About a year ago, the supply chain's quick response and conservative inventory policies were credited with enabling the electronics industry to weather the recent global recession better than previous downturns. Today, however, these same lean inventory tactics - particularly among component makers - are being blamed for triggering the current parts shortages. The conventional wisdom is that the solution is in the manufacturers' hands; boost capacity and everything will be just fine. Unfortunately, nothing in the electronics supply chain is that simple.
True, manufacturers have been reluctant to add capacity, but who could blame them? Just 10 years ago, our industry nearly imploded under the weight of excess inventory liabilities. I don't think anyone wants to relive those dark days - I know I don't. This is exactly what suppliers are trying to avoid. On both a global and industry-specific level, the recovery has been somewhat tenuous. Business is looking up, but long-term predictability is uncertain. Economic indicators are trending toward the positive, but still fall short of full-blown recovery.
Until there is overwhelming evidence that current demand signals are sustainable, it would be unwise for suppliers to make a large investment in capacity expansion. I think that they are being realistic that at least a portion of current demand is inventory rebuilding and not actual long-term demand. If they add capacity to alleviate the short-term problem, there is a significant risk that they will end up with an oversupply - which could have an equally negative impact on the supply chain.
"Until there is overwhelming evidence that current demand signals are sustainable, it would be unwise for suppliers to make a large investment in capacity expansion"
According to various industry reports, average lead times for components such as standard logic, voltage regulators and certain connectors are stretching to 20 weeks. Some microcontroller and passive components have purportedly swelled to 24-40 weeks.
Clearly, no one wants to wait over six months for a part to complete their bill of materials. Unfortunately, there are no quick fixes here. To some degree, we must all play the waiting game while natural selection works to level the current supply and demand imbalance. That is not to say, however, that there aren't steps that we can all take to help get our industry back on track.
Artificial intelligence
It is critical that purchasers be as open and honest as possible with their supply chain partners about their actual need. Double and triple ordering will only exacerbate the situation by artificially inflating the demand picture. If you have a good relationship with a distributor partner, for example, you should be able to trust that they will do everything they can to support your requirements. With more transparency in the supply chain, distributors and suppliers are better in tuned with customer requirements, so that we can focus on those things we do best - such as logistics and inventory management.
There is no doubt in my mind that the trust and highly-integrated communications Avnet shares with our customers has enabled us to be more proactive in positioning ourselves to fulfill customer demand. For example, using historical customer demand data and current forecasts, Avnet began rebuilding our inventory in early 2009, well ahead of the turnaround. As a result, we were able to secure stock in key technologies that are today experiencing as much as 24-week lead times.
History lessons
This is why I encourage those who do not have strong relationships with distributors to start building them now. Despite improvements in supply chain visibility and inventory management tools, our industry continues to suffer inevitable supply and demand inequities. It is important to learn from these challenging times, so we do not repeat the mistakes of the past. Remember what Albert Einstein said: "Insanity is doing the same thing over and over again, and expecting different results."
These days, there are many tools and technologies available to help manage the increasingly complex tangle of global supply chain operations. Yet, at its core, the supply chain is still built on relationships, with an understanding of and agreement on common goals and objectives with mutually beneficial results. Without this strategic alignment, you won't be able to count on your partners to come through when the chips are down (no pun intended).
Risky business
Finally, no discussion of component shortages would be complete without addressing alternative sources. In certain scenarios, if authorized channels cannot fulfill customer demand, there are some independent and aftermarket distributors who may help. These sources can come in handy when a manufacturer discontinues a part and sells off remaining stock, or when an OEM miscalculates demand and is left with significant overstock. However, this is not one of those situations. The shortage problem today is not an obsolescence or "hard-to-find" part dilemma. There are simply not enough parts being produced to fulfill forecasted demand. For example, Hynix Semiconductor Inc. Chief Executive O.C. Kwon recently stated that as of Spring 2010, the chip maker was meeting only about 60 percent of customer demand. He further noted that the company would consider capital expansion if demand remained "very strong" through the second half of the year.
"No discussion of component shortages would be complete without addressing alternative sources"
If a broker tells you he has stock in some of highly sought after parts, there is a good a chance the parts are either counterfeit, remarked, or otherwise sub standard. You can bet that any factory-original parts that are in the supply pipeline are flowing through authorized channels, not the grey market.
I understand the temptation to go down that road. Clearly many do. Going into the downturn, the US Chamber of Commerce estimated that the annual global market for counterfeit electronics was about $10-billion, though insiders claim industry losses could be as high as $100-billion to $200-billion annually. Those who deal in fakes prey on buyer desperation and the shortage plight is making the grey market risk exponentially worse. It's great to be the hero who kept production humming along by securing parts that no one else could get. But, when those parts start to fail, it's your neck on the line. Next time you are approached by a broker, remember, you don't just need parts, you need quality, reliable, factory-original parts. There is a difference.
Ironically, in many cases, those buyers who source outside authorized channels because they "couldn't afford to wait" 12-18 weeks for a part, often end up waiting even longer. As you can imagine, any individual who makes a living by deceiving his customers, is probably not someone who takes delivery commitments terribly seriously. Consider too, that once you realize your mistake, you are going to have to get in the back of the line of those waiting for parts from authorized sources.
I hesitate to say, "be patient." Our industry was built on people taking chances and bucking trends, patience isn't typically a part of our DNA. Sometimes, however, we must accept that there are no shortcuts. By late summer, current production yields should be improving, a clearer demand picture will emerge and manufacturers are likely to review their capacity investments. We can then expect lead times to start coming down. Until that time, our best bet is to stay on the path, keep doing what we do best and trust that our partners will do the same.
Avnet Electronics Marketing Americas