Front End | International Distribution of Electronics Association Real market demand or RIRO?
Protracted discussion and debate have raged over many years across the global electronic components supply network, a market that has consistently failed to accurately forecast ‘real’ customer demand levels. Consolidated data collected from manufacturers authorised distributors throughout Europe confidently predict that electronic components markets will continue to show strong growth, but Adam Fletcher, chairman of the International Distribution of Electronics Association (IDEA) cautions that much of the demand they are predicting is probably “phantom” caused by changes to lead-times in customers’ Enterprise Resource Planning (ERP) systems. In this article Fletcher suggests that the market will in fact end 2023 showing significantly slower growth as components manufacturer lead-times reduce and customer confidence in delivery certainty improves.
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n 1908 Henry Ford revolutionised manufacturing when he started constructing his “Model T” car on an assembly line, a system that was the forerunner of pretty well all industrial manufacturing today. Like Henry’s innovation, Enterprise Resource Planning (Computer) systems introduced in the 1960s to speed up and automate the manufacturing scheduling process, have been constantly refined but remain dependent on the quality of information fed into them. Currently, computer systems are unable to recognise errors that a human can easily spot. What’s worse, some of the data driving fundamental elements of modern customer ERP systems are imported automatically, triggering a Rubbish-
In-Rubbish-Out ‘RIRO’ situation that often leads to significantly flawed results.
Impact of changing components manufacturer lead-times Customer expectations over the past twenty or so years have been that electronic components manufacturing lead-times would remain low, causing them to typically enter nominal four-week lead-times into their ERP systems and confirming their confidence in their ability to securely operate with minimal in-house inventory. In theory organisations in the electronic components supply network regularly update their ERP systems with the latest components lead-time information but reviewing tens of thousands of components
even at a general product category level is a time-consuming process, so it’s perhaps understandable that many organisations fail to do so. For thirty years or so manufacturer authorised distributors have been helping their OEM customers to keep up to date with lead-time changes by providing live updates directly into their ERP systems via Electronic Data Interchange (EDI), but aware of the implications of amending components lead-times in customers’ systems, only do so today in a highly controlled way and with the tacit agreement of their customer(s). Over the past ten years other organisations with an interest in supplying electronic components or IT services to OEMs have offered their services to check and cleanse Bills of Materials
(BOM) information and have begun to provide spurious manufacturing lead-times updates and other disinformation to customers. Sadly, these principally internet-based operations either don’t know or don’t care that erroneous component manufacturers lead-time entered into a customer’s ERP system can have an exponential impact on the calculation of his in-house inventory and safety stock requirements and therefore, on the quantity of components ordered.
Four-to-16-week lead times? Changing a components lead-time from four weeks to twelve weeks causes ERP systems to automatically request that existing scheduled deliveries are pulled in to cover what the system sees as a “shortage” and has the effect of tripling the customers in-house inventory by rescheduling the existing delivery backlog. Pulling forward a scheduled four- month delivery by (typically) three months demands that order cover is increased by at least a further quarter of average usage to compensate.
12-to-16-week lead times? What happens when lead times, for instance, jump from 12 weeks to 16 weeks? The cycle repeats until at about 26 weeks the components manufacturer simply becomes unable to meet what is in reality, merely ‘phantom’ demand and refuses to accept any further orders, which exacerbates the perceived restricted supply situation as OEMs frantically search for alternative sources of supply.
A vicious circle
The potential risk to manufacturer authorised distributor as result of increased components manufacturer lead-time is that many of their
12 April 2023 Components in Electronics
www.cieonline.co.uk
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