Engineering change notification - the lower cost solution

2017 saw manufacturer lead times for all electronic components extend well beyond anything we’ve experienced over the last decade. Simply put, demand is outstripping availability. This is because stronger-than-forecast growth in the global electronic components market has coincided with a significant reduction in capital investment by component manufacturers since the 2008 economic downturn.

The low return on the capital employed in manufacturing commodity passive components coupled commercial risks such as uncertain demand, has resulted in severe capacity reductions and now shortages. Lead time availability has doubled and for the majority of components is today typically eight to ten weeks.

Some manufacturers are quoting 10-to-16 weeks and are offering a few components on lead times beyond 20 weeks. Some customers are even being quoted lead times of 26+ weeks, mostly for the very low cost commodity products used across so many applications. It’s likely that the longer lead time for electronic components will continue throughout 2018 as manufacturers add new capacity and supply and demand returns to balance.

Mergers and acquisitions
The high level of mergers and acquisitions activity in the electronic components industry over the last few years is now starting to impact the market. Supply uncertainty will continue for the next few years as the newly merged organisations start to rationalise their product offerings and reduce costs by removing duplicated products and those products which fail to yield their new corporate sales revenue or margin goals, leading to the issuing of End-of-Life (EOL) notifications.

All organisations need to act promptly when they receive an EOL from the manufacturers or their authorised distributors and be vigilant in tracking them. EOL decisions are not taken lightly. Manufacturers can be heavily influenced by the customer forecast demand for the product and the customer feedback received, which may lead to a withdrawal of the EOL or presentation of an alternative solution that meets the wider market needs. The terms of EOL notices vary significantly but all provide a reasonable time window for their customers to react and take the appropriate action.

Alternative solutions
Almost all customers are today supported via Manufacturer Authorised Distributors who strive to forecast future demand based on their customers’ previous purchasing history, somewhat like trying to drive a car forwards while only looking out of the rear-view mirror. They use regression models and a lot of human intelligence to enable them to start loading increased order cover early in the growth cycle but as they cannot carry the entire inventory risk, such cover is almost always at the lower end of their demand forecast.

The worst case scenario
Things start to escalate when an electronic component normally purchased becomes unavailable from the manufacturer or their authorised distributor and simply cannot be found elsewhere within the wider global distribution network or from another customer.

Of course, steps have to be taken but vigilance is essential. There is always a steep rise in the activities of counterfeit electronic components manufacturers and their sales channels when manufacturer lead times extend significantly and EOL notices are issued. If an organisation you have never heard of offers to supply the electronic component you have been unable to locate anywhere else in the network please just say “No”. Counterfeit components are unlikely to operate correctly through the normal product lifecycle and the reputational risk and cost of rectifying early failure of your organisations equipment or system is incalculable.

In the event that your supply chain partner cannot meet the specified delivery date they may well suggest that you consider an alternative solution. The proposals they put forward can range from adding an alternative equivalent part number from the manufacturer, modifying the acceptable grade (speed, electrical performance, temperature range etc.,) or even adding an alternative manufacturer to the approved suppliers list.

Authorised distributors know that change requests are never welcome, be they relatively simple or more complex, and fully appreciate that they all involve engineering time and expertise to ensure any proposed change does not compromise the integrity and functionality of the equipment or system in which the alternative part(s) will operate. They also know that the additional re-engineering time involved just adds cost to all organisations involved in the process, including supply network partners. Sometimes the best course of action is to apply pressure to expedite delivery as soon as possible with the existing supplier or maybe rearrange the production processes and schedules or even stop production for a short period.

The good news
The highly competitive nature of the global electronic components market will ensure a reasonable level of equilibrium between supply and demand will be achieved in 2018, but there may well be a few nasty bumps along the way. Those engineers within organisations who placed long term orders on their suppliers with fairly accurate monthly demand forecasts can continue to feel fairly smug whilst continuing development of their next generation of more profitable products and avoiding those pesky ECNs.

Fletcher encourages all organisations to communicate their needs to their component manufacturers and their authorised distributors partners honestly and effectively and work with their supply network partners to help maintain market stability.