Stop being an ostrich, electronic component shortages are real

I know, I know, you don’t want to hear that the price of components are going up. Or that lead-times are extending by the day. And of course, that’s assuming the supply chain has been able to quote a lead-time in the first place.

No, it’s much easier to ignore all those e-mails and phone calls from your supply partner until they sort everything out and things are back to normal.

But I’m afraid I have some bad news.

The electronic component market is in poor shape (again) and the sooner you face this fact, the sooner you can put plans in place to mitigate the risk to your business.

As we rapidly head into May 2018 electronic component shortages are once again causing Original Equipment Manufacturers (OEMs) and Electronics Manufacturing Services (EMS) providers a real headache.

In this blog post we take a look at the current state of the market and share with you 7 ways in which you can work closely with your EMS provider to make the best out of a bad situation.  

As an OEM it’s easy to lose touch with what’s going on in the component marketplace - particularly when you have taken the strategic decision to outsource all of your manufacturing to your EMS provider. But wasn’t that one of the original benefits of outsourcing in the first place? You got to hand over full responsibility for the supply chain and any issues associated with it?

Well, you’re right, relinquishing control of material procurement is a huge benefit of outsourcing. But when supply challenges occur there will be times you need to work closely with your EMS provider and component shortages due to allocation is certainly one of those times.

The current situation

The electronic component market is becoming increasingly difficult in terms of stock availability, and the ability for suppliers further down the chain to maintain pricing over longer periods of time. Unfortunately, this is an industry wide problem and not just affecting a handful of suppliers or product lines.

Memory, especially NOR and NAND Flash, has been an ongoing issue for at least 18 months with little improvement on conditions. We have also seen device manufacturers cancel ‘Last Time Buy’ stock that had been on order for over 6 months. Not good. 

In addition to memory product, other commodities are now following this trend, with entire product families on allocation, price increases being advised at point of shipping and extended lead-times on most lines. 

Perhaps the most concerning issue of 2018 so far, is the lack of availability of chip capacitors and resistors. These are no longer widely available as ex-stock items, be it from high service suppliers such as Farnell, or from authorised distributors, like Anglia and Arrow.

As common value chip resistors and capacitors are integral to most printed circuit board assemblies (PCBAs), it’s hard to believe they are no longer readily available in significant quantities. And what once used to cost less than a penny has already reached double digits in some cases.

Working closely with your EMS provider

Hoping to escape electronic component allocation by simply ignoring this issue is a risky strategy.

It’s therefore important to work closer than ever with your assembly partner.

Here are 7 ways in which you can help them:

1. Share your demand forecast as far out as possible so that your EMS provider can replicate your component demand with their supply chain partners. If you only give your EMS provider short term visibility of your requirements, they might not be able to secure the level of stock you need when you place your next set of orders which will impact the overall lead-time back to you. 
2. Respond to price and lead-time issues quickly. Unfortunately, what little stock is currently out in the marketplace can go within minutes. If your EMS provider identifies a source of stock but needs you to agree up front to a short term price increase or extended lead-time, you won’t have much time to make a decision.
3. Ask your engineering team to suggest alternative components. Some OEMs are very good at listing alternative devices on their Bill Of Materials (BOM) or separate Approved Vendors List (AVL) which makes it easy for EMS providers to explore all options when they hit a supply issue. Unfortunately some OEMs keep this knowledge locked away which can mean acceptable alternatives are overlooked. A good EMS provider will always ask if there are alternative components approved but it’s still worth asking your engineering team to review your parts list to make sure every option (documented or not) can be explored in detail when allocation strikes.
4. Make sure you keep your customers and your sales team up-to-date with what’s going on in the component market. If you or your EMS provider are unable to absorb the price increases often associated with allocation, you might need to pass them on yourself. Whilst price increases are usually unwelcome, explaining the reasoning behind them to your customer in plenty of time, can sometimes help soften the blow, or at least give them enough time to review all of their options.
5. Avoid ‘heating up’ the market by placing artificial demands on your EMS provider. This is always the advice when demand outstrips supply but unfortunately some OEMs ignore the message and continue to ‘panic buy’ which usually leads to a problem further down the line - i.e. they end up swimming in excess stock liabilities when the market bounces back which they then can't cancel.
6. Trust your EMS provider and their buying team. If you are working with a reputable EMS provider with demonstrable experience over many years they will be all over the supply chain. That doesn’t necessarily mean they will be able to magic up all the stock you need but they should have exhausted all trusted avenues. Unfortunately, after a quick search online, you will nearly always find a broker claiming to have components you are struggling to get hold of. In our experience, over several decades, this stock doesn’t exist........
7. Ask your EMS provider to re-validate their quotations, even if you have been buying the same product regularly. If you have a Service Level Agreement (SLA) in place with your EMS provider then pricing, delivery and stock liabilities should already be listed and reviewed on a monthly or quarterly basis. If, however, you place back-to-back orders against quoted lead-times then our advice is to get your EMS provider to re-quote prior to sending them an official order to make sure they can still meet your price and delivery expectations.

If you’d like to receive regular electronic component market reviews (you can read the April 2018 update here) then feel free to subscribe to our blog.

Market reviews are typically published on a quarterly basis and in the past have focused on capacity and lead-time issues, pricing, mergers and the challenges surrounding pcb supply.