Managing supply chain trends
01 March 2019
Rapid technology & product innovation is driving the need for speed, disrupting the supply chain model as we know it. Forces such as digital convergence, globalisation, software integration, mass customisation & environmental changes are driving the need for a robust supply chain, backed with complete traceability & transparency.
This article was originally featured in the Outsourcing Supplement in the March 2019 issue of EPDT magazine [read the digital issue]. Sign up to receive your own copy each month.
John Dignan, Managing Director of Dynamic EMS, discusses his predictions for the supply chain in electronics manufacturing – and his thoughts on how best to manage these trends.
Mergers and acquisitions
Original component manufacturers (OCMs) of electronic component parts are continuing to grow via aggressive mergers and acquisitions (M&A), particularly semiconductor manufacturers. Semiconductor industry consolidation, and changes in its distribution sales model, have left end-customers with fewer supplier options, and fewer qualified design resources. We believe that semiconductor suppliers will continue to win share and will likely have pricing/margin power over the industry for a number of years to come – in the chip industry, mergers have created mega-suppliers with considerable power.
When two OCM suppliers with common product portfolios merge, the vendor base for those devices is reduced by a factor of one. Mature lines are phased out in favour of newer and more profitable ones – and we’ve seen end-of-life notices from OCMs accelerate within the past year. At the end of the day, OCMs ideally want to satisfy all demand, but they don’t want to get into a situation where they expand and then the market contracts.
Therefore, the reality is that we now operate in a market with fewer OCMs. Where once, we may have had several choices, we now have only one or two, or sometimes even a sole supply only, resulting in the thinning or damming of the sourcing stream.
Leadtime explosion – contingency forecasting
Current component shortages are now expected persist into 2019. Passives lead-times are stretching to 30-plus weeks, with some orders quoted for delivery in mid-2019. That’s a long time for buyers to live hand-to-mouth. This leads to a ‘bunker mentality’ within the procurement department, with double, or even triple, orders to stock up on supply.
For the first time in a number of years, the term ‘allocation’ is back on the table. Of course, in any scenario where demand exceeds supply, there is an impact on cost, with prices rising at an extraordinary rate. For the first time in years, we are beginning to see price increases in chips, making buyers anxious. Naturally, business is booked well in advance to avoid absorbing an increase, especially in a margin-sensitive business such as EMS.
Being involved in the design stage allows your EMS partner to design the product for manufacture, taking into consideration components that may create a challenge for the original equipment manufacturer (OEM) to secure. Products can be designed with an alternative component, one that could be easier to source, or one that isn’t approaching its end-of-life (EOL) or obsolescence.
Tech migration – plan capacity
Component demand is rising rapidly, thanks to IoT growth and rises in automotive, mobile and industrial markets. Technology migration, particularly within the already-volatile memory market, has a ripple effect on availability.
There is currently a transition in the flash market from 2D to 3D technology. Flash is, of course, the key component in SSDs. This movement is naturally driving a shortage in both flash memory, with a knock-on effect on SSDs. Demand gradually puts pressure on established technology, such as DRAM, with DIMM modules for servers in short supply at a time where cloud technologies drive demand up for server production.
But, this shouldn’t be a show-stopper. Take a sustainable approach by forging open book and transparent relationships with your OCM partners.
Time to make some tough choices
We’re now seeing shortages across a wide range of products. For instance, in passives, MLCCs and tantalum – and some resistors and diodes. The industry’s largest DRAM supplier, Samsung, is considering increasing its DRAM output, even as it adds capacity for newer technologies.
But how should they do this? Does the OCM add capacity, which is expensive and takes considerable time to ramp-up, to a point where the return-on-investment is viable? However, if they don’t add the required capacity, could they run the risk of losing the sale?
And it’s not just the OCMs who face challenging decisions. EMS buyers do too, as suppliers and distributors are allocating products, using customers’ buying history as a baseline.
The solution, to reduce or eliminate risk, is to take control of the parts of the supply chain that can be controlled. Work with like-minded OCM partners only, and form two-way relationships. Develop your supply chain for cost-effective solutions to reduce waste (component waste, e-waste, packaging, process inefficiencies and so on).
Work with your OEM partners to design products with the circular economy in mind, which we at Dynamic EMS see as becoming more important to our EMS business model – and to our OEM customers, who now request our company mission statement in regard to environmental issues and/or policies, for example, Just-in-Time (JIT).
Having operated within the supply chain for the EMS industry for over 35 years, at Dynamic EMS, we recognise that what we are experiencing currently is simply part of a continuous cycle. As this cycle develops, we will see newer, smaller component manufacturers emerge and grow. These companies are born as developmental spin-offs from the larger existing companies, with the talent, experience, and resources in place to transform and disrupt the market once more.
So it’s a cycle: do what you can to sail through it with the minimum amount of disruption. As many management books state on the topic, change is a business objective – belt up and hold on tight, as it could be a bumpy ride.
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