Supply chain intelligence: Allocation is back on the table

Author : Matt Carefoot | Purchasing Manager | SMS Electronics

01 September 2022

There may be electronics design engineers reading this tutorial that haven’t ever experienced allocation during their time working with their purchasing departments or electronics manufacturing service (EMS) provider. Here, Matt Carefoot, Purchasing Manager at electronics manufacturing service provider, SMS Electronics starts off by explaining exactly what allocation is…

This article was originally featured in EPDT's H2 2022 Electronics Outsourcing supplement, included in the September 2022 issue of EPDT magazine [read the digital issue]. And sign up to receive your own copy each month.

Allocation is a word often associated with the electronic component supply chain. It comes back to simple economic principles that we may have learned in school about supply and demand. Currently, we are in a position where demand for certain key electronic components outstrips the manufacturing capacity for these critical components, required in the bill of materials (BoM) to complete the production build.

So, what happens when supply can’t meet demand? Well, in the electronics manufacturing industry, we have our original component manufacturers (OCMs) and their distributors. When supply outstrips demand, these parties will allocate the components parts to try to keep parties like SMS (and other EMS companies) manufacturing, but typically not to the same output volume. The OCM and distributors have their own criteria for determining who gets what: order date, volume, associated industry the components/products are supplying into (for example, automotive, consumer, infrastructure, industrial, medical, and so on), urgency of requirement and line stop status being some of the parameters they will consider and use to make these decisions.

What impact does allocation have on EMS providers?

When the OCM or distributor informs us that a component part has gone into allocation, the first thing we will do is consult with our engineers and our original equipment manufacturer (OEM) customers, to research if there are any component alternatives that could be used. If they advise us that there are, then we will work with the OCM and distributors to try to secure stocks of the alternative. But the reality is that others will do the same, and these will also become challenging to source. If a component part is unique to the build, with no suitable alternatives, this is when you will see lead times extending, and production forecasts lengthening.

What is the current climate within electronics manufacturing?

The electronic component supply chain is currently experiencing considerable strain, with some major disruption. Silicon wafer fabrication is the main driver for these shortages. Global demand is out-stripping supply, in some manufacturer cases by as much as 5:1.

Driving factors:

• COVID-19 hit the globe. Many locations that were severely impacted were the main component manufacturing localities – in China and the Far East. Facilities have faced closures, lockdowns and staff shortages. These factors naturally created a backlog that hasn’t yet been able to be cleared.

• COVID-19 also spurred innovation with the demand for automotive, automation, MedTech and robotics on the rise. Meanwhile, as people witnessed for themselves, and were more exposed to messaging in relation to the environment, and the protection of, unsurprisingly, the demand for more eco-friendly automotive rose. Our family and friends were all talking about how nice it was to hear the birdsong, as well as how clean and clear the rivers looked. This had a ripple effect, spiking the automotive and clean tech industries. If you didn’t attend a Zoom call, or buy some exercise equipment, or invest in some home and lifestyle products, were you even in lockdown?

• COVID-19 economic masters predicted the largest recession since the 1920s, but we’ve actually seen world econo-mies stabilise and in some geographies, even rise. Developing economies and landscapes have continued to emerge, and the electronics industry invests to protect its geographical footprint, landscape and supply chain networks.

Distribution channels compounding the challenges

The sheer volume of activity and material passing through the main ports and hubs used across the globe also created a challenge, with a massive imbalance in capacity of air and sea freight transportation. While many of us sat in the garden enjoying the blue skies above, which seemed odd as they were missing the passing of aeroplanes, little did we know that this would compound the supply chain problem. Many freight forwarding companies utilise space for additional capacity on passenger flights and, of course, we were not jetting off for our two weeks in the sun.

And, of course, we all read about the Suez Canal, but this just became an illustration of how some freight was literally just stuck in the ocean for weeks, which had a knock-on effect on port capacity and processing. So, if your pizza oven or hot tub was weeks late, the likelihood is this is why!

How do you communicate allocation & extended lead-times to customers?

Nobody wants to be the bearer of bad news. Every EMS will handle things differently, but from our own Smart Made Simple (SMS) perspective, we are leveraging relationships that we’ve forged over decades. Many EMS companies are in a panic, spending a ridiculous amount of resources and effort with no progress. Movement is slow; we must accept that and focus our energies in investigating solutions and ensuring information accuracy.

In a market where speed matters, what can be done?

It’s all about getting our OEMs orders in place, in relation to long time demand. Unfortunately, anything short term will be in jeopardy, unless inventory exists in catalogue distribution or the grey market. Our customers should strategically position themselves to be able to approve alternatives at short notice to speed up the validation process.

From an SMS outlook, we will continue to push for delivery commitments and improvements. We will escalate where we can, and bring our OEM customers into shared discussions with the OCM to reinforce the importance of supply.

It is imperative that we all work together throughout the supply chain, from OCM, to distributor, to EMS, to our OEM customers. Transparency, traceability and the sharing of information to support the supply chain network is crucial. These are tough unprecedented times, where supply chain intelligence is a must to simplify the situation. By keeping it simple, sharing data and working together, we will make it through. It’s Smart Made Simple.

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