The semiconductor supply and demand imbalance has highlighted the importance of managing supply chains more effectively.
With the electronic component shortage expected to persist through 2022 and beyond, the effects of the imbalance are sure to be long-lasting. Against this backdrop, supply chains must not only weather the storm, but also look forward to “future-proofing” against subsequent disruptions.
Companies often find it challenging to keep track of rapidly changing semiconductor availability, lead times and prices. As they confront an uncertain market, they need to take action in the following key areas.
Arm themselves with information. Many variables affect high-tech supply chains, including supply, lead time and pricing, and they can change quickly. Pricing today is volatile; some parts that typically cost $2 to $5 in a “normal” market now sell for upwards of $50. Manufacturer lead times have increased from the typical 12-14 weeks of one year ago to more than 40 weeks currently. What’s more, individual part lead times can vary, with some stretching over a year.
Finding enough supply can be challenging in times of imbalance, but the open market is a valuable resource to fill in the gaps. It’s critical to understand what to look for when navigating that opportunity for the first time, and what to do if a supplier runs out of stock.
When buying chips on the open market, the foremost thing for companies to keep in mind is to check for proper credentials. It’s risky to buy from suppliers that don’t have the necessary quality controls in place. Look at the supplier’s background: how long it’s been in business, if it understands current market conditions, if it has the capital to secure parts, and whether it’s certified under standards for ensuring quality and authenticity. Moreover, check to see if it has in-house counterfeit-detection testing labs that are ISO/IEC 17025-certified. Some industries require further certifications; in the case of aerospace and defense or medical certifications, look for AS6081, AS9120 and ISO 13485. Make sure your suppliers have the appropriate protocols in place to ensuring product quality and protect your brand reputation.
Implement logistics improvements. Another key aspect of navigating the open market is understanding the difference between brokers and distributors. Small brokers often don’t have the quality controls, vendor-management systems or value-added services needed to ensure a part’s integrity, and provide integrated inventory-management services. Look for independent distributors with extensive quality-control protocols and certifications in place. Factors that impact a distributor’s ability to provide high-quality services include quality-assurance qualifications, financial soundness, gross revenue, longevity in the market, global reach and range of services provided.
Companies are beginning to re-evaluate the way they manage their supply chains. Many manufacturers, particularly in the auto industry, are realizing that the just-in-time (JIT) inventory model isn’t compatible with the current market. This method of ad hoc ordering of components might help to lower overhead, but it doesn’t provide the flexibility needed in times of supply chain disruption. Companies today need adopt a proactive mindset when it comes to procurement.
The current supply-and-demand imbalance has further highlighted the risk of relying on single-source suppliers. This procurement model becomes extremely limiting in times of shortage, when access to alternative supply sources is most critical. Distributors with vast networks of suppliers around the world can help diversify your supply chain and keep you from scrambling for parts in a pinch. In the process, companies can build resilience and some redundancy into their supply chains, to guard against future shortages.
Partner with trusted distributors. Partnering with distributors is one way to take the guesswork out of managing logistics, and put your company in a strong position to deal with disruptions. It’s critical to maintain a long-term vision throughout the shortage, and cultivate lasting partnerships with suppliers that can address vulnerabilities and help you navigate the cyclical nature of the semiconductor supply chain.
One way that distributors support supply chain management is through vendor-managed inventory (VMI) programs. They ensure consistent and seamless supply by maintaining buffer and safety stock. Keeping some surplus inventory on hand is like having homeowners’ insurance: You don’t always need it, but if there’s a fire or flood, you’ll be glad you have it. VMI programs can help track component lifecycles. A VMI partner can notify you of upcoming product changes that could affect your business, and arrange volume purchases as components near end-of-life. Such programs can ensure a steady stock for the future by offering a range of warehousing options, while reducing inventory holding costs.
Another way that distributors support companies with long-term supply chain management is through IT asset disposition (ITAD) services. ITAD is a system of responsibly disposing of IT hardware through remarketing or recycling. At the end of every shortage, companies typically experience inventory hangovers, where they have more inventory than they want. The longer that unneeded parts sit collecting dust on warehouse shelves, the more likely they’ll become obsolete and lose resale value. ITAD services can bring value back by generating revenue from surplus electronic components.
Shortages are part and parcel of the semiconductor industry, whether due to natural disasters, foundry issues such as fires or outages, or a pandemic. To manage them, companies need to have the right tools and practices in place. By securing information to make informed decisions, implementing a reliable and flexible logistics plan, and maintaining a long-term relationship with a trusted distribution partner, companies can future-proof their supply chains.
Kirk Wehby is chief operating officer with Smith.
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