NEWS


Banking Electronic Chips for the Next Boom (or Bust)


An industry expert offers manufacturers key strategies to “bank” a supply of electronic chips now, without much capital outlay, to protect against future shortages.


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hether boom or bust, the threat of potential future shortages or hard to get parts has some OEMs and Electronics Manufacturing Services (EMS) working to “bank” a supply of critical chips in preparation for whatever might come.


“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, a premier independent stocking distributor of electronic components based in Torrance, California.


A Strategic “Chip Bank”


Today, many electronics OEMs are receptive to the idea of access to a vetted supply of quality chips readily available to them. However, few want to commit capital for chips they may not need for years, particularly if owned by equity or publicly traded firms, according to Thomas.


In response to the need, premier independent distributors like Classic Components hold sufficient supplies of quality chips, acting as de facto “chip banks” for companies requiring the service. Independent distributors play a critical role when franchised/authorised distributors cannot supply the required parts by leveraging their extensive 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 independent 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


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Figure 1: Classic Components offers solutions to electronics shortages by securing and storing chips without upfront payments, providing price protection amidst volatile markets.


Thomas.


Independent distributors like Classic Components can lock in prices and delivery dates using its vast network of supply chains and partners 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, sister companies and subsidiaries on demand.


This is a unique offering within the independent channel that only the largest, most financially stable distributors can offer. Classic Components can usually deliver parts in two to three 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


JULY/AUGUST 2024 | ELECTRONICS FOR ENGINEERS


and distribute it where needed based on long- term production schedules.


“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.


Price protection is also a concern for OEMs. In addition to guaranteeing chip availability, electronics manufacturers may seek to shield themselves from escalating prices caused by the scarcity of components and commodities, which can unpredictably surge in global markets.


“Manufacturers may want to place a year’s worth of electronic chips on order now,” explains Thomas. “If the price rises and it costs 20 per cent for the same chips six months later, they already have stock for the rest of the year that is price protected.” Thomas says this speaks to the core competencies of an independent distributor. Classic Components procures material in all the local markets where they do business and has offices all over the world, so is not


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