Sourcing Electrical Components: Are We Back to Normal?

Working on electronic medical devices gives you a remote but highly sensitive lens of world events. Electrical component production, partly due to its many bizarre raw materials and partly from cost pressures, is highly fragmented and positioned in far flung locations across the world. When disasters of various stripes hit globally — whether it be earthquake, political unrest, or disease — it sends ripples up a supply chain like a macabre game of telephone. For those in the medical device industry who lack the redundant suppliers of tech giants or automotive manufacturers, while bearing the extra pressures of quality and traceability, these signals come in loud and clear.

When Japan was hit by a historical earthquake and tsunami in March 2011, I spent the following weeks in front of an excel spreadsheet with lines of parts for an ultrasound project. We were chasing down every distributor we had to find tiny pockets of stockpiled components, scraping together just enough to finish the current production run.

In the early months of 2021, I was doing it again. Working on a pilot build, we’d repeatedly filled our online shopping carts with our latest components list, then watched red text flash up as soon as we pressed the submit order button. OUT-OF-STOCK would appear against a half dozen line items that had appeared available the hour before.

There were distinct differences in the two experiences. When the disaster hit in 2011, it was an unprecedented shock to a supply chain system that had years of optimization to minimize inventory and reduce cost. Toyota’s “lean production” and “just in time” methodology had propagated across industries and the world. Meanwhile, the internet and accompanying modern communication infrastructure made resources around the world accessible by large and small companies alike. These trends drove the concentration of different part manufacturers into global hot-spots, like the high-tech components production in Japan.  As supply chains grew longer and more efficient, there were minimal inventory stockpiles nearby when a hot-spot was taken out. While Apple, Toyota, and Honda’s component woes made the headlines after the Japanese disaster, thousands of small companies — including my little medical device company in California — were thrown into chaos a world away.

By the time COVID-19 shut down our factories and ports in early 2020, we had experienced a decade of smaller disasters to learn and rethink the costs and benefits of lean approaches in the face of catastrophic events. Why, then, was the more recent electrical component disruption so bad, especially for the medical sector, and why does it seem to be dragging on?

Lead times for a wide range of materials hit a record high in the summer of 2021. Microchips went from eight to 12 weeks to almost a full year for delivery. Many companies went the brute force route, building up massive stockpiles of inventory and chartering small ships at exorbitant shipping prices to get parts delivered into smaller ports. These responses to the scarcity of 2019-2021 led to a surplus in many areas outside of electrical components in 2022. Medline announced a $500 million expenditure on extra inventory in September of 2022. This, in turn, led to renewed interest in optimization in 2023. The resilient approaches were not sustainable once the pressure of the pandemic had lightened. This return to optimized supply chains is expected to continue through 2024.

The rapid rebound may be surprising to those who are unfamiliar with the nature of different supply change risks. Catastrophic disruptions — such as earthquakes and pandemics — are intense, but generally short lived if the market demand and raw resources are still available. COVID-19 led to an increase in demand for medical technology, and general manufacturing and logistical infrastructure was disrupted, but not destroyed. This is why the industry has, for the most part, returned to discussing inventory optimization less than two years after the crisis.

Catastrophic disruptions are very different from rapid, year over year scaling in global demand. While some resources can quickly expand to meet a growing need, a sharp increase in global demands for a resource that is either finite or very difficult to scale will mean an extended period of shortages.

This is why some electronic components are still scarce long after our ports have been cleared and workers have returned to production lines. The last decade has seen an intense ramp in the demand for electrical components. In 2011, only a third of Americans had smart phones — compared to the 85% of 2021. Tesla was just transitioning from luxury roadsters to sedans at their first production facility. Today, the company operates five Gigafactories across the world.

Our own industry has been juggling the dual trends of retrofitting existing products — pumps, implants, surgical tools — with smart technologies and the explosion of personal and mobile healthcare. Apple launched its smart watch in 2014, when fitness tracker usage in the US population was still in the single digit percentages. Wearables are now tracking the health of one third of the population and climbing, signaling a launch of health monitoring into mainstream use.

Current producers have not been able to keep up with the growth. The need for a domestic US supply of semiconductor components was highlighted by the federal CHIP and Science Act of 2022, which included a $52.7 billion investment in American semiconductor research, development, manufacturing, and workforce development. But semiconductor facilities are massively complex, both in terms of operations and equipment. The first highly publicized factories launched under the program are not set to begin producing parts until next year, with follow-on factories coming online as late as 2027.

Meanwhile, political unrest is cutting the availability of key raw materials. While the electric vehicle industry has been concerned about China’s restricting access to battery Lithium for years, last summer export restrictions were placed on a wide variety of critical metals for semiconductor production. Half the world’s supply of neon gas (another crucial element for semiconductors) comes from the Ukraine, where war with Russia forced the closure of their two main facilities in 2022.

The medical device industry faces a third challenge the automotive and consumer electronics do not: our size. As a report from Deloitte pointed out in 2022, about 50% of medical devices now contain a semiconductor, but that only makes up 1% of the market demand total. AdvaMed, the medical devices’ largest trade and advocacy organization, openly petitioned the leadership of the CHIPs act to ensure a supply of chips for the industry. AdvaMed CEO Scott Whitaker was quoted as stating how “…we simply cannot compete with larger players to gain access to chips…”. AdvaMed submitted formal comments on the federal program in November of that year and continues to highlight medical device needs as each new CHIP award is announced.

The many efforts to spread out vulnerable manufacturing hot-spots will doubtless improve the aftermath of future catastrophic events. Medical device manufacturing capabilities have erupted around the globe after COVID-19 shut down access to China’s infrastructure. From medical textile production expanding in India to Costa Rica becoming the darling of medical contract manufacturers, medical device’s global supply chain seems to be learning.

But “more factories in more places” will not solve medical device’s high-tech woes anytime soon. The infrastructure is too complex to build quickly, the raw materials are more restricted, and we are sharing these resources with much larger, more influential customers. For now, keep your pandemic era strategies handy:  design for your supply chain, validate multiple sources and borrow from big tech — use the components they use themselves — to avoid that OUT-OF-STOCK alert.