Front End I Electronic Components Supply Network
Component availability: the ‘F’ & ‘A’ words and a world of pain….
All sorts of euphemisms are being used to describe the developing availability situation currently affecting certain sectors of the electronic components supply network. Terms such as ‘constrained supply’, ‘tight market’, ‘undersupply’, ‘demand supply imbalance’ are becoming commonplace but thus far the dreaded ‘A’ word (allocation) is largely being avoided. From his unique perspective as chairman of professional community the Electronic Components Supply Network (ecsn) Adam Fletcher explains how forecast (the ‘F’ word) is able to have such a significant effect on the ‘A’ word
Adam Fletcher T
oday, most organisations operate within a supply network with only a very few very large organisations operating within supply chains. The term 'supply network' infers that organisations that operate within it accept some responsibility for the well being of other organisations in the network and are therefore mutually dependent on the accuracy of information available to members both up and down the network. Unfortunately most electronic systems integrators (OEMs, ODMs, CEMs) have consistently under-invested in the processes needed to accurately forecast their organisation's material demand and have therefore failed to communicate effectively within their supply network.
10 September 2017
A perfect storm? The electronic components market is today facing what many commentators are describing as ‘a perfect storm’. Poor forecasting has constrained investment by component manufacturers - particularly semiconductor companies - in new capacity and in-process inventory. This is understandable in an uncertain market, as few organisations are prepared to take the huge financial risks of adding new manufacturing capacity even though the cost of borrowing is at an all-time low. They have in fact used availability of inexpensive capital to consolidate via mergers and acquisitions to better utilise resources - particularly manufacturing capacity - whilst also improving their return on investment and flattering their growth performance. Capacity constraint coupled with demand increasing above poorly forecast levels and the uncertainty caused by M&A activity inevitably results in extending manufacturing lead-times. The vast majority of electronic components are today seeing a modest increase in manufacturing lead-times but most products – E-Mech, batteries, displays, interconnect, power supplies and lighting - remain within reasonable lead- times of less than 12 weeks. That said, many semiconductors and some passive products are currently on lead-times of circa 16 weeks and some have already moved out to 20 weeks and beyond. A small number of these critical products are now being quoted as having lead-times in excess of 26 weeks and of these a smaller number of manufacturers have begun to whisper the dreaded ‘A’ word, ‘allocation’.
What is allocation?
The dictionary defines allocation as “the action or process of sharing out something”. For us in the electronic components supply network, allocation
Components in Electronics
generally means that the manufacturer has orders in excess of its manufacturing capacity and in partnership with its authorised distributors who serve the majority of customers, finds itself having to determine how to equitably apportion its available output to best serve customers' requirements. This is inevitably a ‘world of pain’: the management time and effort required to allocate products to customers fairly whilst striving to bring on additional capacity quickly is a nightmare scenario for all and no one wins in the process.
‘Proprietary’ or ‘commodity’…? In periods of allocation ‘proprietary’ products produced by a very few organisations get a much higher priority in available manufacturing capacity than ‘commodity’ products that are multi- sourced and available from many organisations because customers are entirely dependent on the manufacturer(s) for their supply. As a result availability issues around ‘proprietary’ products - typically semiconductors - are normally resolved reasonably quickly whilst the allocation period for ‘commodity’ products is often much longer and steeper. It's worth remembering however that very complex interconnected semiconductor manufacturing processes often involve multiple specialist third party organisations and even in normal times, demand a cycle time in the range of 12-to-16 weeks. This can be accelerated by the use of die banks or partially processed products but multiple bottlenecks are inevitable and need to be overcome. Accelerating the production process also increases costs significantly, which ultimately impacts the manufacturer's profitability.
Authorised distributors The electronic components markets are fiercely competitive and even in a period of allocation competing manufacturers are desperate to retain their customers and hold on to or even boost their market share. Manufacturers' authorised distributors have a critical role to play in bringing the electronic components supply network back into balance and maintaining its stability. They are often the largest ‘customer’ of the manufacturer and use their internal forecast of their customers' demand to prioritise the manufacturing mix and allocation of finished goods. Most customers purchase a range of proprietary and some commodity products from a particular manufacturer so there is always a precarious balancing act to ensure adequate supply of both product types to meet the customer’s needs. Distributors maintain a wide ranging
inventory investment to support the manufacturer and their customers and often have the technical expertise in place to advise customers of more generally available alternative product from the manufacturer that may be acceptable even though it might be a different speed grade, package or temperature range etc.
Customers Customers are well advised to remember that a period of ‘allocation’ is only likely to impact a very small number of specific and identifiable electronic components. A knee jerk reaction to the fear of product shortages impacting their organisation and jeopardising their output is understandable but does nothing to help them or the broader electronic components supply network. The more considered response for most organisations is to review with their suppliers the current manufacturing lead- time against all items on their BOM and identify if any are ‘at risk’ and put in place a plan to monitor and manage the supply of these products. In this context ‘at risk’ can be applied to any components where the lead-time is in excess of 20 weeks.
Forecast or prediction…? I'm confident that the competitive nature of the global electronic components supply network will resolve the emerging allocation problem reasonably quickly but the global electronic components market is in a growth cycle and short-term recovery may well depend on the demand for electronic components in the Asia-Pac region in the second half of 2017. If demand grows strongly the recovery period will unfortunately extend. Now's the time for all parties in the supply network to fully recognise the role that the ‘F’ word has in mitigating the worst excesses of the ‘A’ word problem. All organisations need to communicate their needs to their component manufacturers and their authorised distributors honestly and effectively and work with all partners in the supply network to help maintain market stability. However, I suspect that overall manufacturing lead-times are likely to remain in the six to eight week range for at least the next few years.
www.ecsn-uk.org
www.cieonline.co.uk
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