HID Connects Podcast Episode 3: Will the Supply Chain Crisis Ever End?

Most people never thought about — much less talked about — supply chains until the onset of the pandemic in 2020. Since then, supply chain issues and materials shortages have impacted almost every industry imaginable, including security.

Now that we are emerging from the pandemic and have the opportunity to look back, what has been done to overcome supply change challenges? What have we learned from it all?

Join us for this episode of HID Connects where Josh Freeman, our SVP Head of Operations, discusses the important question: Will the supply chain crisis ever end?

Take a minute to listen below. And while you’re at it, be sure to subscribe to receive future episodes.

 

Here is a transcript if you’d like to read along:

Matt (Host):
Hello everyone! Good morning, good afternoon, good evening — whatever time it is, and wherever in the world you may be. My name is Matt Winn, your podcast host and resident secure identities nerd. Thank you for joining us again for this episode of HID Connects. We're excited to have you back.

Since we have a lot to cover on a very hot topic that's impacting our industry and beyond, let's just get straight to it.

Today's burning question is, “Will the supply chain crisis ever end?” Joining me in our studio today is our resident expert on the topic, Josh Freeman, Senior Vice President and Head of Operations at HID.

Josh, mind saying hello to our listeners?

Josh:
Hello everybody. Glad to be here.

Matt:
Glad to have you, Josh. Let's get into it. You ready?

Josh:
I'm ready.

Matt:
All right, Josh, let's just start at the beginning. What happened and why are we here?

Josh:
Well, I think we have to go back to 2018 to really get a full picture of what happened. In 2018, there was a fairly significant downturn in the semiconductor market that was mainly driven by business cycles, technology cycles and just an overall ebb and flow of that industry. And what happened was, as we came out of 2018 and we went in 2019, that industry saw a kind of weakening in demand, and then some things started to come up in the horizon. We started to see the initial information about concerns globally around the pandemic that started to come in towards the end of the year. But really the market at that point set the conditions for some decisions across an array of components in the semiconductor supply chain, and in 2020 everyone saw two years of uncertainty in demand. They saw some over utilization, they saw some downturn, and then they really began to witness what was happening in the Covid crisis.

So you can imagine, like lots of companies, they had to rationalize what they were going to do. They wanted to make sure that they were not going to overproduce. They wanted to make sure that the semiconductor supply chain would be in position to meet needs but not get themselves into a position of having too much material produced.

Well, what happened is, no one anticipated that in the pandemic we would have some rapid shifts in demand and mix. So the first thing is, you had an extreme increase in work-from-home requirements, meaning that everything from the ICs that went into personal computers required to work from home, to the ICs that went into mobile devices, to all the equipment that we're using here for the podcast right now — those things became in high demand.

I mean, we saw a massive growth in the PC industry, as an example. You couple that with changes in the auto industry happening at the same time, and what happened is that the semiconductor industry started to react. They started to look at adding capacity, but you can't add that much capacity that quickly in a pandemic.

So we found ourselves in a position where lots of demand was being placed on the semiconductor industry because of the pandemic, including secondary and tertiary impacts, but then you also had this kind of expansion of electronic vehicles. You couple that with a lot of technology being deployed in the auto industry. And as we came through the pandemic and auto demand picked up, you saw another wave of massive demand on that industry.

Fundamentally, we just had a mismatch between supply and demand.

And that mismatch, I think, got made worse when you had some panic buying that occurred in the industry. You had big players like Apple go pick up hundreds if not millions of semiconductors and corner the market. You had big players like Tesla kind of change their technology entirely to go consume what was available. And those big players kind of caused more issues there.

So overall, we found ourselves in a very difficult position across many industries. We've been trying to deal with that to the best of our ability, and we'll talk more about that later. But that's where it started — it’s basically the dynamics starting in 2018, the pandemic and the associated shifts in the market, and then the reactions that the market did over the past two years which have kind of caused this.

Matt:
That's interesting that you mentioned panic buying, because the first time I really noticed anything regarding supply chain was when I couldn't find toilet paper in March of 2020. I remember going to the grocery store trying to find that, and really any food to eat, and I came home with a package of turkey hot dogs that continues to live in my freezer.

Why do you think the world was so caught off guard when the pandemic hit?

Josh:
Well, I think there are a few things. One is that all of our supply chains have evolved through a long period of stability and reliability. What I mean by that is that we all became very accustomed to being able to get things on a very, very short lead time without a lot of planning and coordination. If you think about it in your personal life, we never think twice about buying toilet paper in advance. And if you take that a little further — it may seem silly — but the reality is that the use for toilet paper has not doubled — right? — just because everyone was working from home. But because we actually did study the paper supply chain to benchmark what happened and how we would adjust to it, there are fundamental differences between what you use at work and what we use at home.

That mix shift had a big impact on the industry. We all know it's coming, but there are other disruptions that are going to affect it. So I think we saw it coming. We actually kind of initiated a task force very early on because we saw indicators of this happening. But your ability to react to it is limited.

It's something you can be prepared for. You can argue you can hold on to more inventory. We typically like to run our operations with around three months of inventory on hand, and that's for our targeted levels. There are some things we run with more inventory because the volume's very low or the demand is very volatile. Well, even if you have that on hand, you will consume it within three months. And if you have a long-term disruption, that was just a short-term remedy. So we saw it coming, we started to make some changes, but I think no one anticipated that the disruption would be persistent. It would be widespread, and it would drive other market dynamics around things like pricing, and I would argue, tied to inflation. There are some aspects there. So, we were ready at a certain level, but not ready for the magnitude of this.

I don't think any industry was quite ready for what happened. I saw some satellite photos a few months ago that showed the different holding pens for e-vehicles in the auto industry that are not completely built. And I came from the auto industry. At one time I worked for a big auto manufacturer outside of Detroit, and that is absolutely the worst thing to do — to build ahead and rebuild a car because you're short on parts. For those in the auto industry to take that risk on, build ahead and wait for semiconductor parts to come in to then reassemble aspects of their instrument panels or their technology suite — it had to be a significant issue for them as well. So this crisis has affected a lot of things.

Matt:
You mentioned the auto industry. We've talked about toilet paper, we've talked about turkey. So it's hitting everybody across the board and maybe some sectors have recovered faster than others, but we can only control what is right in front of us, right?

So let's bring it a little bit more personal. What have we done? What have you done? What have the teams done at HID to respond to this ongoing issue?

Josh:
It's a great question, and I think I would say it's an array of activities. It's not one silver bullet. You've got to look at this as an opportunity to exercise all kinds of tricks of the trade from a supply chain management perspective. But I think the most important thing we've done is we've looked at this as a business problem, not just an operational problem. The first thing I would say is we've been very aggressive around qualifying alternatives, meaning that it gave us a better opportunity to go secure alternative components on the market. We got very engaged with the broker market and that allowed us to gain a little bit of flexibility.

For example, if we couldn't get capacitors or resistors from one distributor, this allowed us to look at others. That meant that not only did we have to become more aggressive about looking for alternative supplies and alternative sources, we had to be very aggressive and put the controls in place so that we could qualify them quickly and then also make sure we had the quality controls in place to make sure that even though we're going to alternative sources, it had no impact on our products.

I can tell you, I was actually at one of our contract manufacturers several months ago. We got an alternative resistor supplier in, and we went through the inbound inspections, and we had to fail them. So then we had to go out and search for alternatives. But that shows that our process for dealing with alternatives works. On top of alternatives, we had to become very, very aggressive on paying premiums to secure supply. That meant that we were spending upwards of $145 on some ICs that would cost us typically $4.58. This is a huge amount of cost that we've incurred on our side to keep running our business. We value our customers so much that we've done a lot of that, but that just shows how constrained the market was.

After we executed those kinds of supply chain tricks, we started to work the problem more at a business level where we started to look at: could we bring some products to market that didn't have the full feature set that met a high percentage of our customer needs, and make some changes to our products so we could basically design around a constraint?

We've been able to bring a few products to market that may have restrictions on what their capabilities are, but they meet our install base requirements, and that's been a very successful effort to kind of avoid constraints.

Then on top of that, we've actually redesigned what we call our chip sets, the combination of the semiconductors as well as the other board components to design into a more available supply chain. We've done that on several of our products, from our controllers to our readers and even our credentials and printers. I'm really proud to say that one of our key business leaders has been an advocate for this. Martin Huddart, who runs our Physical Access Control business area, said, "Today you can get a COS credential in four different variants. Nine months ago, you could get one.” And so, form, fit and function — they're identical, but we had to qualify alternative suppliers.

I think that that was the ultimate commitment from HID, because that meant not only did we have to invest all of our R&D resources to design these alternatives, we had to then go qualify them, we had to go work through the certification processes, and again, on our end, incur significant cost to maintain continuity in business. Now with that all said, have we been able to close every gap? No. There have been some components that are very difficult, and we've taken even further steps. I can tell you right now, one of the things I'm very proud of that we did is we had some constraints, not because of semiconductors, but because of other materials in our ribbons for our printer business. We actually deployed our associates to our suppliers' location to run their lines, because not only do we have a semiconductor crisis, but we also have a labor crisis. They didn't have enough staffing to run their business.

So we actually sent people there, got them qualified on how to produce that equipment for the supplier, and we had them there for multiple months making sure we could build our product and help them out. That helped us with our relationship with our supplier.

Again, it's another example of how we didn't leave any stone unturned to see what we could do. And we continue to benchmark ourselves against others, not just in our own industry but with other industries, and ask, "Is there something else that we can be doing?" And we're learning and adapting. But no, those are the things that we did.

Matt:
You raised a lot of really interesting points for me too, because I sit on the communication side of things. So supply chain is not just a matter of getting toilet paper to me, but now it's also more of a true business function, and it's something that's palpable to everyone across the organization. It's really brought that to the forefront across the board, which I think is really interesting.

I also think that it's a testament to the team effort — there was a lot of effort made to get us to where we are now. But that said, we're still not completely out of the woods. And while it's a lot of good news, customers are probably still wondering what's next? So what message might you deliver to our customers?

Josh:
I would say there are a few things. The first one is, I don't think that we're ever going to return to the world of near infinite availability and predictability. I think the world is going to be different. I know it’s an overused term — the new normal — but I don't think there is going to be a new normal. I think there's always going to be some kind of evolving constraint that we have to work through.

So my message is about a few things. One is, let's all adjust. Let's make sure we understand what our needs are and actually collaborate to understand what our needs are on a longer-term horizon. I think that's going to be a really key aspect of how we're going to operate in the future. Yes, we will do our best job to anticipate our customers’ needs and forecast them, but I think things like product transitions need to take on a different approach.

What I mean by that is, I think when we have our products that we're either going to be phasing out or introducing new ones, I think there's a lot of value in collaborating with our customers to say, "How many of these do you need before we end of life this product, and can we reserve some for you?" We get to a commitment where maybe over the next nine months we will allocate material to you because you're committed to purchase this for the end of life. Also, can we get you earlier advanced versions of the new product?

So when we do move to the new product, you're able to shift your forecast and move demand over in a much more, I would say, elegant way than with just a disruptive kind of manner. I think there's a need for continued collaboration. I think there's also a need for us to work together with our customers to ensure we've got resilience in that supply chain. And I think that'll come up when we continue to develop second sources, alternative products. We just need to keep our lines of communication open to make sure that we've got alternatives for our customers, that those alternatives are qualified, that they're prepared, and that we're not surprised if we have to make some kind of changes there.

Matt:
And of course, a big thanks for your patience and understanding and support along the way. It's been a journey for everybody.

Josh:
Yeah, I would say this. And I'll laugh at this. I mean, I've met more customers over the past year and a half than I’ve ever met in a supply chain or operational role. And we all have a common goal. We all want to meet our customers' needs. What I've seen is a lot of collaboration with our customers.

I would reinforce what you just said. I do think we owe our customers and our partners a tremendous amount of gratitude because they have been patient with us, they've worked with us. I would give you examples of where they worked with us that I think are really notable. One is, some of those alternative products I discussed, they're restricted features. Our customers have been very, very helpful making those transitions. Also, we've had customers we've partnered with to help us push on some of the semiconductor suppliers to secure materials for us and for them.

Some of our customers are extremely large, big brand companies and they've helped us try to get supply. So that helps when we go to the semiconductor suppliers as an alliance, not just as a single individual. That's been a level of collaboration, and I would argue transparency, that I don't think we've ever done before. It's helped, I think, both us and our customers. I think it's helped not only secure more supply, but it's also helped us better understand each other and maybe regain a little bit of trust in us working together as a team.

So no, I would give a big thank-you to a lot of our customers for working with us through this transition.

Matt:
Yeah. Well, there's that saying, "It takes a village," but in this case, it's almost like it takes a global community to address some of these concerns. That's really good insight, too. Now, Josh, you already touched on this a little bit. So just really quickly, in a few words, what's your prediction for the future?

Josh:
I think because of the overall economic outlook, we're going to see some interesting things unfold. The first is, we're going to see a lot of these large companies that have secured big chunks of supply and capacity in the semiconductor industry are going to start to decommit on those. We're already seeing some of that, where they're either moving to a new technology or they're reducing their forecast requirements.

So what's happening is, the semiconductor suppliers are now all kind of scrambling to say, "Okay, if I invest in this capacity, if I have the supply line coming in, how do I reallocate this with these changes?" That, I think, for our company and for a lot of people will be a welcome situation. I think it also comes back to that we still have to be flexible. That may not mean every semiconductor is in a very positive supply position.

It just means we have to adapt, and we have to continue to change. I think we're going to see semiconductor availability improve in targeted areas, and our ability to move to where those improvements are is going to be critical. We have a lot of plans in place to do that.

The second thing is, I think we're going to see some stickiness to the inflationary prices that we've seen. I don't see any kind of immediate price correction. We've incurred a tremendous amount of price increases to both secure the supply and remain at the top of the list to get parts. But I don't see a change there where, all of a sudden, the inflationary pressures change overnight. There are some commodities that we're going to see stabilize. I think copper is one of them. I would also say freight costs we see stabilizing, but they're at a higher rate.

I don't think they're going to come down that quickly because of where energy prices are. My concern is, there are underlining core commodity price increases that will have a long-term inflationary impact on both energy and labor. So I think availability improvement will be very challenged on cost.

Then I'm going to start to worry about the possibility of some more consolidation. I think in a time where you've got this inflection point in demand, and you're going from a period where you couldn't get enough supply and there's a lot of demand on the limited supply chain, and then when that flips, there's excess supply, I'm worried about certain players in the supply chain that may have some financial viability issues.

I think some distributors are going to be stuck with lots of inventory. I think there's going to be certain contract manufacturers out there that are going to find inflationary pressures they've not been able to keep up with, and they may have some financially distraught situations that we're going to have to work through. So I think as a company, we're going to have to also adjust in how we look at the health of our supply chain, not just through availability and continuity, but also through the financial viability of some of the key partners that we work with. And so we're doing some tests in how we evaluate that. We're staying on top of that.

I don't have any red flags right now that I would talk about, but I just think there's a next challenge the market's going to go through because of this inflection point that we see.

Matt:
So the saga continues, it sounds like.

Josh:
Same saga, different chapter.

Matt:
And that is the perfect segue to my final question for you, Josh, and that is: will the supply chain crisis ever end?

Josh:
Well, yes. I think we're going to adapt to what supply chains look like in the future. What I would say is — and I put together a presentation for a lot of internal folks about this — fundamentally, so many of us have grown up in our careers in a period of great stability. That stability was underpinned by the globalization of supply chains, stability in currency and stability in interest rates in a relatively stable inflationary period. Basically, it's called the Great Moderation, as I think the US Fed would call it. That is changing. I think that underlining stability is something that is going to be an ongoing issue for us. I think we're going to be looking at a regionalization of supply chains. There are going to have to be multiple sources. We can't just have all semiconductors being produced in one location.

I think there's going to be geopolitical challenges that are going to continue to haunt supply chains. But I think we've all learned how to adapt to these and be able to make adjustments. What this is going to mean is, maybe we can't always anticipate the next problem and get ahead of it, but I think we're going to be much more agile about how we can respond to it as an organization and how we can respond to it as an industry.

I think that, to me, is why I say, "Supply chain may not always be on the first page of a news story, but I guarantee it's going to be in the newspaper maybe on page eight for the foreseeable future."

There will be something that happens. We see that from natural disasters. We see that in geopolitical conflicts. And I would argue the need to become less intrusive in the environment. Our commitments to things like green initiatives and science-based targets are going to mandate more transformation in the supply chain. That may be self-imposed, and that may be something that we participate in because we're a big believer in that. But that will also be disruptive, but hopefully it ends up being a net positive.

It's just it's going to cause some unintended consequences that we have to work through.

Matt:
"The only thing that's constant in life is change," so they say.

Josh:
Absolutely. Absolutely.

Matt:
Very good. Well, Josh, wonderful. Thank you so much for sharing your thoughts and your perspectives on this topic. It's really important, and it's shaping — exactly like he said — all facets of our lives now and moving into the future.

So with that, a big thanks to all of you listeners for joining us for this episode. As always, we really do enjoy creating this podcast and hope you equally enjoy listening to it.

While you're with us, please be sure to subscribe to HID Connects. Doing so will make sure that you are connected and not miss future episodes, and you can subscribe wherever you get your podcast.

Now, in the spirit of connection, please do send me your questions and topic ideas for future episodes. All you have to do is drop me a line at [email protected].

Until our next episode, Josh, thanks again. Thank you again for listening.

May your identities forever be secure.