Front End | Electronic Components Supply Network
Accurate & timely forecasting – a universal plus!
The American businessman and investor Charlie Munger once said, “I’ve never been able to predict accurately: I don’t make money predicting accurately. We just tend to get into good businesses and stay there”. In this article for CIE readers Adam Fletcher, chairman of the Electronics Components Supply Network (ecsn) suggests that the global electronic components industry continues to be a “good business” but needs to successfully manage adversity in the short-term to protect the long-term outcome. For that to happen, the industry needs improved, accurate and timely forecasting.
T
he primary objective of most commercial organisations is to maximise the ROI (return on capital invested) for its shareholders. In most privately held companies this process is somewhat ‘opaque’ to outside observers, but the owners and managers in these companies often do take a longer-term view of their organisation’s performance and therefore seek to protect it from short-term impacts even if it means compromising their bottom line. In contrast, publicly quoted companies have to report their performance, leaving them with few alternatives other than endlessly striving to maximise the investment return to shareholders. Whilst public company directors are given some discretion in their decision-making process, and may provide compelling justification for their specific actions, it is ultimately the balance sheet that dictates investment decisions and drives their share price.
To enable successful operational business planning, management in all organisations forecast what they believe is likely to happen to their business in its markets, either over a 12-month period, or on a rolling quarter by quarter basis. Accurate and timely forecasts enable the efficient allocation of resources (people, cash, assets etc.,) based on the anticipated outcome. Regular monitoring and tracking facilitate necessary changes, based on the latest actual and forecast data. A typical company in the electronic components supply network will review the outcome of the previous twelve months by product
12 November 2024
type, business unit and/or geographic region, with particular emphasis on sales revenues, operational costs, profitability and sales backlogs. This process is sometimes complemented by formal PESTL (political, economic, social, technical and legal) analysis to help determine current and future threats and opportunities that may impact future outcomes. Almost all commercial investment activities are driven by the need to meet the current and perceived future demands of the customer, so reviewing the performance of the organisation’s top customers against their previous activities and their future expectations is a critical aspect of all forecasting activities. In a free market, it would also be sensible to forecast the potential actions of competitor organisations who may also wish to supply the customer. The complex range of probabilities within the forecasting process need to be linked to the likely forecast outcome in order to enable a focus on any short- term operating decisions forced on the organisation’s management. An example: If a large forecast order from a customer ultimately proves unforthcoming, then the company needs to either reduce its capacity or find a buyer for the product elsewhere, either of which could have an impact on the organisation’s costs, revenue and profitability.
In a perfect market the goods the customer needs would be available from their suppliers as required, at a price acceptable to all parties. Unfortunately,
Components in Electronics
the global electronic components market, like many other markets, is not perfect due to many reasons such as the impact that rising geopolitical tensions have on the macro environment, trade wars, pandemics etc., as much as unpredictable activities of competitors and dynamic ongoing technological changes, but make no mistake, consistently inadequate customer forecasting is also a significant contributor!
Investment?
The global electronic components markets have always been cyclical, primarily driven by changes in semiconductor technology, which is the industry’s - and the global economy’s - underlying driver of real growth. The interconnect, electromechanical, power and displays markets all benefit from on-going modest investment in new capacity and technology and as a result are relatively stable, however they too are impacted by the cyclical nature of the semiconductor market and increasingly, by supply issues in the passive component market. The nature of the investment required in semiconductor manufacturing (and to a lesser extent, in passive components manufacturing) is just outrageous and this risk is being carried by a relatively small number of large publicly quoted companies. The risks and rewards of their multi-billon $ investment dwarf those of any other sector of the economy. For a good example of the rewards that can be gained from careful long-term
execution and good timing one only has to consider the meteoric rise in the market capitalisation of Nvidia, currently leading the way in the AI Graphics Processing Unit (GPU) market. And for an example of the risks, take a look at Intel, who posted a $13b loss this quarter! Some analysts are putting this down to historical management missteps, but that is merely their subjective judgement and is overly simplistic.
The current - and following Donald Trump’s election - probably escalating trade war between the US and China is significantly impacting all manufacturers of leading-edge technology products, including semiconductor manufacturing equipment, the largest suppliers of which are based in Europe and Japan. This strident move away from globalisation to a more national or protectionist strategy is already impacting short- to mid-term industrial and global GDP growth and it’s difficult to predict the outcomes in the long-term. Whilst many private sector companies will try to find innovative solutions to reduce or absorb their costs, public companies have already announced some big cuts in their resources, primarily staff and new investment and are also ‘mothballing’ some of their manufacturing facilities. More to come? Unfortunately, almost certainly.
Outlook for the UK and internationally
The forecast for the UK & Ireland electronic components market that ecsn
www.cieonline.co.uk
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