Analysis

Electronic components network demand and supply

Just as members of the Electronic Components Supply Network (ecsn) predicted in October last year lead-times currently being quoted by manufacturers of electronic components have stepped out, in some cases exacerbated by escalating prices and delayed shipments: According to the association’s Chairman Adam Fletcher, the pendulum of demand and supply in our industry is currently arcing wildly in the direction of tight supply, and with little sign of a returning swing in Q1’21, an imbalance looks to be inevitable. 

In this article Fletcher examines the reasons behind this imbalance and suggests what could be done - and what should not be done - to ease the situation: “The pendulum is likely to remain in tight supply territory in the short- to medium-term but eventually demand will be met and supply once again will overshoot.”

Electronic components manufacturer lead-times step out

In Q3’20 ecsn’s manufacturer authorised distributor (afdec) members began advising their customers that component manufacturer lead-times for electronic components were beginning to extend, strongly indicating a looming supply issue. The change in lead-times was originally led by semiconductor manufacturers, who’s quoted delivery times of ten to 12 weeks at the beginning of Q3’20 rapidly degraded to 16 to 20 weeks and now stand at 26 weeks plus.

Passive components followed a similar pattern with ‘merchant market commodity products’ and in particular legacy case size MLCC (the type mainly used in the US and Europe) became notably difficult to source. The lead-times for interconnect and electro-mechanical products also extended but with current lead-times of <12 weeks availability remains generally good, but early indications of a shortage of specialist metals are emerging, which may cause some difficulties.

Sadly, customers weighted down with the many issues related to COVID-19 and Brexit were slow to act on their suppliers’ warnings and the industry’s key metric, the ‘Book to Bill’ ratio, remained stubbornly in negative territory. In November ’20 however customers started to take notice and their ERP systems belatedly started to process the latest components availability data and automatically sought to increase customers’ in-house inventory and buffer stock-holding levels and of course, their order cover with suppliers, all of which served to exacerbates the escalating supply problem in Q1’21.

There are some signs that manufacturer lead-times for most components will start to decline a little - probably by around 30% on average - as we move into Q2 ’21 but will only stabilise for perhaps a quarter before jumping out again in the second half of the year. Pundits are predicting a return to stronger global economic growth in 2H’21, but I’m concerned that it’s likely to coincide with increased 5G handset and infrastructure roll out.

Just how far components lead-times will move out in the next two years is a function of how strong the actual demand is and how quickly manufacturers can scale up supply. It’s unlikely for instance, that manufacturers of semiconductors will be able to quickly upscale their fab capacity. They will try to reassure the market for a little while by ‘sweating assets’ to operate a little over theoretical capacity but in reality, only eye watering investment right across their supply network will solve the dramatic supply problems we’re currently facing, and for that we must allow a minimum of two years.

‘Sweating assets’ whilst making massive investment across the semiconductor supply network is horribly expensive and manufacturers will inevitably seek to mitigate this burden by increasing their prices to reflect their increased costs.

Double ordering and the grey market

For well over a decade, UK procurement professionals have operated in an environment where the availability of electronic components has typically been ex-stock or less than 6 weeks. They must prepare for a massive change and make plans for a much tighter supply scenario throughout 2021 and probably well into 2022.

At the same time, they must retain their professionalism and play their part in maintaining the integrity of their supply network. Sadly, the nefarious practice of ‘Double Ordering’ is already being seen by ecsn members. Customers struggling to obtain the supplies they need are deliberately placing duplicate orders for the same product on multiple suppliers and as the required quantity of goods arrive from one supplier, casually cancel the outstanding orders on the others.

To perform this ‘trick’ buyers need to deliberately mislead their supply network partners and compromise their own trusted ERP systems, leading to internal confusion within the customer’s material management infrastructure and in the national electronic component market, at the same time gifting ‘grey market’ dealers with a great revenue-generating opportunity.

Grey market dealer are always quick to exploit despair in the market by promising access to ‘hidden’ inventory that only they have, often at inflated prices. ‘Hidden’ inventory should never be taken at face value, as it is often old, reused, or just a straight counterfeit. If an existing, trusted supplier cannot meet your requirements ask yourself how it is that some internet-based, often remotely located organisation you’ve never heard of is able to supply just the component you need?

Your existing supplier values your business and is adept at meeting the needs of your organisation. You are well advised to step into the ‘grey’ market only after open, frank and cordial discussion with your established supplier(s). My industry experience has taught me that buying on the ’grey’ market is risky and potentially career-limiting, whilst Double Ordering is simply irresponsible and a betrayal of your supply network partners. Avoid these practices at all costs.

Brexit and impact on logistics

The UK’s exit from the European Union caused a redrafting of the terms on which we trade with our European neighbours. The initial problems with export documentation that the changes threw up have now been largely resolved but some remain, particular issues surrounding the ‘Country of Origin’ documentation.

Currently the UK is being denied ‘preferential origin status’ for electronic components that have been accepted into the UK and merely stored here before being shipped out to non-UK customers. If the UK and EU governments don’t sort this particular issue out quickly the UK will lose out, as organisations will re-direct inventory away from the UK to their EU-based hubs from where they can easily ship to customers throughout Europe, probably including many in here in the UK.

We have to hope that this will soon be sorted out and that UK businesses will not be faced with further changes to import/export documentation, but any changes made by the authorities should only take a few days to implement.

Disruption to long-haul and last-mile logistics continues to trigger restricted capacity and price increases, causing difficulties for authorised distributors and the customers they serve. The COVID-19 pandemic over the last twelve months or so has seriously curtailed air-freight capacity and sea-freight companies are still struggling to get their ships and containers to the optimum locations. Airlines have responded by scheduling more goods-only flights, but it will take at least another quarter for sea-borne freight to get back into balance, so pricing looks set to remain at premium rates, probably until the end of the year.

Last mile courier companies are currently doing a difficult job in the face of unprecedented levels of demand. An increase in missed, late or lost deliveries can be put down to a combination of underinvestment due to historically fierce competitive pricing, outdated legacy IT systems and insufficient operational infrastructure, but they are making great efforts to improve. Shipments have also been delayed by the disruption to main routes throughout Europe caused by excessively cold weather. We should recognise and encourage the courier companies who, recognising the importance of transparency to their customers, are regularly publishing information about the volumes of packages currently in their system, the backlogs and the problems they are experiencing.

Concluding thoughts

Everyone involved in the supply and integration of electronic components will have to contend with many familiar and some unfamiliar supply issues in 2021 and probably into 2022. I predict however that the pendulum will swing back and a glut in electronic components is likely at some point in 2023 as supply begins to overtake demand.

In negotiations with your partners in the electronic components supply network it will pay to remember the adage ‘what comes round goes around’ and that at some point soon the boot will be on the other foot.

On that basis I continue to urge all organisations in our industry to engage effectively both up and down their supply network. Sharing business intelligence honestly with your supply network partners can make a very effective contribution to the performance of your organisation and to the partners who also rely on your success.

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