With the unprecedented, once-in-a-lifetime disruption of the supply chain for electronic components in the rear-view mirror, the market is finally beginning to stabilize. Over the past few years, manufacturers found many critical electronic components hard to come by, watched as prices skyrocketed and lead times extend to almost a year in traditional distribution channels.
With hard-earned lessons from the pandemic, many manufacturers are looking to secure their supply chain and prepare for what will be inevitable disruptions in the future. At the same time, they want to do so at reduced cost and capital outlay after paying a premium for electronic parts over the past several years.
“We just went through one of the biggest supply chain disruptions in history outside of a world war,” says Mike Thomas, who is VP and global general manager at Classic Components. “Now, things are starting to settle down. Interest rates have risen sharply, which has slowed the economy and demand is down. However, the supply chain is still highly vulnerable to present and future disruptions.”
Covid related supply chain shortages are not the only disruption to affect global manufacturers in recent years. In 2018, there was a worldwide shortage of multi-layer ceramic capacitors (MLCC) when demand outpaced supply. Even now, there are components in short supply due to the limited number of suppliers, geopolitical trade tensions, and ever-changing technology.
As a result, manufacturers are taking steps to secure the supply chain over the long run. One of the key strategies is to be less dependent on China and more diversified in sourcing the electronic components they will need to manufacture their products, according to Thomas.
There will also be a continued role for independent distributors. When authorised distributors were not able to supply the required parts, independent distributors stepped in and played a critical role in helping keep many manufacturers’ production lines running. Independent distributors can leverage their strategic relationships to find alternate sources through regional authorised/franchised distribution, manufacturer direct, or surplus/excess inventories.
According to Thomas, many manufacturers are sitting on excess inventory due to stockpiling parts and ordering from multiple sources to ensure delivery. After having to pay exorbitant prices over the past three years to secure parts, many manufacturers are also looking for ways to reduce costs further, even as prices drop. Some are looking to take advantage of financial services that some independent distributors provide to minimise cash outlay while ensuring access to inventory.
Reducing Excess Inventory
When manufacturers faced tremendous lead times on parts, many double, triple, or quadruple ordered since they did not know who was going to deliver first, according to Thomas. “Now that all these parts were delivered, some manufacturers have excess inventory and aren’t sure what to do with it.”
If it is true dead stock, a distributor like Classic Components can help liquidate the components and get them off the books through various types of arrangements initiated with a simple email list of surplus items with the original price paid.
Classic Components then searches its extensive database to see if any other customers use those parts and can broker a deal between the parties.
“We have a global customer base and lots of information about the materials they use,” says Thomas. “So, if a manufacturer has excess inventory, we hopefully can find an opportunity to sell it to one of our other customers.”
Classic Components can also list and sell surplus inventory on consignment with, or without, taking physical possession of the inventory.
“We offer complete transparency throughout the consignment process. As we receive inquiries, we share the information so you can decide whether to sell [your surplus] at the offered rate,” says Thomas who adds that they may even opt to purchase the inventory outright to resell it later.
With high inflation manufacturers are also looking to reduce the expense of procuring parts. Some independent distributors have found ways to lower the cost of parts by leveraging their global relationships and with offices all over the world they are not bound by regional price constraints. With a comprehensive global network, the independent distributor can make purchases in local markets that currently offer the lowest prices and pass the savings to their customers.
For example, Classic Components has established 12 regional offices in strategic locations throughout the world to support its global distribution business and its buyers have developed a knowledge of regional supply chains with the expertise to find and manage quality component suppliers.
“By using regional quality centres and logistic hubs, we have the flexibility to purchase components from any country, in any currency, and then ship them to anywhere they are needed,” explains Thomas.
Customised Financial Services
Manufacturers may also seek financial or logistical services when their cashflow is constrained or they want to optimize their working capital.
In some cases, they can even make speculative purchases for a customer and/or provide financing to purchase inventory when a qualified client has capital constraints.
To improve manufacturers’ cashflow, independent distributors can offer tailored programmes of vendor managed inventory, which can simplify logistics, reduce the total cost of ownership, and enable the redirection of capital to other spending categories. In some cases, they can even make speculative purchases for a customer and/or provide financing to purchase inventory when a qualified client has capital constraints.
While the specifics of any financial services arrangement will depend on many factors, the framework is always to facilitate a mutual benefit.
Protecting against future disruptions
Thomas asserts that the up-and-down nature of the market means manufacturers need to prepare today, for whatever will come next.
“What happens in a year when the authorities decide to lower interest rates?” says Thomas. “There is still an incredible amount of pent-up demand. When the economy begins to return to normal it may not be like it was during covid, but a spike in demand will cause [electronic component] shortages again.”
Another factor that could affect the supply chain in the reshoring effort spurred by the passing of the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act). “They may not be saying it, but parts built in the United States are going to cost more than the parts from Taiwan. It will start to affect pricing structures at some point.”
To combat this and any other future market volatility, Thomas advises partnering with a flexible independent distributor that can provide services authorised distributors cannot.
“You want to have that relationship with a partner that is flexible enough to shift gears in a moment’s notice,” explains Thomas. “You may be in shortage mode on Monday, and then Tuesday, you have excess and want help selling it. Then on Wednesday, you decide you don’t want to sell any more and prefer we loan you money against it.”
Flexibility also involves a level of customisation because no two deals are the same. “An independent distributor has to be flexible enough to adjust to whatever the manufacturer’s specific requirements are,” says Thomas.
With the market seemingly in continual flux, the only constant may be change. When manufacturers seek to successfully adapt to whatever comes their way in the market, partnering with a flexible independent distributor that can cater to their specific needs may be the best bet to survive the next supply chain disruption.