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Promoting and Protecting Semiconductor Supply Chains

During the forum at the 2024 NAE annual meeting, four panelists from some of America’s leading companies explored how to reimagine supply chains to enhance the resiliency of the US economy and quality of life. As with the preceding plenary session, the forum was moderated by Deanne Bell. “During the COVID pandemic, we all saw how disruptions to supply chains can shock the economy and affect the livelihoods of people all across the globe,” Bell said. Among the results of this wake-up call have been new legislation, increased investments, a wide range of public and private commitments, and much greater attention given to developing more resilient supply chains and reshoring key industries back to the United States. The issues associated with supply chains are complex, Bell observed, but they are issues of “great national importance.”

To begin the forum, Darío Gil, senior vice president and director of research at IBM, continued the discussion of semiconductor chips begun by Locascio in the preceding plenary session. In particular, he addressed the need to both promote and protect the industry’s supply chains. What policy actions affect where manufacturing and R&D are done? And what are the limitations on where critical supply chains can be sourced and R&D can be conducted?

Gil observed that the globalization of semiconductor chip supply chains pursued optimization around economic advantages. This brought cost savings, but it also resulted in what he called “hyper-concentration.” In the three critical areas of design, wafer fabrication, and assembly and test, particular regions of the world account for 65 percent or more of activity. Thus, the United States leads the world in design, Korea in memory devices, and a combination of Taiwan and Korea in advanced logic chip manufacturing. Other countries are also key parts of this production ecosystem and contribute to its localization, including China, the Netherlands, and Japan.

Gil said that the decline of US semiconductor production from 37 percent of global production in 1990 to slightly more than 10 percent today has produced a dangerous US dependency on other countries. According to an analysis by the Semiconductor Industry Association, the economic impact of a disruption of chips from Taiwan would be 11 percent of GDP within eight months for the United States.¹ For countries like Germany, Japan, and China that have an even heavier dependence on overseas manufacturing, the impact would be 16 percent of GDP within eight months. The implications of this dependency are “hard to overstate.”

The 2022 CHIPS and Science Act marked the re-emergence of industrial policy as an element of the toolkit that the federal government is applying to the US economy. However, even with a forceful industrial policy, “realistically, we are not going to reverse decades of globalization in short order,” said Gil. At best, the United States might expect to have 20 percent to 30 percent of manufacturing capacity in advanced logic semiconductors by the early 2030s. “This is going to be a tough problem that is going to require very sustained commitments for long periods of time between the United States and allies.”

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¹ The Project 2049 Institute, 2023. United States, Taiwan, and Semiconductors: A Critical Supply Chain Partnership. Arlington, VA: US-Taiwan Business Council.

The United States also has moved to protect as well as promote its semiconductor industry, Gil observed. For example, it has imposed export controls in such areas as semiconductor equipment process equipment design and artificial intelligence. This complicates the decisions companies must make about investments, production, and distribution since many of the leading technology companies derive much of their revenues by exporting technologies to other countries. “This is an area where we have a lot of work cut out for all of us, including all of this community, to provide the right technical advice as to what should be protected and how, and also the challenge of understanding the economic consequences of implementing those export controls,” Gil said.

Today, technology has the same level of geopolitical importance as trade or military alliances, Gil noted. In particular, the elevation of semiconductor technology to a position of geopolitical significance is reshaping the nature of global commerce. The United States must not only develop its technological capacity but also work, in close coordination with allies, to make sure that the United States continues to have access of markets with a competitive advantage.

In response to a question, Gil mentioned the role of business model innovation in supply chains. For example, TSMC’s pioneering of fabless plants “enabled economies of scale and productivity levels that others found hard to match to,” and concentration became focused in Taiwan. “Part of what we have to innovate is not only on the R&D side of the house but on the business model around that.” As an example, he mentioned the concepts of chiplets that can be put together in different ways to perform different tasks, which would represent the intersection of R&D and business model innovation. “What is the R&D element and the policy element, but also what is a business model and economic incentive model to make this sustainable?”

TRANSFORMING SUPPLY CHAINS IN THE AEROSPACE AND DEFENSE SECTOR

The aerospace and defense sector supports national security, transportation, and space exploration, explained Steven Walker, vice president and chief technology officer at Lockheed Martin. Evolving as technology advances,

the sector has a major influence on global economies. According to the 2024 Aerospace and Defense Global Market Report, the size of the market grew from $884 billion in 2023 to $986 billion in 2024.² However, markets and budgets can fluctuate significantly, said Walker. Even within just the United States, major customers include the Army, Navy, Air Force, Marine Corps, and Space Force, and “each of those customers has its own priorities.”

Lockheed Martin is an important component of the sector. It has more than 122,000 employees worldwide, more than half of whom are engineers, scientists, or technicians (and more than 20 percent of whom are veterans). Lockheed Martin has business areas of aerospace (Aero), missiles and fire control (NFC), rotary and mission systems (RMS), and space. Each of those business units is focused largely on platforms, such as helicopters, missile systems, and the Global Positioning System satellites. Microelectronics are a critical piece of this hardware, which has been an area of emphasis for the company in recent years. This has often involved partnering with other companies to bring leading-edge digital technologies into Lockheed Martin’s platforms.

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² The Business Research Company. 2024. Global Aerospace and Defense Market Forecast 2024-2033: Estimated Market Size And Growth Rate. Available at https://blog.tbrc.info/2024/10/global-aerospace-and-defense-market-forecast.

Lockheed Martin has more than 13,000 suppliers across 52 countries, which means that it has a very heavy reliance on global supply chains. These supply chains have points of fragility, Walker emphasized. The sector is highly regulated; for example, export controls affect what information can and cannot be sent out of the United States. Different countries have different ways of doing business. Suppliers may be concentrated, and microelectronics from foreign suppliers must be trusted. Critical materials may come from a limited number of sources. For example, magnet technology is important in some platforms to reduce size, weight, and cost, but these technologies can be dependent on rare earth materials that come mostly from China and Russia.

Lockheed Martin is seeking to transform its supply chains for anti-fragility, Walker said. Risk management and sourcing controls are being applied proactively. Sources are being diversified in areas such as semiconductors, solid rocket motors, and rare earth elements. For example, the company is working with General Dynamics to develop a more robust and diverse supply chain in the rocket motor industry. AI will help the company understand and oversee its supply base. One possibility is a digital twin of the supply chain for important systems. “Being able to model and simulate supply chains to our advantage is going to be really important moving forward.”

In response to a question about the sustainability of materials supplies, Walker mentioned the possibility of reprocessing mine tailings for value materials such as rare earths. “We’re working with a small company or two to look at that. If we can make that a reality, that’s absolutely something we want to go after.”

SUPPLY CHAINS IN DRUG DEVELOPMENT

Within the health care sector, drug development ranges from basic research through clinical trials to manufacturing and commercial sales, all under the regulatory oversight of government, observed Taiyin Yang, former executive vice president of pharmaceutical development and manufacturing at Gilead Sciences. Each of these activities has distinct stages. Manufacturing, for example, progresses from raw materials to finished products to distribution to use. As a result of the many steps involved in drug development, long lead times are the norm, and these long lead times require resilient supply chains and just-in-case plans.

Having a safety stock policy across the entire supply chain is a safeguard against interruptions in patient treatment. “It’s imperative to have reserved production capacities that are ready, not dormant, and in a state of compliance.” Ensuring a resilient supply chain requires investing in the three Rs, Yang said. Resisting disruptions means planning to avoid impacts. Responding means ensuring that the ability exists to cope with disruptions. And recovering means securing access to supply chain products quickly.

The COVID-19 pandemic demonstrated the importance of all these components. The healthcare system raced to deliver medical innovations and patient care. The importance of data integrity and cybersecurity was highlighted. The pharmaceutical and biotechnology industries invested in operations that were foundational to supply chain quality. “A resilient health care supply chain mattered more than ever before.”

Several transforming forces are currently making it possible to reimagine health care supply chains, Yang said. New technologies and medical modalities, such as the advent of generative AI, will “dictate customized supply chain strategies.” Data analytics can be applied throughout the ecosystem of supply chains. Equitable patient access is no longer an aspiration but a force taking hold in clinical trials. Geopolitical influences and natural disasters, such as those resulting from climate change, are reshaping the industry as well.

Like the aerospace and defense sector, the health care industry is highly regulated to ensure the safety, efficacy, and availability of medical products. As a result, the health care industry has an opportunity to partner with health authorities on the governance, qualification, and data integrity of new technologies, such as AI tools, Yang concluded.

FULFILLMENT AS A SUPPLY CHAIN

Russell Allgor, chief scientist for Amazon.com, turned the conversation from manufacturing to how manufactured goods get to people. The outbound supply chain at Amazon begins when a customer clicks on a computer or mobile device to buy a product. The first step is “to provide a customer with a delivery estimate right away of when they might get the product,” Allgor said. “The second step is to try to make that come true.”

Amazon has hundreds of fulfillment centers from which it can ship products. All of the tens of millions of items customers can order are under a roof somewhere in that network. Once a fulfillment center for an item has been chosen, the item is picked off a shelf or off a pod and put into a box, possibly with other items. That box can then be sorted onto a cart or a pallet or put directly onto a trailer on the outbound dock of the facility. If the package is traveling a short distance, it may go all the way to a delivery station and be routed there directly to a delivery van. If it has to travel a longer distance, it will probably travel to a sortation center somewhere within what is called the middle mile network within the company. That sortation center will sort and consolidate packages headed to the same destination and place them in a trailer or cargo plane. This middle-mile network uses carriers and trailers owned by Amazon as well as by third parties.

If the package has traveled a long distance, it usually goes to another sortation center where it is deconsolidated and then reconsolidated. Items may be sorted again at a subsequent delivery station, so “lots of handling is going on to get the packages to small containers, which are then loaded onto delivery vans.”

This network of fulfillment centers, sortation centers, delivery stations, and transportation processes has several elements that make it resilient to disruptions, Allgor noted. The first is alternative supply points. Most of the items Amazon sells are stocked in more than one fulfillment center, “some in all of the hundreds, but many in a subset of those.” If one of the sites has

a power outage or weather-related problem, customers will not see a disruption. “There’s no single point of failure.”

Redundancy also is built into its fulfillment centers. Amazon typically stocks items in what is called random stow. “Rather than directed stow, like you might see in a supermarket where all the chicken soup is together, we’ll have individual items stocked in many places.” That serves two purposes. One is better storage density. The second is better line balance because items can be pulled from different places. If a particular machine is down, an item can be acquired from another spot in the same facility.

Amazon also has built flexible capacity and supply into its network. The company scales its infrastructure for the peak shopping season between November and December. As a result, it has capacity throughout the rest of the year to recover from disruptions or to handle spikes in activity like Prime Day. The middle mile network provides speed and efficiency by regionalizing the network, and the company works not only with its own vehicle but with partners like the US Postal Service and United Parcel Service to do deliveries.

Managing a network of this size requires adaptable systems, Allgor said. Automated decision systems work throughout the planning, design, and execution phases. These systems use optimization techniques, machine learning, and artificial intelligence to monitor activities and adapt to chang-

ing conditions. “For instance, if weather and road conditions are bad, we can reroute the trucks across the network.” All these steps “lead to a more resilient network that’s adaptable to changes.”

In response to a question from Bell specifically about weather-related threats to resiliency in supply chains, Allgor said that Amazon pre-positions supplies that are expected to be needed for natural disasters such as hurricanes or wildfires. Furthermore, these hubs are usually positioned near an air hub so that supplies can be flown to support regional or even international recovery efforts.

The pandemic helped Amazon think about its supply chains, Allgor added. “We learned a lot about becoming adaptable. We changed most processes to keep people safe. Doing that led people to redesign and think about how to use the capabilities and the technology we have to move forward.”

Also, even before the pandemic, not having single points of failure was part of the design principles adopted by Amazon in its software engineering and distributed systems. That is now embedded in its operations. “If a node goes down for whatever reason, it doesn’t bring down the ability to get products to customers.” Even on a small scale, if something in a fulfillment center falls off a shelf and blocks a path, everything is rerouted immediately so that the blockage does not cause a failure in delivery.

STYMYING BAD ACTORS

In response to a question about how to detect the actions of nefarious actors who insert harmful components into supply chains, Yang cited the importance of traceability. It “makes business sense to do that,” she said. Tracing the components of supply chains is resource-intensive, but tools are available that can make the process less onerous.

Allgor also pointed to the importance of very tight tracking, especially since much of what small businesses own Amazon ships to its customers. “Using vision technology and other things, we know where everything is at all times, and if something is out of place, you get pictures” of what is missing. “The key is to make sure you know where every item is at all times and where it came from.”

In the defense sector, knowing the pedigree of supply chain items is covered by the term “trusted,” said Walker, and “making sure you have a trusted supplier for your critical components is absolutely necessary.”

Companies typically work with their government customers to examine the supply chain process and “allow illumination down to the lowest level.”

POWER CONSUMPTION

Asked to comment in more detail about the power consumption of AI, Gil noted that the issue has been a “preoccupation for everybody involved in computing, certainly in the last couple of years and a lot more to come.” Extrapolating from current rates of growth suggests the need for huge amounts of power, and people have discussed constructing huge data centers and building or reviving nuclear power plants to run them. “By the time you add all the elements on that, it could be a $30, $40, $50 billion project.” However, the situation has recently been improving, he added. In the past, people have been focused on a demonstration of capability, and “a demonstration of capability scaled blindly is a very poor engineering practice.” Attention is shifting to rethinking architectures and incorporating efficiencies to cut back on power demands. Nevertheless, considerations of power use have to be “central to everything we do.”

Walker added that defense applications are very focused on edge processing in small and compact spaces. Such applications are going to “spur innovation in computing for lower power.”

EXTENDED DISRUPTIONS

In response to a question about large-scale hazards that could shut down supply chains for extended periods of time, Yang emphasized the importance of planning for business continuity. “You identify how many days, how many hours, can you do without. And what is your solution? What is your alternative way to operate?” Companies need to be diligent in preparing for major disruptions, she said.

Yang also mentioned sensitivity analysis as a key to designing supply chains. “You have to think ahead about where your end users are and where your values are.” This can mean different things for different companies, goods, and regions, but it is an important consideration for business leaders.

On the topic of managing supply chains for disruptions, Walker mentioned the concept of “contested logistics,” where normal aspects of the supply chain, such as communications or sea lanes, are unavailable. This requires a switch from just-in-time to just-in-case planning, he said, where things are prepositioned in places where they might be needed. Another approach to avoiding supply chain disruptions is to have multiple manufacturing locations. “We’re working with our allies and partners—mainly in Europe, Germany, and Poland—to build weapon systems there instead of just in the U.S. That is a way we’re fighting the fragility of our DoD supply chain.”

BASIC COMMODITIES

Raw materials “go deep,” Yang said in answering a question about securing access to basic materials. For example, rare earth materials from China and Russia might be involved in a process, requiring that safety stocks of these materials are available. Processing may also be done in other countries, requiring quality checks as part of maintaining supply chains, or materials may come from a distributor and not a manufacturer. In addition, intellectual property issues can be involved in maintaining supply chains. “You have to have knowledge of the supply chain.” In some cases, contractors—”I would call them partners because you need them to do a good job”—need to be managed. All these concepts need to be built into supply chain management.

Walker added that the issue involves not just the rare earth materials. For example, the closing of markets by events such as the war in Ukraine has affected titanium production, which has tightened supplies in the United States.

WORKFORCE DEVELOPMENT

In response to a question about how best to develop the workers who can maintain the resilience of supply chains, Gil said that the time has come for a new version of the 1958 National Defense Education Act. As a consequence of the crisis sparked by the launch of Sputnik, that act addressed a perceived relative erosion of competitiveness in science and technology, and it dramatically increased the number of engineers and scientists trained in the United States. The same renewal of interest in science and technology is needed today, Gil said. The nation needs to commit to invest in its people, and human capital is a vital part of supply chains. “That is the highest level of urgency.”

Also on the topic of workforce development, Gil mentioned that, during the pandemic, he led an effort in collaboration with national laboratories and others to create the COVID-19 High Performance Computing Consortium. “The idea was to aggregate supercomputing capacity and make it available to scientists that were working with COVID-19.” That has led to the idea of creating a national strategic computing reserve that would aggregate not just computing power but datasets and talent.

Allgor added that the technologies involved in supply chains have created many opportunities for new jobs, including jobs that require technical knowledge. “The nature of the work is changing through time.”

CONTINUING THE CONVERSATION

Throughout the forum, the speakers and Bell emphasized the critical role of engineers in supply chain resiliency. “We encourage you to take this conversation and continue it,” Bell said at the forum’s conclusion. “You are the leaders of our nation in engineering.”

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