P.S. Subramaniam, a partner in the Strategic Operations and Performance practice of Kearney, explains how electronics manufacturers went from having too few materials and components on hand to too many in a very short time — and how they can do a better job of planning in the future. 

For much of 2023, U.S. electronics manufacturers experienced a glut in inventory of microprocessors and other components that are essential to the making of high-tech products. Currently, says Subramaniam, “there’s way too much inventory for companies to manage going forward.” That’s in sharp contrast to the shortage of chipsets that the industry experienced in the previous couple of years. 

The reason for the current oversupply was a sharp drop in consumer demand for high-tech products, ranging between 20% and 30%, at the beginning of this year. The problem, Subramaniam says, is that companies during the shortage were unable to target specific components that were most in need, such as microprocessors, so they ended up building inventories of everything required for production, even components that weren’t in shortage.

Historically, the electronics industry has been subject to cycles of boom and bust. But manufacturers can do a better job of assessing their inventory over those periods, Subramaniam says. It’s important to build “muscle” into planning efforts, he adds, “to understand where we are on the leading or trailing edge of a glut situation.”

Rather than think about absolute amounts of required inventory, planners should focus on the rate of change and how it matches the demand cycle. By employing the metric of inventory momentum, and understanding how that will play out in the months and years ahead, they can better understand future needs. 

Manufacturers should continue to take the long view about the necessity of building new chip plants, especially in the U.S., in order to shrink lead time and de-risk supply. But they should also be reevaluating inventory needs in the short term, looking out two to three quarters and making monthly judgment calls about actual requirements.