Front End | Electronic Components Supply Network
Macro trends impact electronic component markets
Fluctuating worldwide macroeconomic trends are having an unprecedented negative impact on the global electronic components market. According to Adam Fletcher, chairman of the UK’s Electronic Components Supply Network (ecsn) and the International Distributors of Electronics Association (IDEA), the supply network is accustomed to managing complex challenges, but the marketplace is now contending with multiple destabilising macrotrends simultaneously. “I can’t see a resolution to the current difficulties appearing over the horizon any time soon,” Fletcher says. “Survival may come down to cash — which remains king. Successfully
managing cash flow during stressful times is a key strategic goal for all organisations.” T
ogether with many other industry analysts and commentators, this correspondent has for decades decried the de-industrialisation of the UK economy and the increase in ‘outsourcing’, primarily to Asia but also to Eastern Europe. I maintained that these practices were not in the national interest and the rhetoric spouted by successive governments since the mid-1990s that “western economies were moving up the value chain” was absolutely no excuse for their inaction. Sadly, history has proven this to be the case as the UK (and US) manufacturing base has simply been ‘hollowed out’: Hard won IP and technology and manufacturing skills have effectively been sacrificed on the altar of short-term cost saving.
ERP systems and inventory control From the mid-1970s the introduction of enterprise resource planning (ERP) systems (computers and software) enabled a quantum leap in manufacturing and coordinated materials planning. Inventory of raw materials, components, sub- assemblies or finished goods ties up capital reserves and reducing it releases money for more profitable investment elsewhere in the organisation. Among the benefits offered by sophisticated ERP systems was production inventory optimisation, ensuring that materials are bought, paid for and made available as close as possible to the point where they’re required. The transition to increasingly “inventory lean”, optimised systems initially based on
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Materials Requirements Planning (MRP), then Manufacturing Resource Planning (MRP2) and ultimately Just-In-Time (JIT) has radically reduced inventory holding across the industry. A critical element of all of these systems is the “lead-time” quoted by the supplying manufacturers, because this data will determine the financial value of the customer’s existing inventory and dictate the frequency of future deliveries, order coverage and the levels of “safety stock” needed.
Transition from JIT to just in case (JIC)
The COVID pandemic provided little of value to the world and its population, but it did hammer home the importance of electronics to the global economy and the fragility of some seemingly ‘copper-bottomed’ organisations in the electronic components supply network. Almost overnight the supply mantra changed from Just in Time (JIT) to Just in Case (JIC), which caused customers’ ERP systems across the globe to demand ever more inventory and order cover. Realising their vulnerability to what was quite likely to be ‘phantom’ demand and to orders that could be cancelled at any time, components manufacturers have been forced to turn to Non-Cancellable / Non-Returnable (NCNR) order contracts in a bid to control their customers’ excesses.
A vital role
Authorised distributors play a vital role in maintaining their customers’ inventory balances. They serve over 98 per cent of all customers globally and through cherished
Components in Electronics
agreements with component manufacturers offer a wide choice of components locally in their market. In addition, distributors play an important role across the electronic components supply network by providing a wide range of value-added services to both the manufacturers they represent and their vast customer base. A critical role of the manufacturer authorised distributor is to provide an “inventory buffer” that benefits both component manufacturers and customers. Typically, a manufacturer authorised distributor will maintain inventory sufficient to supply their customers for three-to-five months, involving millions of SKUs (stock keeping units). For the sake of simplicity many component manufacturers view their distribution partners as their largest customers and rely on them to use regression analysis of past customer purchasing patterns together with ongoing investment in market intelligence and research to determine what parts they should be manufacturing, the volumes they need to produce, and when they should be producing them!
A change of ideology
Way back in 2012 it was becoming obvious that the increasing dominance of primarily Asian / Chinese manufacturers of electronic components and systems was driving a change in the political thinking of Western governments. Many administrations had begun to realise the critical financial value and political importance of electronic components manufacturing to their economies, but perhaps a little too late?
The refusal of the Chinese Government and their domestic manufacturers to recognise and respect Western intellectual property (IP) legislation and the licensing / payment of royalties to IP owners was frankly a disgrace! Many analysts suggested that a gradual transfer of electronic components manufacturing (particularly semiconductors) away from an Asian dominance to a more widely dispersed geographic footprint was essential to reduce the risks to their domestic technology manufacturing and pricing infrastructure but once again, possibly a little too late?
The other side of the pond The Trump administration is continuing its efforts to “Make America Great Again” by unilaterally changing the established patterns of international trade. Escalating an ongoing trade dispute with China, initiating conflict with Iran and imposing swinging tariffs on most other nations while at the same time seeking greater inward investment by technologists, has so far only resulted in huge global economic instability and reduced global GDP growth. Sadly, the resulting situation is beyond the control of most organisations or governments and will probably, take a long time to resolve.
The rise of hyperscale computing The current insatiable demand for GPUs and associated High Bandwidth Memory has caused manufacturer lead-times across the wider semiconductor and passive components markets to hyper extend. At time of writing, the average lead time for
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