Front End | International Distribution of Electronics Association
customers will seek to increase their backlog on the components manufacturer at the same time, and pull forward deliveries on their existing orders in a bid to secure their ability to meet demand, further reducing available manufacturing capacity and extending lead- times for new orders. As a result, inventory moves from the authorised distributor - where held centrally it’s available to service the ‘real’ requirements of many customers - to the in-house inventory of customers able to react quickly to “defend” their position. Played out internationally, this vicious circle triggers a huge spike in demand on components manufacturers. The vicious circle is perhaps best illustrated by Graphic T1 “Total Components, Booking Billing and Book to Bill Ratio”. In the two-year period from Q4’20 to Q2‘22 historically unprecedented levels of Bookings (new orders) were placed by customers, totally outstripping the electronic components industry’s ability to supply. Illustrated by the gap between the blue and orange bars, (which represents order backlog) this largely ‘phantom’ demand has resulted in record levels of order backlogs, components shortages and pain, and will have to be purged from customers’ ERP systems. Component manufacturer lead-times
will naturally begin to reduce as OEM’s ERP systems are updated with the latest lead-time information, but their inventory and order backlogs will only really start to come down when they regain confi dence in their suppliers’ ability to 100 per cent meet their bill-of- materials requirements and deliver on-time.
Concluding thoughts
I’ve no doubt that in the highly competitive global electronic components market supply is rising as capacity is added and for a short- time may overshoot ‘real’ but not ‘phantom’ - demand, but in my opinion is likely to be at a signifi cantly lower rate than current industry pundits would have us believe. Until we as an industry invest additional resources to improve the accuracy of our ERP systems and improve the accuracy of our demand forecasting, market stability will not be achieved. In uncertain times I urge all OEMs to eliminate RIRO from their systems and get their order book back into balance in a controlled way in close collaboration with their supply network partners. Organisations ‘applying the brakes’, cancelling orders or otherwise making abrupt changes in their purchasing procedures, will inevitably frustrate their network partners and open everyone up to increased supply risks.
Microchip is… For information
Adam Fletcher is chairman of the International Distribution of Electronics Association (IDEA), an association of individual country electronic components associations whose objective is to arrive at and share best industry practice. He is also chairing the Electronic Components Supply Network (ecsn), a UK business association that was established in 1970 and today offers support to all organisations with an interest in electronics technology.
“…Promoti ng Positi ve Collaborati on Throughout the Electronic Components Supply Network to Benefi t Members and the Economy…”
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Components in Electronics
April 2023 13
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