Sourcing Smart Components for Smart Factories

While the impending shortage of metals and rare earth materials will have global implications, facilities in the United States will likely be hit the hardest since domestic mining and refinement have stagnated in recent decades. How can they improve their sourcing strategies to achieve the goals of Industry 4.0 without pausing implementation or going over budget? Let's take a look at sourcing smart components.

Smart Component Sourcing Issues Persist

The global chip shortage triggered by the COVID-19 pandemic has subsided after roughly three years. However, supply chain volatility and supplier uncertainty are not over yet. Analysts expect a second shortage will occur, affecting the Internet of Things builders and buyers. Scaling production cannot resolve the mismatch between supply and demand. 

Base, special, and precious metals will likely be affected. For instance, there is a global nickel shortage due to the lack of active mines and supply chain volatility. Around 65 percent of nickel consumed in the Western world is used in stainless steel, so this will have major repercussions.

Rare earth elements like germanium, gallium, lithium, and tantalum will also be challenging to obtain. Consequently, sourcing components like semiconductors, integrated circuits, batteries, displays, and storage media will become difficult for many manufacturers.

Domestically, the lack of active mining operations — the country’s primary nickel mine is set to close in 2025 — is a major contributor to rising supply chain volatility. Alternative raw material sources are in areas where regulatory or political factors threaten long-term reliability. 

China may restrict the export of 17 rare earth elements in 2024, leading to prolonged shortages for Western manufacturers soon after. Suppliers, builders, and buyers have faced component scarcity before, but the impending shortage is unprecedented — dozens of raw materials will become scarce simultaneously.

Why Smart Factories Must Address Scarcity

Digitalization is fundamental because deploying intelligent systems is among the most important aspects of achieving the goals of Industry 4.0. Smart manufacturers must be able to reliably source components to remain competitive, reduce operational costs, minimize downtime, and increase productivity. 

Moreover, the Internet of Things, artificial intelligence-embedded smart sensors, automated power management systems, and advanced processors are vital for bridging the historical gap between operational technology (OT) and information technology (IT). The numerous potential business benefits of integration should be motivation enough. 

Many facilities are midway through implementation, as navigating IT/OT convergence and legacy system compatibility is complex. If a second global shortage were to occur as early as 2025, they would lose their competitive edge. Even those that have fully embraced Industry 4.0 may struggle if scarcity makes sourcing replacement parts difficult.

Even though the CHIPS Act will eventually alleviate domestic supply chain volatility, the federal government has only begun dispersing funds recently — it will take years to see the act’s effect. Suppliers will remain unable to turn raw materials into working components until 2027 at the earliest, according to one estimate.

Resilience to Smart Component Shortages

Smart manufacturers don’t have to be at the mercy of volatile supply chains and inconsistent supply. There are several ways to build resilience to smart component shortages.

Supply Chains 

Decision-makers must determine where their contractors and suppliers get raw materials. Will that source be affected by mine scarcity, China’s export restrictions, or U.S. tariffs? Digitalizing supply chains to understand shortages enables builders and buyers to enhance their sourcing strategies and combat volatility. 

E-Waste Recycling 

Even though modern technologies contain valuable resources, facilities often discard them improperly. While the world produces over 53 million metric tons of e-waste annually, it recycles just 17 percent. Electrical and electronic equipment is the fastest-growing waste stream in the world, with a 3-5 percent annual growth rate. 

Mining materials for a printed circuit board is almost seven times more costly than recycling and reusing them. The tremendous effort that goes into raw material sourcing shouldn’t be wasted by improperly disposing of smart components during an impending global shortage. E-waste recycling should be a priority for every manufacturer.

Domestic Sourcing 

The U.S. produces just 12 percent of the world’s chips, down from 37 percent in the 1990s. Although the CHIPS Act aims to increase production drastically, the country is limited by deposit availability. While manufacturers may be unable to source smart components domestically until 2027, they can use suppliers and contractors that locally process and refine imported raw materials.

A Second Shortage Has Global Implications

If dozens of precious metals and rare earth materials simultaneously become scarce, typical alternative sources likely won’t be viable. After all, every builder, buyer, and reseller will flock to them to supplement their short-term reserves. Factories must act proactively — and quickly — to remain resilient under these circumstances.