Recovery challenges – balancing capacity and demand

09 March 2010

Susan Mucha

One of the biggest challenges EMS companies seem to be facing in 2010 is lengthening component lead-times. After a year of slow sales, just as demand is picking up, lead-times are stretching out.

The problem: component suppliers who are unwilling to increase capacity or inventory until recovery is clearly underway. Whether this will be a first half 2010 challenge or a full year 2010 challenge is still up for debate.

Given the economic uncertainties that still exist, it is hard to blame component manufacturers for being reluctant to take a leap of faith and increase inventories and/or capacity. At the same time, EMS providers are seeing revenues drop, not because of order cancellations, but because of an inability to get materials.

If past cycles are predictive, there will be a bright spot: OEM customers will likely make sourcing decisions faster and may start to share longer forecast windows.

But what can EMS companies do in the interim?

Strong supply chain relationships may help, but distribution is also feeling pain. At this point, the best business strategy is to address the current situation both reactively and proactively. The reactive strategy should focus on bringing quality components in as quickly as possible in the given current market conditions. It won’t fix the immediate revenue and profit issues caused by extended lead-times and hard-to-find components. While creative sourcing may be required, reactive measures should continue to support customer approved vendor list (AVL) integrity and avoid questionable sources of supply.

The proactive strategy focuses on longer term solutions that help address a market that could have extended lead-times for several more quarters and prevent excess inventory liability. Proactive strategy steps should include:
• Working with customers to develop extended forecasts so that orders can be placed with sufficient lead-time. Contractual commitments related to material liability should be updated to reflect extended lead-time because once things even out, OEMs won’t want liability for the just-in-case measures they previously asked be put in place
• Working with the customer to expand the AVL where possible to increase sourcing options on critical components
• Careful monitoring of total company inventories of critical components. Conventional wisdom says that companies should have ERP systems and component numbering practices which allow real-time visibility into inventory by customer and inventory across the company. The reality is that while that is the best practice, it isn’t always done. Companies that have grown by acquisition may not have compatible ERP systems in all plants. Smaller companies sometimes have very limited or legacy MRP or ERP systems
• Careful monitoring of lead-time trends and pricing. Demand and capacity will balance out and just-in-case measures need to be adjusted when that happens

The good news is that lengthening lead-times are a bellwether trend of a recovering market. And, just as the downturn provided opportunities for individuals to make large contributions to their companies’ success, this part of the recovery cycle will have its stellar performers.

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