Front End | Electronic Components Supply Network Confrontation or collaboration?
For twenty years or so Adam Fletcher, chairman of the Electronic Components Supply Network (ecsn), has advocated ‘collaboration’ between buyers and sellers rather than ‘confrontation’ as the way to achieve progressive result improvements in the electronic components supply network. After all, neither party can have a viable business without the person(s) sitting on the opposite side of the table. Great collaborative strides have been made, particularly over the past ten years, but in this article, Fletcher reports that whilst the electronic components market has reached a positive inflection point in the current supply and demand cycle some customer organisations are today seeking short-term advantage to the detriment of their supply network partners.
The UK electronic components market
The pricing of electronic components has historically been, and remains, highly competitive in a global market where multiple manufacturers and their authorised distributors seek to maintain their privileged relationships with their customers by negotiating terms that satisfy their real needs. This has security of supply benefits for both parties, with preferred suppliers gaining access to new design opportunities, potentially resulting in new business. At the same time customers enjoy enhanced service levels (technical support, market insights, price reviews, buffer stocking, on-time delivery metrics, etc.) together with commercial terms that are constantly competitive over the long- term. In the electronic components supply network at least buyers and suppliers can easily transition to alternative suppliers or customers if acceptable terms simply cannot be agreed. For obvious reasons this is a non-preferred solution for organisations in hitherto long-term supply relationships. A failure to find an amicable way forward could pose a significant business risk to both parties. For 98 per cent of the UK electronic components supply network the buyer / seller relationship is primarily between the Systems Integrator (customer) and the manufacturer’s Authorised Distributor, often with commercial support from the manufacturer. Systems Integrators primarily partner with Manufacturer Authorised Distributors because they are best placed to guarantee supply of quality products with full supply traceability, and they are often able to leverage
12 July/August 2024
the relationships they have with the multiple components manufacturers they represent to supply many products on their customer’s Bill of Materials. This has the benefits of supply base reduction for customers and importantly, increases the focus on their organisation’s purchasing spend, making them a highly visible and therefore an important customer for the supplier to retain.
Recovering from the indigestion phase of the cycle
Over the past few years of very significant demand and supply turbulence right across the UK electronic components supply network Manufacturer Authorised Distributors have managed to engage collaboratively with both their customers and their suppliers – generally with good humour – as they sought to find amicable solutions. Whilst the outcomes may not always have been perfect, many of the short-term needs of our industry were successfully met. I had hoped that organisations throughout the supply network had collectively learnt from past experiences and had come to recognise that improved levels of organisational collaboration benefits everyone. However, following informal discussions with UK industry executives, I am forced to conclude that this is not always the case. Whilst the largest Tier 1 customers are engaging much more deeply with their supply network partners, the procurement folks at many Tier 2 & 3 customers are readopting ‘same old, same old’ highly confrontational tactics with their supplier base, which in my opinion is both a shame and a missed opportunity.
Components in Electronics
Why is this happening? There is no single reason for the behaviour of Tier 2 & 3 customers, who I’m sure could all cite a whole raft of reasons. These companies maintain little procurement representation at board level able to add ‘supply context’ and merely see procurement as a subset of either the manufacturing or finance director’s brief. I suspect the current primary driver is a board-level mandate to reduce costs “come what may”. In contrast, Tier 1 customers generally do have board directors with responsibility for the organisation’s ‘material supply chain’. Of course, these executives also want to see lower overall costs but they are primarily focused on achieving reductions in ‘total acquisition costs’ of which inventory balance is a key metric, and are able to articulate this at board meetings to guide increasingly informed decision making. I fully agree with the necessity to ‘burn off’ the inflated, additional in-house inventory holding that most customers put in place to satisfy the demands of their ERP systems and account for recent ‘speculative’, if inappropriate, purchase decisions. Manufacturer Authorised Distributors have where possible striven to bring the overall supply network back towards equilibrium by re-scheduling deliveries and cancelling obvious overordering by their customers. Some customers however agreed ‘Non- Cancellable and No-Return Agreements’ with their suppliers at the behest of the components manufacturers (who were desperately seeking to regulate their uncontrolled customer demand), so this
flexibility has not always been possible. Tier 2 and 3 customers could well be exercised about the pricing suppliers offer to their organisations on long- term contracts, especially when they compare what they are asked to pay with current ‘spot market’ pricing. Over recent years our market has transitioned from ‘famine to feast’ and now finds itself in the ‘indigestion phase’ with a considerable ‘inventory overhang,’ so an alternative vendor might well be able to offer customers a component at a lower spot price, but be warned: his inventory is getting rapidly consumed and with the market changing so rapidly this vendor is very unlikely to be able to maintain low spot pricing for very long. A very small short-term financial gain can significantly disrupt longer term supply agreements and goodwill, whereas cooperative supply network partners can often propose ways to mitigate any price discrepancies.
Electronic components supply network – 2H’24 and into 2025 The global electronic components market has now stabilised, and monthly industry statistics suggest that markets in Europe, the US and Japan will continue to bounce along the base of the revenue curve for the rest of the year while revenues in Asia will almost certainly improve in 2H’24. Global revenues look set to return to growth strongly into 2025.
I wish that I could accurately forecast the specific electronic components shortages that will drive lead-time issues as we move into 2025 but, unfortunately, I cannot! In a market awash with new semiconductor manufacturing capacity
www.cieonline.co.uk
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64
