Managing supply chains in a rapidly changing market
It is safe to say that last 12 months have been unlike any other for so many sectors, but the electronic components market supply chains in particular has struggled with a series of upheavals that could not be foreseen. Simon Meadmore, Global Head of IP&E, and Lee Turner, Global Head of Semiconductors and SBC, Farnell explains.
Hindsight may be unhelpful, but there is much that buyers in the semiconductor industry know now that they might wish they had have known before. Nevertheless, it is never too late to capitalise on the key lessons that have been learnt about how to manage supply chains in a rapidly changing market.
What we thought we knew
When the global pandemic first broke and whole industries were mothballed, many original equipment manufacturers (OEMs) and contract electronic manufacturers (CEMs) paused or reduced production on the understanding that lockdowns would result in cancelled orders and reduced demand for components. At the same time, the semiconductor industry’s focus shifted from feeding traditional markets to catering for exponential growth in demand for medical equipment parts and consumer products. While broader markets were put on hold, supply chains were initially switched toward producing essential items that would help the medical sector to treat patients and save lives.
Unpredictable strains occurred in meeting this new demand that were beyond the control of manufacturers and suppliers, such as reduced air freight capacity, the cost of transporting containers rising by up to 10 times, and even difficulties transporting components within countries following the implementation of regional lockdowns. As the pandemic swept across the globe, the general consensus was that a slowdown in the traditional semiconductor market would result in surplus stocks of components with nowhere to go.
What we didn’t know
As a situation on this scale had never been experienced before, it was impossible to predict the immediate and long-term changes that would ensue. The universal instruction to 'stay at home' implemented across most of the developed world created a new mass digitisation market that generated immediate need for high-end products relating to remote working and home entertainment. In turn, this development led to an increase in demand for reliable connectivity, adding greater pressure on the need for delivering 5G and its associated infrastructure.
The initial uncertainties that had hit markets, caused in part by the assumption that the pandemic would present relatively short-term difficulties, gave way to the realisation that what began to be called 'the new normal' was in fact a long-term situation against which plans could be made. With hundreds of thousands of businesses able to liaise with a home-based workforce, activity within the market increased and a new-found confidence returned, with surplus component stock swept up by manufacturers of high-end products to support this sector. Uncertainty was replaced by buoyancy and even expansion, with optimism at levels not seen for three or four years. There was simply no way that this could have been predicted.
Bob Swan, CEO of Intel, summed up the sector’s need for a re-think when he commented: “We are witnessing what will surely be remembered as a historic deployment of remote work and digital access to services across every domain, including medicine, education, government, entertainment and more.” He added that digitisation of services would increase “as the creativity of a massive work-from-home population gets rolling”.
GDP falls, the market grows
Traditionally, performance of the world’s semiconductor market has mirrored the global behaviour of GDP. However, while the pandemic created a massive global dip in GDP, the worldwide market for semiconductors grew by 5.4% (2020).
The future looks promising, with market reports suggesting future growth beyond just semiconductors. A report by Research and Markets forecasts that the test and measurement equipment market globally is expected to grow annually by 3.7% over the next five years, reaching a value of over USD $30bn by 2026. A separate study by Technavio predicts that the passive component market in 2024 will have grown by nearly USD $12bn while MarketWatch estimates the global single-board computer (SBC) market will expand by more than 12% within the next six years.
These are impressive figures and echo growth in the semiconductor market which has broken free from its usual pattern of following global GDP movement for the first time. Growth is looking healthier than it has in many years as semiconductor suppliers continue to feed an expanding new customer base. Industry experts now believe that there will be no going back to what was the status quo.
Supply chain reality
To counter this unexpected optimism and expansion (after months of uncertainty and even tension in the marketplace), the reality is that significant supply chain challenges will remain in the market. As traditional semiconductor customers have turned production back on, they have found that supplies of key components are not there waiting for them.
Automotive and industrial industries, for example, now find they are having to compete with semiconductor suppliers’ new – and more profitable – customers in growing markets which have more than offset any drop-off in demand for components at the beginning of the pandemic. The BBC called it a “perfect storm of chips shortage”, exacerbated by some telecommunications companies exhausting stock by placing huge pre-emptive hoarding orders during the pandemic.
What did we learn about managing supply chains?
There is no doubt that the global shortage of electronic components has been a wake-up call for many in the industry, and for governments. The wisdom of relying on specific suppliers in countries halfway around the world has already been questioned. While it’s not expected there will be a major move away from sourcing components from Taiwan and China, some countries such as the US are looking to increase their indigenous manufacturing capabilities. The aim is to supplement current resources and offer protection should another crisis hit external supply chains.
As well as diversifying sources of components with multiple vendors, in multiple regions, buyers of semiconductor products can move forward and avoid similar crises by adopting a few key practices, such as always having purchase orders in place for essential components and where possible, dual sourcing options. Likewise, the sector at large now knows how vital it is to ensure an entire bill of materials is always available to eliminate the risk of holding costly stock that cannot be used due to the unavailability of one component. This can be achieved by placing orders with broad-line suppliers for 80% of components required and staying close to these suppliers to check on the status of deliveries from up to three months in advance. High-service distribution can then play a key role in the supply chain, by providing flexibility to ‘top-up’ volume as needed when final required volumes become more certain, in the knowledge that critical components can be delivered from stock as quickly as the next day.
Buyers should also survey all points of a supply chain to ensure they are being managed effectively and review contracts with manufacturers and distributors to ensure they offer maximum protection during a crisis. Finally, and possibly most importantly, it should never be assumed that reduced demand in one market means that components will still be there when demand comes back – new, bigger markets could emerge rapidly.
The COVID-19 pandemic accelerated trends toward mass digitisation in a manner that has fundamentally, and permanently, changed the semiconductor market. While Farnell could not have predicted these market changes, its overall structure and policy of investing heavily in stock availability has enabled its customers to mitigate many of these unforeseen issues.
Farnell has more stock available in its warehouses than ever before, enabling customers to have better access products during the pandemic, with components shipped from the UK to Europe and the Americas in three to four days. As Farnell is a fully authorised and fully franchised distributor, customers knew that only genuine manufacturer products would be supplied. Peace of mind was also guaranteed because Farnell offers from a single source what other distributors provide separately, a unique on-board off-board product offering and an online-offline service that combines traditional sales with an industry-leading digital platform.