely overloaded. This explains why there are hardly any components that can really be procured without problems.
Of course, all components that go directly into booming markets are particularly critical, as demand has risen extremely here. Components with few to no second sources are also very critical. In addition to the usual „suspects“ such as memory components, certain processors and „commonplace components“ such as those for the Ethernet interface are also affected.
And how does PHYTEC maintain the supply of critical components? What steps are taken if a component cannot be obtained?
When we realized how far-reaching and protracted the chip crisis would be and how it would affect virtually all supply chains, we formed a task force that identified the following solution areas, among others:
– Close supplier relationships
– Intensive customer contact
– Flexible product designs and parts lists
– Transparent pricing policy
– Consistent focus on the latest component generations
Can you tell us more about the different approaches?
Of course. As a globally active company, PHYTEC also buys globally. Our close contacts with many major semiconductor manufacturers help us to address our needs in the right places. If material becomes available somewhere in the world, the chances are quite good that we will hear about it.
The second important screw we can turn concerns our customers. PHYTEC has always maintained intensive contact with its customers. Often, it is relationships of trust that have grown over the years that enable us to find solutions together. The task force mentioned above considers all possible steps to enable timely production.
One trivial but very effective lever, for example, is to check whether a customer actually needs a certain critical component in his application or whether it is possible to adapt the bill of materials. The super-critical Ethernet components, for example, are often only used to put an image on the production line. This can often be solved in a different way.
Our developers support the customer in carrying out this production step differently and there is one less critical component in the parts list. Of course, it is also possible to switch to more readily available modules, use adapter boards or procure components from the customer.
And if a component cannot be dispensed with?
Yes, of course it is not always as simple as in the case of Ethernet: alternative suppliers often have to be evaluated (keyword second source). Then we adapt designs, provide software patches, carry out EMC tests in the laboratory: All with the aim that the customer notices as little as possible of the change. Of course, we inform the customer, but where possible we avoid any effort on the part of the customer. If the customer has to make adjustments himself, our developers are again available to provide support.
You are probably having a lot of crisis talks with customers at the moment. What is your experience here?
The very good relationship we have with our customers allows us to have a very open dialog about quantities and demand dates. This is a sensitive issue, but it is also an effective lever. As always in times of weakening supply chains, many companies tend to increase their inventories. Unfortunately, this only reinforces the crisis in the end: everyone has material in stock, but no one has everything they need.
We have been able to defuse a great many situations in recent months precisely by knowing when which quantity is really needed. Of course, customers are only that open if they can trust their supplier enough to disclose safety buffers in terms of quantity and time. We have this trust from our customers, because acting in partnership has always been part of our company philosophy and partnership is the best way to get through such a time.
We also apply this partnership approach to the next piece of the puzzle in our package of measures: our pricing policy. A consequence of component shortages is always an increase in the price of components. It was clear to us from the outset that we would not work with across-the-board price increases, but would only pass on the additional costs actually incurred without any markup.
However, even these can fluctuate greatly, depending on how critical the component is and how quickly it is needed. And if there is an availability of goods on the market, it is often necessary to place an order immediately. So we can’t ask our customers first about every single purchase decision with an additional price.
For this reason, we have developed a computer-supported special process. Our customers give us a quarterly budget within which we are allowed to purchase material at higher prices in order to realize desired delivery dates. The actual additional costs are then invoiced subsequently, also on a quarterly basis. This is a very fair approach that our customers greatly appreciate and which, in combination with the disclosure of demand dates, helps enormously to minimize additional costs.
What impact does the current situation have on new developments?
Many companies hardly find the time to deal with new developments. The effort required for rescheduling, design adjustments, and procurement is simply too great in this crisis. This is also managed very differently from company to company. We encounter very restrictive language regulations with regard to roadmaps and innovations, but also with a completely open willingness to engage in dialog. Of course, we particularly value open communication, because it provides a good direction for the future and our development planning. Any planning that is still shaky is better than none at all.
The chip crisis is also affecting future product planning at component level. Many components are being withdrawn from the market as a result of the crisis, or long-term availability is deteriorating because only a few fabs now offer the necessary manufacturing process. The background here is that many fabs are being converted to modern processes earlier than planned. And the new fabs no longer offer the old processes. So these components are discontinued or poor availability has to be expected. That’s why we are concentrating more consistently than before on using the latest generations of components.
And are you already noticing the effects of the war in Ukraine?
This topic makes me sick to my stomach. The humanitarian crisis caused by the war is shocking. People from both countries work at PHYTEC, as well as many colleagues from Poland, the main refugee destination. PHYTEC supports all employees wherever possible and stands up for democracy and human rights. Of course, we participate extensively in the sanctions against Russia. The war does not yet have a direct impact on our supply chains.
However, one can already read that in particular the supply of the metal palladium by Russia as well as the supply of the noble gas neon from the Ukraine are affected. We must observe this further.
Thank you for your time and all the best.