If you’ve operated “business as usual,” hoping that the global electronics components shortage would end soon, it’s time to rethink that strategy. A tough situation is becoming even tougher to navigate.
A Fabrication Shortage
The shortage was caused by a classic case of demand far outstripping supply. Think back about a decade ago to the Great Recession. Suppliers were left with lots of inventory when demand dried up, seemingly overnight. Those same suppliers have operated out of an abundance of caution ever since, not believing orders, or demand, when it appeared.
Back to today. We are experiencing a global innovation boom with connected gear in everything from clothing to consumer electronics to automotive manufacturing. This surge shows no sign of slowing. In fact, data indicates that the need for electronic components is growing exponentially.
The problem is, they can’t be manufactured quickly enough to keep up with demand. This is not a material shortage; it’s a fabrication shortage. Components across the board are going out of stock — small commodity type capacitors and resistors, as well as custom integrated circuits (IC) which are more complex and have longer lead times. There are lead times of 20 weeks on some basic parts.
Recently, reports of customers double-ordering components further fueled lead time anxiety, and there is a growing concern that electronics components could become a pawn in the trade debate.
Soon after the Trump administration slapped tariffs on aluminum and steel imports, China threatened to place duties on U.S. exports including electronics—though they have yet to pull the trigger.
“In today’s digital world,” read a statement from the Electronic Components Industry Association, “nearly every industry utilizes electronic components and the supply chain for such components is globally interconnected and complex. As a result, the imposition of tariffs on electronic components will have global consequences for businesses and consumers alike, adding friction and costs to the supply chain that can hinder economic growth for all involved.”
With all the brinksmanship and uncertainty, what can customers do to make it through?
1. Don’t panic. Human behavior can be unpredictable when it comes to shortages, as the website Hackaday describes. There’s always a tendency to want what we can’t have even when we don’t really need it. And that’s especially true when we see other people getting it. Ordering managers need to have ice water in their veins at times like these, and very good forecasting skills. The key isn’t to overbuy or panic-buy. The solution is to create an accurate forecast based on your sales data, then stick to it, even when you think that competitors are not sticking to theirs.
2. Get real. Maintain realistic expectations of the capabilities of your contract manufacturer and their suppliers. Though this varies by component type or manufacturer, we have seen many parts with six month lead times, some extending out to a year. If your part or product requires electronics, it’s going to take longer. End of story.
3. Right size. Ask yourself: Are you getting the attention to your needs and flexibility of supply chain options that fit your business volumes? Or are solutions geared to much larger or smaller customers? Red flags should go up if your phone calls or emails aren’t being answered in a timely fashion, or your suppliers just don’t “get” what your deadlines and specifications are (and don’t’ go the extra mile to meet them.) If you’re a small company working with a large supplier or contract manufacturer supplying large companies, you’re not their top priority. Look for a supplier that will make you a top priority.
4. Set up agreements. The time for a solution is before you have a problem. If you don’t have them already, it’s time to put supply agreements in place. What sorts of options does your supplier offer to help you manage your orders?
Set up a time to talk to your customer service representative at the supplier to find out what they can do to help you. Keep an open mind and be willing to listen to their ideas. Then create written authorizations that allow your supplier to purchase long lead time components in advance. You will assume financial responsibility, but it’s better than running out of critical components.
Remember: You’ll rarely need to advance order all the items on a circuit board, just those that have the longest lead times.
5. Leverage relationships. Do you have an existing relationship with a specific supplier of a difficult-to-get component? If you work with a contract manufacturer, make sure to let them know. They might be able to leverage that relationship to get the component more quickly. You may also have better terms than a contract manufacturer—for instance, your global pricing agreement with that component supplier might help bring a lower price.
6. Stay prepared. This isn’t the first time there have been long delays for components, and it won’t be the last. Maybe you’re in OK shape, but if that’s the case, use this time to build an even better ordering system that can stand up to supply chain shocks. The tools you’re using right now—vendor ordering agreements, ordering and purchasing using longer lead times—should be considered standard operating procedure. You can always adjust down, but if your system is already in place, you’re prepared for almost whatever comes your way.
If you create your process now, during the crisis, the agreement is already in place. Then you maintain it and adjust what’s on the list. When lead times go down or if lead times for certain parts go up again, you can react quickly. The customer just gives approval if needed, but the hard work is already done. It’s like anything. You can react, or you can respond.
Although the industry is still in “crisis mode,” it needs to focus on the future. How do we get in a better position, to prevent this from happening whenever the next cycle comes? How do we mitigate that proactively?
Business as usual in the electronic components industry may still be a long way off, but with an understanding of what caused the components shortage and a plan of action to mitigate the effects, you can successfully ride out the worst of the crisis and hopefully come out ahead of the pack.
Steven Lustig is vice president of engineering at East West Manufacturing, an Atlanta global contract manufacturer of components, sub-assemblies, and finished goods for OEMs and distributors.