The trend away from balance sheet ‘efficiency’ (lowest price minimal inventory, single sourcing) in favour of balance sheet ‘security’ (increased inventory, lowest cost of ownership) is currently continuing but many organisations remain frustrated by supply delays that disrupt their ability to produce finished goods. Whilst some industry analysists suggest that this is likely to necessitate a long-term change in the overall supply strategies I remain sceptical because Manufacturing Resource Planning (MRP II) / JIT systems have been operating successfully for over fifty years and remain the only viable working solutions. I welcome the fact that the market is moving back towards a ‘balance sheet efficiency’ model but all parties still need to be careful in their management of the process and the impact it may have both up and down their supply network. The consensus opinion amongst ecsn members at the end of last year was that equilibrium in supply and demand would be reached in 1H’24 but with so many geopolitical headwinds and high levels of uncertainty in the global economy this now looks likely to ‘stretch’ throughout 2024, with real growth not returning until some point in 2025.
Continuing credit squeeze Manufacturer authorised distributors of electronic components support 99% of all UK customers, (systems integrators) who themselves serve a very wide and diverse range of end-markets. Many customers are highly reliant on the ‘buffer’ inventory that their distribution partners maintain on their behalf and on their ability and willingness to speedily ship that inventory to meet the dates defined by their JIT delivery systems. This strategy means that distributors must effectively manage the entire inventory pipeline on behalf of both their customers and the components manufacturers they represent and are continually having to balance their inventory purchases against both fluctuating manufacturer lead times and changes in customer requirements, at the same time avoiding overstocking, reduced inventory turns and potential ‘channel stuffing’ by manufacturers desperate to move their inventory on. Customers who unreasonably extend defined payment terms significantly
increase the need of their suppliers for increased liquidity. I’m pleased to report that average Debtor Days’ (the time customers take to pay for goods) have fallen to @40 days over the past three years when the historical industry average is @65 days, but I fear payment terms will begin to extend again as stability returns to manufacturer lead-times and confidence in the ability of the supply network to deliver ‘on-time’ increases. Our members are already reporting average debtor days hitting the @55 day mark, and this seems likely to extend further as the year progresses and customers’ credit is squeezed. However, effective credit management - and therefore continuing trust between customers and suppliers - is vital and should always be the subject of negotiation and agreement to ensure all parties are being supported fairly.
Political investment in semiconductor manufacturing The EU and USA started to make huge investments in semiconductor manufacturing technology in 2022. The implications of the USA’s ‘Chips Acts’ is prompting large publicly quoted semiconductor manufacturers to construct new foundry capacity but ongoing tensions between these technologists, their shareholders and state investors concerning the scale, scope and timing of this funding continue. Some new semiconductor manufacturing capacity is scheduled to start production in 2025, but ongoing uncertainties have created huge inflationary pressures on the costs of construction and also on the ability of manufacturers to source suitably qualified employees to staff them once they’re built and ready for operation. Investment in new ’back- end test and packaging’, most of which is currently located in SE Asia is also lagging: New foundry capacity needs to be co-located close to the ‘back-end operations’ in order to more tightly couple the supply network. Substantial ongoing investment in the entire advanced semiconductor manufacturing eco-system is essential but many leading industry analysts forecast a delay due to the huge political commitment necessary.
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Sadly, state investment in semiconductor technologies by ‘market economies’ has historically not been very successful, unlike more ‘centrally planned’ economies where funding is usually provided by the state for a few sector champions. However, western governments are beginning to realise that state investment in semiconductor technologies is likely to yield significant economic returns and wider overall benefits to society, because over time it leads to unplanned but welcome gains in ‘added value’ across multiple technical sectors of a wider industry base and to academia.
Concluding thoughts We continue to operate in an environment where well-publicised levels of geopolitical tensions remain elevated beyond those we’ve experienced over several decades. These influences continue to destabilise the global economy, forcing up commodity prices for oil, gas and electricity, thereby contributing to significant inflation and resulting in increased bank interest rates and the need for direct governmental financial stimulus. While we’re waiting for governments and diplomats to speedily resolve these political problems organisations in the global electronic components network must find ways to manage headwinds and continue their organisations’ success. ecsn member organisations remain committed to providing the highest possible level of customer support. To help mitigate future supply and demand imbalances I urge suppliers and customers to play their part in our industry’s continuing success by participating and contributing to the collaboration process both up and down their supply network. This activity costs organisations very little and when well-managed, offers great returns for the time invested and benefits all parties.
For information
Adam Fletcher is chairman of the Electronic Components Supply Network (ecsn), a business association established in 1970 that today offers support to all organisations with an interest in electronic components throughout their entire lifecycle. He is also 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.
www.ecsn-uk.org
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