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Front End I Electronic Components Supply Network

Market volatility is now the new normal

The reality in the UK, European and US electronic components supply network, according to Adam Fletcher, is that increased market volatility is now the new normal and players will have to react quickly or suffer the consequences


arket volatility affects all players in a supply network especially when the rate of change is fast but the

effects it brings are never equitably distributed. The organisations that will be most able to withstand the peaks and troughs will be those that accurately forecast the impact of change and adapt or reposition their business model accordingly.

Customer demand visibility in the

European electronic components supply network has declined significantly over the last three years and in my opinion this is likely to remain limited even when business confidence returns.

A critical element of accurate demand

forecasting is the ability to identify the primary drivers of market growth or change and then mapping that information to one’s organisational business plan. Over the last 40 years or so the electronic components market has benefited from five primary application drivers: Military, Mainframe Computers, PCs, Telecom/Datacom and today by Consumer Products.

Over this historical period of relative stability most organisations in the electronic components supply network planned their use of resources (land, labour, capital) on an overall five-year

Forecast for 2013

ecsn’s electronic components market forecast 2013 released last month indicates that the bottom of the current economic cycle in the UK components market occurred in Q3 2012 and a slow return to growth will occur in the first half of 2013. It’s likely that growth will return to the global electronic components supply network in 2013 - the actual rate of growth remains difficult to forecast - but given the volume of manufacturing capacity mothballed over the last 18 months, even moderate growth may result in rapidly extending manufacturing lead-times and short supply.

8 December 2012/January 2013 Components in Electronics

business forecast, within a current 12 month firm window. They monitored their plans against market activity and customer & supplier forecasts, which they reviewed annually. The final outcome was often different to the plan but a +/-10%- 15% margin of error in a fast growing market was considered acceptable. Each of the fore-mentioned primary drivers was subject to on-going innovation and change but fortunately remained fairly stable. More importantly these market drivers were geographically dispersed, especially when compared to the current consumer products market, which is much more dynamic and very Asia centric. Unfortunately the UK, EU and US have little manufacturing exposure to the electronic consumer products market but have plenty of consumers, even if their spending power is currently restricted! The UK, European and US electronic components markets are increasingly being driven by a wide range of much smaller sub-market sectors (industrial, military and aerospace), with tier two and three customers predominating. In the absence of an obvious primary market driver these customers are in turn more directly influenced by economic conditions in their domestic and export markets, so it’s hardly surprising that this is resulting in significantly increased volatility.

The new normal

Market volatility has become the new normal and is now changing the way in which organisations in the electronic components supply network plan their use of resources. There is a move towards a new norm of a three- month ‘firm’ period (where change is inevitable and will be dealt with), a further three- month period with +/- 20% flexibility and a six- month period with a further +/-30% flexibility.

Fortunately, modifying IT systems and organisational infrastructures to manage a ‘lean manufacturing’ and a customer ‘on demand’ model has been an on-going successful undertaking for companies in the electronics supply network over the last 20 years. However these systems are highly reliant on good communication flows and downstream processes occurring on-time. Some recent events

(earthquake in east Japan / flooding in Thailand) halted production at a higher level, demonstrating that even rigidly controlled automotive and computer supply chains are susceptible to adverse downstream events. The UK / European and US electronic components supply network are not threatened by such cataclysmic events but still suffer from an on-going lack of visibility. Why? Because component manufacturers focus on devices for the consumer markets - as they represent the high volume production - at the expense of electronic components used in our core industrial, military and aerospace markets. I fully expect that products for other market sectors will follow suit and in turn become marginal to their main revenue drivers.

This marginalisation coupled with

increased volatility is likely to lead to both over and undersupply in the UK, EU and US, where manufacturer authorised distributors who serve over 95% of the customer base will be increasingly required to act as a buffer. To overcome the lack of customer visibility distributors are increasingly using mathematical models based on historical data (time series and regression analysis) but this is a complex way of trying to predict the future, and without the addition of human intelligence based on market knowledge the results are often flawed. The speed at which component availability change occurs in the global electronic components market has become digital. What used to be a gradual transition over a few months now occurs in days and unfortunately can catch us all out and impact our organisations. Currently almost all electronic components can be purchased off-the-shelf in moderate volumes from manufacturers’ authorised distributors but buyers must not expect this to continue indefinitely. Enhancing relationships and sharing market information with partners in the electronic components supply network is an effective and inexpensive way of maximising business efficiency and ensuring the greater chance of success for UK, EU and US organisations.

ECSN | Adam Fletcher is Chairman of Afdec/ECSN

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