Author: Adam Fletcher, Chairman of the Electronic Components Supply Network (ecsn)
Adam Fletcher, Chairman of the UK’s Electronic Components Supply Network (ecsn) and the International Distribution of Electronics Association (IDEA), welcomes the great collaborative strides that have been made in the electronic components supply network, particularly over the past few years of severe market turbulence and components shortages.
Collaboration, flexibility, and good humour has mitigated many potential supply difficulties and fostered a willingness throughout our industry to share problems and seek amicable resolutions. In this issue of Procurement Pro, however, Fletcher reports on a different procurement strategy that now seems to be gaining traction in the electronic components market. Some customer organisations are today turning their corporate backs on cooperation and are aggressively seeking short-term advantages to the detriment of their supply network partners.
The end of Q’2 2024 saw the global electronic components market reach an inflection point, where supply and demand became balanced (albeit probably for a short period only) and embarking on a slow and probably oscillating sales revenue growth trajectory. Stronger consistent growth looks set to return in the first half of next year. These trends are reflected in the graphic, which shows the performance of the European electronic components market over the past three years. Conversely, the dynamic shortages of a very small and constantly varying number of electronic components that we’re currently experiencing looks set to continue, at least for the next 12-to-18 months.
Visceral?
Currently, the electronic components supply network is operating in an ‘indigestion’ phase with excess inventory being held right across the network, but this is rapidly beginning to change. The unpalatable medicine of rescheduled customer deliveries and cancelled orders, compounded by component manufacturers reducing output and the steady consumption of customers’ in-house inventory that component manufacturers and their authorised distributors have had to take, is doing the job and overall industry inventory indigestion is markedly reducing.
Much of the ongoing dynamic shortages of some components can be put down to poor industry demand forecasting and lack of good market visibility over the past two years. Without these reports to guide them, components manufacturers have little idea which components are in short supply until customers – via authorised distributors – place their orders. And even when customer orders are accepted component manufacturers may still be reluctant to commit to production until their economies of scale targets are met.
Differing procurement strategies
All organisations have a range of procurement strategies and goals and frequently modify them in line with the changes they need to make to continue to operate successfully in their particular market sector.
Tier 1
Tier 1 organisations generally have direct Board level representation overseeing their procurement/supply chain function. These executives are privy to highest level commercial discussions relating to pricing, inventory holding, preferred suppliers, global procurement strategies etc., and are able to directly influence organisational decision making. They will of course be looking to make ongoing reductions in overall costs but are primarily focused on achieving reductions in the organisation’s ‘total acquisition costs’ rather than individual unit prices.
It’s not unreasonable to say that the procurement strategies of Tier 1 customers have over the last 40 years or so been greatly influenced by the size of the monthly cheques they send to their suppliers, many of whom became ‘captive’ (wholly commercially reliant) on their business. When a Tier 1 customer said ‘jump’ the only acceptable response from one of these suppliers used to be ‘how high?’.
More recently, Tier 1 customers in the electronic components supply network have been forced to completely re-evaluate their supplier engagement model resulting in much tighter alignment and greatly increased collaboration between them, components manufacturers, and their authorised distributors. This has proved highly advantageous, enabling customers to better control their ‘supply chain’ and ensure that their production systems operate with a minimum of supply disruption
Tier 2 & Tier 3
Sadly, in the last couple of quarters, it seems some Tier 2 and Tier 3 customers have adopted a more combative procurement strategy in place of collaboration with their supply partners. I suspect the primary driver behind the change is a Board-level mandate to achieve across-the-board cost reductions come what may. Tier 2 and Tier 3 organisations maintain little procurement representation at Board level and merely include it among the responsibilities of either the Manufacturing or Finance Director, so there is little scope to add ‘supply context’ to Board Room discussions.
Inventory reduction
Since the COVID-19 pandemic most customers have added significantly to their in-house inventory holding in order to satisfy the demands of their ERP systems. It’s understandable that they need to ‘burn off’ this inflated inventory and account for the ‘speculative’, if inappropriate, purchase decisions that they took. Manufacturer Authorised Distributors have made every effort to bring the overall supply network back towards equilibrium by re-scheduling deliveries and cancelling obvious overordering by their customers, but where customers have signed
‘Non-Cancellable’ and ‘No-Return’ agreements’ with their suppliers at the behest of the components manufacturers (who were desperately seeking to regulate uncontrolled customer demand), this flexibility has not always been possible.
Pricing and supply
Tier 2 and 3 customers are understandably concerned about the pricing their regular suppliers put forward on long-term contracts, especially when they compare the figures to some of today’s ‘spot market’ pricing. The current ‘indigestion’ phase’ with an ‘inventory overhang,’ has created a need for manufacturers to dispose of inventory via brokers, so an alternative vendor might well be able to offer a customer a component at a lower spot price but as the ‘inventory overhang’ gets consumed and with the market changing as rapidly as it is, these vendors are very unlikely to maintain bargain-basement pricing for very long and seeking a combative, short- term financial gain might threaten existing long-term supply agreements and supplier goodwill.
Collaboration is better: established supply network partners will always seek to maintain goodwill all-round and can often propose ways to mitigate or offset price discrepancies.
Good or bad strategies
Procurement strategies vary from customer to customer and no external observer can possibly declare any particular strategy to be good or bad due to the numerous unknown variables in the decision-making processes. However, based on my observations of the electronic components supply network and the procurement strategies customers have advocated over the past twenty years or so, I’m certain that ‘collaboration’ between buyers and sellers rather than ‘confrontation’ is the best way to achieve progressive, incremental long-term improvements for both buyers and sellers. Whilst most European, US, and Japanese culturally also seek mutual ‘Win-Win’ solutions it’s often not the case in Asia, particularly in China, where buyers culturally seek a ‘Win-Lose’ outcome that can have the (intended?) consequence of destabilising their supplier. However, like all good Khama ‘what goes round, comes round’ and this situation is slowly beginning to change.
Concluding thoughts
As we move into 2’H 2024 and then quickly into next year and beyond, I encourage all Systems Integrators, however powerful and influential and particularly their procurement teams, to play their part in helping mitigate future supply and demand imbalances by engaging in honest, open and frank collaboration up and down their supply network. Initiatives such as accurate and timely requirement forecasting costs little but delivers much to the competitive advantage of all parties in the supply network and in addition, benefits the wider economy.
This article originally appeared in the September issue of Procurement Pro.
