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ELECTRICAL & ELECTRONIC COMPONENTS


FEATURE


BANKING AGAINST ELECTRONIC CHIP SHORTAGES


Classic Components offers manufacturers


key strategies to ‘bank’ a supply of electronic chips to protect against future shortages


as geopolitical tensions, shortages and natural disasters. Similarly, the supply of computer chips can be impacted by factors like trade disputes, geopolitical tensions and disruptions in manufacturing processes. Fluctuations in prices ripple through the economy, affecting the cost of electronics, vehicles and other high-tech goods. While there are fears of future shortages,


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some experts are suggesting we are on the precipice of the next tech boom, driven by artificial intelligence, mobile internet, Cloud, and the Internet of Things (IoT). Either way, there is the potential for future


shortages or hard to get parts. “Many companies – particularly those that build critical equipment like medical, military, industrial controls, and automotive – are now considering how they can protect themselves from future vulnerability. They experienced serious chip shortages and want to ensure a reliable, ready, supply at a reasonable price without tying up capital,” says Mike Thomas, president at Classic Components, an independent stocking distributor of electronic components.


QUALITY PRODUCTS Many electronics OEMs are receptive to the idea of access to a vetted supply of quality chips readily available. However, few want to commit capital for chips they may not need for years. Independent distributors like Classic Components hold sufficient supplies of quality chips, acting as de facto ‘chip banks’ for companies. Independent distributors can leverage their expertise to find alternate sources for chips through regional authorised/franchised distribution, manufacturer direct, or surplus/excess inventories. To ensure there are no delays when the chips


are needed, the distributor can be proactive about securing the required inventory without asking for money up front. “We invest our own capital to secure the chips and hold them in inventory for the customer until required, however long that takes. We keep a certain amount in buffer stock, ship it when needed, and then get paid. In doing so, manufacturers can get the chips they need, when they need it,” explains Thomas. Independent distributors can lock in prices and


delivery dates for many months at a time. The chips are placed in long-term bond or long-term schedule contracts with applicable service or storage fees. The inventory can be shipped to authorised partners, contract manufacturers,


s with oil, when demand for electronic chips outstrips supply, prices rise. Oil markets are influenced by factors such


sister companies and subsidiaries on demand. This is a unique offering that only the largest,


most financially stable distributors are willing or able to offer. Classic Components, which has been in business for more than 40 years, can usually deliver parts in 2-3 weeks that the OEM or authorised distributors may not have access to for 52 weeks or longer. Classic Components will also stock chips that OEMs acquire through traditional distribution, franchise distribution, or authorised distribution channels. Based on customer preferences, the independent distributor can hold all, or some, of the stock and distribute it where needed based on long-term production schedules. “Based on annual projections and forecasts, we


can keep a certain amount of inventory on hand and a certain amount of inventory on order, so capital exposure is minimised,” says Thomas.


INVENTORY AND FINANCING “Manufacturers may want to place a year’s worth of electronic chips on order now,” continues Thomas. “If the price rises and it costs 20% for the same chips six months later, they already have stock for the rest of the year that is price protected.” Classic Components can also make purchases in local markets that currently offer the lowest prices and then pass the savings on. Besides its facility in Torrance, California,


Classic Components has established 12 regional offices in strategic locations throughout the world to support its global distribution business. Regional quality centres and logistic hubs means the company has the flexibility to purchase components from any country, in any currency. To ensure the authenticity and quality of each part, a rigorous inspection process is carried out on each component received along with timely supply chain management. Classic Components, for example, utilises a quality management system (QMS) and holds certifications such as AS6081, a requirement for distributors serving the aviation, space and defence industry. Like a bank, a premier independent distributor


can offer a variety of financing options that can facilitate securing the required chips. One example is a ‘buy and sell back’ program for companies with excess inventory. According to Thomas, many manufacturers are sitting on excess inventory due to stockpiling parts and ordering from multiple sources to ensure delivery. If it is true dead stock, an independent distributor can help liquidate the electronic components while maximising your


recovery and get them off the books through various types of arrangements. “We have a global customer base and lots


of information about the materials they use,” comments Thomas. “So, if a manufacturer has excess inventory, we can often find an opportunity to sell it to one of our other customers.” Classic Components can also list and sell surplus inventory on consignment – with or without taking physical possession of the inventory – and may even opt to purchase the inventory outright to resell it later. Furthermore, the distributor also offers


transition services, which can benefit OEMs holding electronic chips in inventory that will be shipped to third parties such as an EMS that will do the actual manufacturing. In this case, an independent distributor can purchase, warehouse, and distribute the chips, and later sell the inventory to the third-party – much like a Third-Party Logistics (3PL) operation.


RISING CHIP DEMAND Today, the memory of pandemic related chip shortages and sky-high pricing is beginning to fade. “Manufacturers were often forced to wait 52 to 80 weeks for chips when the economy softened,” says Thomas. “The parts finally became available and now there is a good supply. However, as soon as demand heats up for any reason, they will face the same constraints. For some of these parts, the lead time is still 52-60 weeks. But nobody’s that concerned because the demand isn’t there yet.” Any number of destabilising events could tip the global chip supply into a severe shortage. Some are even predicting a tech boom in the next decades. With chip demand set to rise over the coming


decade, the global semiconductor industry is poised to become a trillion-dollar industry by 2030, according to the mckinsey.com article, What’s driving the semiconductor market. About 70% of growth is predicted to be driven by the automotive (particularly electric vehicles), data storage and wireless industries. “The world learned over the period of time


through Covid just how dependent it is on chips,” says Thomas. “It really is a lot like oil. But I would argue OEMs are even more vulnerable to a disruption in the electronic chip supply chain because domestic manufacturers still rely predominantly on the global supply.” As chip demand rises to supply myriad


technologies in the latest tech boom, OEMs that work with independent distributors to secure low- cost, quality, inventory over the long term will weather the inevitable and unexpected disruptions far better than competitors.


Classic Components Corp. www.class-ic.com


JULY/AUGUST 2024 DESIGN SOLUTIONS 41


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