Front End I Electronic Components Supply Network
Topical issues in the global electronic components market
ecsn chairman Adam Fletcher is frequently invited to speak at industry events or join round-table industry discussions. He sees these events as a great way to gain and, hopefully, share the insights and experiences of experts across a wide range of industries who interestingly, often have many problems in common. In this article Fletcher identifies some of our industry’s “old chestnuts” and addresses some of the key issues currently facing the global electronic components markets in 2018
market as increased un-forecast demand has driven electronic component manufacturers to significantly extend the lead-times for their products across the board (sic). Inevitably the pendulum will at some point begin to move back toward the centre and supply will again match demand but when…?
Adam Fletcher A
ll organisations have to contend with a range of external factors that are likely to impact their financial performance in the short, medium and long term, many of which - regulation, legislation, natural disasters, Brexit etc. - are almost entirely beyond their control. All industries have a range of specific ‘challenges’ within their internal markets that change over time, however many supply network issues around availability, choice, competition and trends are common and need to be addressed. Those organisations able to either; drive, ride or anticipate market changes and adapt to them quickly are more likely to benefit from them financially. Unfortunately, in dynamic markets like electronic components and systems it’s not possible to stand still and survive, organisation have to keep running to succeed.
Extending manufacturer lead- times
After over a decade of “ex-stock availability” the pendulum has now swung from a ‘Buyers’ market to a ‘Suppliers’
10 December 2017/January 2018
Generally speaking, extended manufacturer lead-times don’t pose too much of an issue as most manufacturing organisations have ERP systems able to determine the appropriate levels of order cover, in-house inventory and re-order points to maintain production. In the second half of 2016 Manufacturer Authorised Distributors anticipated extended lead-times and based on their customer demand modelling started to increase their order cover with the manufacturers they represent in a largely successful bid to ensure they had sufficient inventory to serve their customers’ requirements. In the electronic components market today there are over 1,000,000 SKUs (stock keeping units). Thanks to the insight provided by Pareto Analysis we’re pretty sure that 200,000 of these SKUs are A’ class inventory items (‘high runners’)’ in terms of value multiplied by volume shipped. Most ‘high runners’ used in industrial markets (i.e. not commodity memory used in PCs and mobile phones) are currently on a lead-time of >12 weeks but generally <20 weeks, with a very small number, probably less than 100 SKUs on lead times of 26 weeks+, which potentially poses a much more serious problem. Unfortunately, contained within the
remaining 800,000 ‘B’ and ‘C’ class inventory items are those commodity electronic components that are often overlooked due to their low unit price. Many manufacturers of these parts are quoting lead-times between 6-to-20 weeks and probably around 500 SKUs are today on delivery lead times of 26 weeks+. Manufacturers of ‘A’ class inventory
items are likely to resolve their lead-times issues reasonably quickly, but I remain concerned about availability of some of ‘B’ and ‘C’ class inventory items, without which boards and systems simply cannot be assembled.
Components in Electronics
Component price increases Increases in price for electronic components in the UK in 2017 were primarily driven by the rapid decline in £Sterling against both the US$ and €EU. Although largely outside their control, many organisations try to mitigate currency fluctuations in the short term using financial instruments such as ‘currency hedging’ but in the longer-term change inevitably feeds through to the bottom line. In the short term we must expect further price volatility on specific products caused by extended manufacturing lead- times: It’s simply a function of the market operating in a competitive landscape and often reflects increased costs of manufacture as new capacity is added or contracted to meet demand or additional inventory investment costs. For the past 50 years the electronics industry has been a huge beneficiary of reduced cost, increased integration and performance of semiconductor products, often referred to as “Moore’s Law”. The ability to further scale semiconductors cost effectively has slowed dramatically and as a result prices have stabilised and now seem likely to increase slightly in the medium term. Although hardly to be welcomed moderate price increases will however enable the investment necessary to drive new semiconductor manufacturing technologies to scale and reduce costs in the longer term.
End of life notifications The mergers and acquisitions in the electronic components industry over the last few years are now starting to be felt within the market and will continue for the next few years. The newly merged organisations continue to reduce costs by rationalise their product offerings, removing both duplicate products and products which fail to achieve their revenue or margin goals. All organisations need to be vigilant in tracking End of Life (EOL) notifications sent to them by manufacturers and their authorised distributors and ensure they act promptly when they are received. EOL decisions are not taken lightly and are often heavily influenced by the customer feedback
received, which may be a withdrawal of the EOL or another solution that meets the wider market needs. The terms of EOL notices vary significantly between manufacturers but all provide a reasonable time window for customers to react and take the appropriate action.
Counterfeit components opportunity increases If an electronic component your organisation normally purchases becomes unavailable from the manufacturer or their authorised distributor and cannot be sourced from within their wider global distribution network or possibly from another of their customers, it’s time to escalate the problem internally with your organisations’ management and consider very carefully how to proceed. Remember that there is always a steep rise in the activities of electronic components counterfeiters and their sales channels when manufacturers start to significantly extend lead times and/or issue EOL notices. If an organisation you have never heard of offers to supply an otherwise unavailable electronic component, please just say “No”! Evidence shows that this will prove to be the lowest cost solution for your organisation and will avoid exposing your organisation to greater risks.
2018 has all the hallmarks of another
interesting year for everyone involved in electronic component markets. I extend New Year greetings to you all and take this opportunity to encourage you and your organisation to communicate with your component manufacturers and their authorised distributors honestly and effectively whatever the year throws at you and work with all your supply network partners to help maintain market stability.
www.ecsn-uk.org
www.cieonline.co.uk
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