Front End I Electronic Components Supply Network Instability in the Electronic Components Supply Network
It is an unusual operation that does not prefer to operate in a reasonably stable marketplace, striving always to mitigate peripheral factors that could disrupt the core elements of their operation and threaten their ability to meet the needs of their customers. “Just as our members predicted at the end of last year the electronic components supply network has now entered a period of disruption”, says Adam Fletcher, chairman of the Electronic Components Supply Network (ecsn). In this article, Fletcher highlights the disruptors that threaten progress for our domestic industry in Q1’21 and suggests how these factors might be mitigated and even overcome…
Markets and economic data The global electronic components market continues to be driven primarily by mobile phone handset manufacture followed by automotive electronics, a sector that is predicted to become the lead market driver within the next couple of years. In third place comes personal computers and tablets, which are enjoying a renaissance due to the massive increase in remote working and home schooling. In contrast the UK has no mobile phone or volume computer\tablet manufacturers but does have a reasonable automotive manufacturing sector, but this is highly reliant on the broader ‘industrial’ segment that includes medical, avionics, instrumentation, network infrastructure etc. The UK Office for National Statistics recently reported that the UK economy - measured by GDP - declined (9.9%) in 2020 as a result of COVID-19, a rate more than double the worst annual fall on record. In the same twelve months figures for the UK electronic components industry showed that the DTAM (distributor total available market) declined by (8%), which given the current international and national economic situation could be viewed as quite a reasonable outcome.
Escalating electronic components manufacturer lead-times In Q3’20 authorised distributors (ecsn members) began advising their customers that manufacturer lead-times for electronic components were beginning to extend. They were slow to respond and the industry’s key metric, the “Book to Bill” ratio, remained stubbornly in negative territory until November ’20, when customers belatedly started to increase their order cover.
The lead-times ‘charge’ was originally led by semiconductor manufacturers, who’s quoted delivery times of 10-12 weeks at the beginning of Q3’20 rapidly progressed to 16-20 weeks and now stand at 26 weeks plus. Passive components followed a similar pattern with ‘merchant market commodity products, and in
10 February 2021
particular legacy case size MLCC, becoming difficult to source. The lead-times for interconnect and electro-mechanical products have also extended but with current lead-times of <12 weeks availability is generally good. As ERP systems process the latest availability data customers will inevitably seek to increase their in-house inventory and buffer stock-holding levels and will also put pressure on authorised distributors to increase their order cover, all of which will exacerbates supply problems. On the plus side there are signs that manufacturer lead-times for most component will start to decline a little as we move into Q2, probably by around 30% on average, but will stabilise only for a short period before jumping out again in 2H’21. How far components lead-times will move out in the next two years is a function of how strong the actual demand is and how well manufacturers are able to scale-up supply. My concern is that there is likely to be stronger global economic growth in 2H’21, which may coincide with increased 5G handset and infrastructure roll out. A perfect storm! I recommend that UK procurement professionals plan for a tight supply scenario throughout 2021 and into 2022.
Double ordering and the grey market
Double ordering is the deliberate placing of duplicate orders on multiple suppliers by customers, which as they the required quantity of product arrives leads to the outstanding orders being cancelled. Sadly, customers have to compromise their own ERP systems and deliberately mislead their supply network partners in order to perform this trick, leading to internal confusion in the electronic component market and opening a great opportunity for grey market dealers, who will always try to exploit customers’ despair. Our members are already reporting evidence of double ordering by customers struggling to obtain the supplies they need but if your existing, trusted supplier cannot meet your requirements then it’s very unlikely that the component you need is
Components in Electronics
available from some internet-based, often remotely located organisation you’ve never heard of. Your existing supplier is invariably best placed to understand and meet the needs of your organisation and you are well advised to break the relationship only after open, frank and cordial discussion. Mandy Rice-Davies famously once said “well he would say that, wouldn’t he” and I recognised that the same will be said of me, but experience has taught me that Double Ordering and ordering from Grey Market dealers are particularly daft and high-risk activities that should be avoided by procurement professionals and the organisations that employ them at all costs.
Logistics and Brexit
Despite the government’s assurances Brexit and the new trading terms, details of which were only made known at the eleventh hour, did throw up some initial export documentation reporting problems. Manufacturer authorised distributors of electronic components (ecsn members) have been able to overcome most of the hinderances, but some, such as issues related to non-compliant export documentation remain. Of particular concern is the Country of Origin issue that apparently denies preferential origin status to components that have been accepted into the UK and merely stored before being shipped out to non-UK customers. If the UK and EU governments don’t sort this particular issue out quickly the UK will lose out as organisations re- direct inventory from UK to their EU-based hubs. I hope, probably in vain, that there will be no further changes to import/export documentation, but it will only take a few days to implement any changes that do rear their ugly head.
The cost and availability of long-haul and last-mile logistics continues to be a challenge, both for ecsn members and the customers they serve. The reduction in commercial aviation occasioned by COVID-19 over the last twelve months or so has seriously curtailed air-freight capacity and sea-freight companies are struggling to get their ships and containers to optimum
locations. Airlines have responded by scheduling more goods-only flights, but it will take at least another quarter for sea- borne freight to get back into balance, so pricing looks set to remain at premium rates, probably until the end of the year. Last mile courier companies are currently doing a sterling job, but they’re overloaded due to unprecedented demand and are suffering from underinvestment in IT systems and their operational infrastructure due to historically fierce competitive pricing. I applaud and encourage the courier companies who, recognising the importance of transparency to their customers, are regularly publishing information about the volumes of packages currently in their system and the backlogs they are experiencing,
Concluding thoughts There can be no doubt that everyone involved in the supply and integration of electronic components will have to contend with many familiar and unfamiliar challenges in 2021. Once again, I urge all organisations in our industry to engage effectively both up and down their supply network. Sharing business intelligence with supply network partners can make a very effective contribution to the performance of your organisation and to the partners who also rely on your success.
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.cieonline.co.uk
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