According to the supply chain, on February 4th, Microchip sent a notice to its customers and made several specific measures in response to the shortage of supply.
Microchip stated in the notice that, 2020 was a very strange year - a weak and sharply declining environment in first half of the year followed by a V-shaped recovery in second half of the year, especially in the last few months. In the first half of 2020 there was a significant reduction in demand as customers were canceling and pushing out orders. In that environment, Microhchip had no choice but to draw down inventories and safety stock to protect themselves from what looked like a severe economic contraction. During that time, nobody in the industry was adding any capacity.
Microchip said that they requested longer-term backlog visibility from their customer in a letter in July 2020, and some customer provided it to Microchip. Those that did not act are seeing even more severe shortages today.
Starting around September, Microchip began to see very strong broad-base bookings and this acceleration has continued since. Microchip’s booking are now coming in at a rate of 70% above what would be considered normal bookings. Over 30% of what customers want from Microchip is currently available later than when they would like to receive it, and there is no capacity to make up for it. Microchip estimates that these shortages will continue for much of 2021 and possibly into 2022.
Given the severely constrained environment, Microchip have taken two actions:
- Increase capacity as fast as possible with their supply china partners, but are facing equipment, materials and people shortages and delay;
- Extend the cancellation and reschedule window to longer than normal to confirm that there is high confidence in the backlog placed.
In Addition, Microchip stated that many of their customer have asked them to provide a solution for prioritized capacity beyond the short term(next 5-6 months), where microchip’s capacity is over-subscribed. In response, Microchip introduce the Preferred Supply Program(PSP) and offer customer the option to receive prioritized capacity in the second half of 2021 and the first half of 2022. The Preferred Supply Program has the following elements:
- 12 months of continuous, non-cancellable and non-reschedulable backlog.
- Capacity priority will be for the second 6 months of the next 12-month period-not the first 6 months.
- Capacity priority allocation will be made on a first-come, first served basis until the available capacity is allocated which Microchip expect is likely to happen by the end of February.
Microchip emphasized that to make PsP work their need customer’s engagement now, and ask all of their customers to immediately place 12-month non-cancellable non-reschedulable backlog on Microchip. In additional, Microchip also ask their worldwide distributors to do the same.
Microchip stated that they expect the bulk of capacity to get booked up by the end of February and they will be accepting 12-month backlog on a first-come, first-served basis. In addition, Microchip will reserve a portion of their capacity to ensure that new customers and new designs can be served as they launch early production, new products can be launched with a available inventory and that smaller customers can continue to be served.
