‘Golden screw’ will determine market success

This year is well on its way to being another strong year for the electronic distribution industry, but as we’re looking at the final few months of 2022, the speculation is that we’re starting to see some softness in the broader market. Consumer spending is down, but demand remains extremely strong across all industries and verticals and is expected to remain strong, although specific components remain a big challenge.

The issues that Digi-Key Electronics is witnessing globally are the same challenges that companies are facing in Canada, from decreasing consumer spend to continued COVID issues and new variants. Add in extreme weather incidences, high demand, carrier delays and lack of staffing and it’s enough to make any engineer’s head spin.

Waiting on the golden screw

There is an assumption from our industry that many are waiting for the ‘golden screw.’ Meaning that from an inventory standpoint, customers have procured some material, but they’re still waiting for those one or two critical components to finish production and start generating revenue.

Source: Dan Francis, Fargo – Digi-Key Electronics

There’s been some thought that as consumer builders get ready for the holidays, since all that product needs to hit the market between September and October, many of those companies are going to play the supply and demand game and not wait for the elusive golden screw. They’re going to weed off their inventory and may not have as much on the shelves for consumers at the holidays, but they’re hoping that the overdrive of the price from an inflation standpoint will make up the difference.

So, we’re experiencing some softness on the passives side and some increase in support on components, but there are still those hot items for automotive and some data centre design that are still in critical need, and the lead times are still long there.

Overall, at a macro level, there’s softness, but there are still folks who are feeling the pinch and we’ve really been trying to keep a close eye on the data, because it’s not any one specific industry or component, it’s still pretty grey.

For many customers who have transitioned from a just-in-time inventory to a just-in-case strategy due to the supply chain issues of the past couple of years, we’re witnessing many who were used to holding X amount of inventory, and now they’re holding 4-5 times that, which causes challenges with cash flow.

Specific to Canada, we’ve seen a lot of medical designers and manufacturers specifically be hammered by the supply chain disruption, and any little change or modification to a design in that industry requires a very lengthy process, consequently in many cases the customers are just holding and waiting. They might be able to find the component they need on the broker market, but they’re probably going to pay twenty times the regular cost of the product, which doesn’t make it worth it in the long run.

Challenges ahead

The biggest challenge we’re facing right now as a distributor is the golden screw, or lingering needed component. If I had a dollar for every call or email I’ve had regarding an expedite, I could be a very rich man! And although we might see some of the market softening, a lot of the customers are very bullish about what they’re seeing and what their future is, because they don’t see their demand going down – they don’t see customers backing away. In fact, they’re getting more and more customers to start depositing on future builds just to guarantee the inventory they think they’ll need and make sure they have their place in line, so that when the inventory is produced, it can be delivered.

The world is changing, with all the Internet of Things (IoT) driving demand, everyone is going to live differently than we have in the past. The phones are going to start talking to the refrigerators to tell you what to procure from the store or what to get delivered. The demand isn’t going to go away, we’re going to experience a softness of sorts, but the manufacturers are bullish, and that’s one of the reasons why there’s so much investment in their fabrication plants. And the locations they’re choosing – they’re not just going back to their traditional spots in Asia-Pac, they’re bringing some of that manufacturing back to North America to optimize the supply chain.

Source: Dan Francis, Fargo – Digi-Key Electronics

The manufacturers see that the need will be there moving forward, and the demand isn’t disappearing in the future. We can look to the next generations as our gauge – they don’t bank the same way; they don’t purchase the same way – it’s a very different world for them and they’re the customers we’ll be supporting moving forward.

Digital continues to drive

Digital will continue to be a big push – those who are going to have the data faster are going to be able to decide faster, and the one who makes the decision the quickest will be the one to win. You can’t make the call if you don’t have the information, and the fastest way to get that is digitally. That’s going to be a big push as we head into 2023, to make sure that our efficiencies are in line and we’re doing as much with automation as possible for speed, accuracy and quality.

Humans will still be completely necessary, but if you can provide that human with a better tool, and better data integrity, that human is going to be able to make a better decision, which in the end should be a better decision for the company. Engineering staffs are really being pushed in this market, they are selecting components not based on what they need or what the design is requiring, but when they can get it. And that’s not always the best for the product and the overall cost, so it’s really pushing the engineering community.

A lot of customers are trying to do a lot more with a lot less, so the digital connection becomes even more critical, whether it’s through an API or submitting a digital order to reserve inventory. The days of the paper purchase orders are nearing an end since most companies are having a hard time hiring people to enter those POs, so they sit and wait. But if you click submit on the web, those parts are reserved automatically.

Finding folks to enter those POs isn’t the end of the labor shortage – the Great Resignation is a significant outcome of the pandemic, and many people have been evaluating their lifestyles and making alternate choices, which is resulting in staffing shortages everywhere from restaurants to manufacturers to Silicon Valley. The world is coming back online, but it’s a struggle everywhere to find the people to work.

Source: Digi-Key Electronics

On the business side, customers are looking for more tools to self-serve, self-quote and easily check availability – as quickly as possible. They also want to manage their bill of materials (BOM) and share it with others. Customers can now do all this and more with Digi-Key’s myLists tool which allows them to upload a list of components or BOM for quick analysis. This is an enhancement that is really improving efficiencies for the customer and making their jobs easier.

Continued supply chain chaos

The perfect storm of supply chain disruptions that we’ve been experiencing for two and a half years now between COVID, extreme weather, high demand and international conflicts will continue the rest of this year, especially as new COVID variants continue to disrupt every location and facet of life. A lot of people are sitting on a bunch of inventory right now and waiting for that one special part and just trying to weather the storm until they can start shipping and making revenue for themselves. Some of the bigger manufacturers have been restructuring their inventory forecasts and we expect others to follow that trend. We’re also looking ahead to the holidays which are always a big driver.

Growth will continue

While some of these trends and forecasts aren’t the most uplifting, the positive is that customers are experiencing exceptional growth year over year. Now the question is if it will maintain towards the end of the year and into 2023. Of course, the 40-60% growth they’ve been experiencing just isn’t scalable year over year.

The good news is that we’re already planning for the next growth cycle, because in our industry it’s never a matter of if, it’s a matter of when. As the market fluctuates, one thing will always remain: We will continue to support our customers and suppliers to ensure we’re delivering on our promise to enable the world’s ideas and remain a trusted distribution partner.

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Kim Vettleson is regional business development director – Canada for Digi-Key Electronics. Digi-Key is a leader and continuous innovator in the high service distribution of electronic components and automation products worldwide.