The electronics industry is on the cusp of a worst-case scenario.
As an electronics manufacturing services (EMS) provider with a holistic approach to Lean manufacturing, we’ve fully bought into the benefits of a digital supply chain in the era of Industry 4.0. But as a long-time supply-chain manager, I’ve also seen the negative impact that can come when supply-chain professionals have a better relationship with their computer terminals than with their counterparts at component manufacturers.
A pure electronic data interchange (EDI) model works well for projects that are up and running, assuming no constraints. The challenge comes when component demand exceeds capacity. Initially, lead-times stretch out. Again, not terribly challenging to projects with predictable demand and an established supply-chain pipeline. New projects, projects with unexpected spikes in demand, projects with obsolete parts and projects moving among suppliers may feel the impact though. When allocation sets in, everyone feels pain because sending a pull signal, even for components that already have a bond established, doesn’t mean that number of components will automatically be delivered in previously agreed upon timeframes.
Industry 4.0 has a solution for that as well. Companies double- and triple-book orders to ensure the amount they need will be delivered. Component manufacturers understand this and move more slowly to increase capacity because they can’t tell how much demand is real and how much are orders that will be cancelled in a normal market.
This pattern of behavior is about to deteriorate to a worst-case scenario. Over the past year, lead-times for passive components such as resistors and capacitors have been getting unusually long because demand for these parts has grown faster than component manufacturer capacity. For example, a quick snapshot taken in August of availability of 1,064 passive components in my company’s supply chain indicates that 255 have lead-times of at least 26 weeks; 190 have lead-times of at least 32 weeks, and 96, or almost 10%, have lead-times of at least a year.
The math gets worse. According to various news reports, as many as 500,000 vehicles were waterlogged by the flooding with Hurricane Harvey. Those with insurance will want replacement vehicles, and those without insurance will likely buy spare parts to keep what they have running. Additionally, it has been reported that 100,000 homes in the Houston area received some level of water damage, and 30,000 to 40,000 of those homes are total losses. That means high demand for appliances and all the home conveniences that require electronics to run. Construction crews will be working overtime, and the demand for power tools, measurement equipment, drones, tablets and laptops will increase as well. And passives are part of all these products. In short, we are about to see an unimaginable spike in demand for commodity parts that everyone needs. I wish I could say that was the end of this, but as I wrote this, Hurricane Irma was a Category 5 storm tracking toward Florida, and another potential hurricane was right behind it. In short, the demand spike will get worse before it gets better.
Industry consolidation has exacerbated the problem because when component suppliers merge, a bill of materials (BoM) that had multiple sources for each part may suddenly have many sole-sourced parts.
What do OEMs need to do to decrease the risk of supply-chain disruption?
First, talk with your engineering team. At Firstronic, we regularly see BoMs with obsolete parts, or parts that have not been recommended for use in new designs due to the point they have reached in their lifecycle. Take any advice contract manufacturers, distributors or component suppliers offer on best availability when it comes to parts selection. Pick parts that are easy to cross-reference.
Second, go back to building relationships with your component suppliers. Case-in-point: We recently had difficulty getting a part for a new program because one component supplier thought the increased orders were an attempt to game the system. The issue was resolved when we provided detailed documentation for the vehicle platforms that the components were being supplied to, but this never would have been an issue had there been a stronger relationship between OEM and supplier that gave the latter better visibility into new programs.
The demand spike will get worse before it gets better.
Third, avoid specifying unique parts wherever possible. Component manufacturers that make parts for specific programs rather than the general market are experiencing capacity constraints at the subcontractors that fabricate their parts.
Finally, recognize this is an industry-wide problem until capacity increases, and component manufacturers are unlikely to increase capacity to a level that won’t be impacted by the spike in demand related to Harvey and Irma. Good forecasts and an approved vendor list (AVL) focused on sourcing flexibility are the best options for addressing this.