In the ever-evolving landscape of global supply chains, procurement professionals are continually facing new challenges and opportunities. As we step into 2024, these dynamics are becoming more complex and crucial than ever.
Procurement Pro’s Paige West had the opportunity to speak with Ryan Jacob, CEO, Sourceability to gain insights into the current state and future outlook of procurement.
Sum up the challenges that manufacturers have faced in 2023. What do you think has been the biggest challenge?
Looking back at the lead-up from 2021 into 2022, and particularly the peak around Q3 of 2022, the industry faced massive shortages. These weren’t your typical shortages confined to a product type or specific manufacturers. What we saw in 2021 and 2022 was widespread. Virtually every manufacturer and Original Component Manufacturer (OCM) experienced some constraints in their portfolio. This caused massive headaches, especially for the consumer side – the Original Equipment Manufacturers (OEMs) and the Electronics Manufacturing Services (EMS) companies that we supply to. They struggled to locate products that were suddenly unavailable due to these widespread shortages.
The root of these issues can be traced back to the COVID-19 pandemic, which initially forced a low demand, leading OCMs to reduce capacity at their fabs. And as you might know, semiconductor fabs aren’t like light switches; you can’t just turn them off and on. So, when the demand started to rebound, the industry just wasn’t ready. By the time everyone realised what was happening, our forecasts were already out of sync, leading to supply shortages.
Fast forward to 2023, or rather last year, we saw a correction where capacity finally began to catch up with demand. This was partly due to a slight reduction in demand in sectors like the EV market, which remained relatively stable, but in other sectors like automotive and industrial, we still saw strong demand. The broad spectrum of demand stability led to a real challenge. As OEMs built up capacity, they pushed this supply onto buyers, working on the assumption that the forecasts would remain stable. This, unfortunately, led to an overstock of inventory that we’re now trying to work through.
How would you say these challenges have impacted the decisions made by procurement professionals?
For procurement professionals, the balance of managing inventory levels has been the key challenge. During the recent shortages, many customers resorted to double or triple buying, thinking it would somehow expedite their orders. Unfortunately, this approach didn’t work as expected.
As the supply caught up, they were forced to take on additional inventory that they weren’t consuming as rapidly as they needed to. Now, we’re going through this process of bleeding through the excess, which I anticipate should be resolved by the end of Q2 this year.
So, what we’re seeing now is companies grappling with the challenge of managing this excess inventory while still needing to intake additional items essential for their product manufacturing. It’s a delicate balance, and many are still in the process of determining how aggressive they need to be with their orders in the second half of the year.
As they navigate through this, they’re enduring the pain of managing their inventory while ensuring they have the necessary components to continue production. It’s a challenge, but one that is essential for maintaining the delicate balance in the supply chain.
How might ongoing geopolitical tensions effect the electronics component market in 2024?
We’re seeing a shift in manufacturing, with builds migrating from certain countries back home or to more politically aligned and stable regions. I’ve noticed that some of our customers are now avoiding parts made in China due to tariff issues and the uncertainty of the political climate. They are actively seeking alternatives.
The ease of finding these alternatives varies with the type of product. For simpler products like passive components, it’s relatively easy to find drop-in replacements. However, sourcing alternatives for more sophisticated products is not as straightforward.
The tensions between the US and China are creating more opportunities for onshoring in Western markets. For instance, we’re seeing more critical applications being moved back onshore, primarily due to their essential nature. You might have read about major companies like Apple shifting their manufacturing strategies, reducing their reliance on China, and exploring other countries like India to diversify their manufacturing bases. China remains a powerhouse in manufacturing, but the current geopolitical landscape has highlighted the risks of concentrating all production in one region. It’s becoming increasingly clear that having a more diversified manufacturing strategy is prudent, especially in these uncertain times.
What impact would you say the rising interest rates are having on the market?
It’s huge. For a long period, borrowing money was almost free, but that’s not the case anymore. I’ve seen firsthand how this shift is influencing financial strategies and balance sheets.
When money was cheap, companies could afford to hold larger inventories without significantly affecting their financial metrics. However, with the current higher interest rates, this strategy is no longer viable. As a result, our customers are increasingly looking for flexibility in how they manage their inventory. They’re adapting to these new financial conditions and seeking ways to handle inventory issues more efficiently, without the financial strain caused by the previous era of low-cost capital. This change is reshaping how businesses approach their operational and financial planning.
What applications do you foresee driving demand in 2024?
Firstly, we’re currently seeing an inventory burn, which I expect to continue over the first half of this year. This phase is crucial for balancing the market. Following this, I anticipate a recovery in the second half of the year, leading into 2025.
Looking ahead, I foresee pockets of shortages emerging in 2025. This is primarily due to the resurgence of demand in certain sectors. The electric vehicle (EV) market, for instance, remains robust, and the industrial sector continues to show strong demand. Additionally, the consumer sector is making a comeback, though it’s important to remember that this is a cyclical business.
In my view, the industrial market will continue to be one of the main drivers of demand. Moreover, given the ongoing geopolitical tensions, the military and defence sectors are also expected to be significant contributors to market dynamics.
Finally, what’s your one bit of advice that you’d like to offer procurement professionals for 2024?
In an ideal world, it would be great if companies could just buy everything they need and have it readily available, but the reality of balance sheets doesn’t always allow for that.
The key, I believe, lies in harnessing the power of data. There’s an abundance of data available today, offering insights into market trends and future directions. Navigating this wealth of information to form a coherent strategy is a task in itself. There’s so much information out there, and the challenge is filtering through it to build an informed opinion. Without leveraging these tools and data, companies risk finding themselves in the same predicament they were in during 2021 or 2022.
It’s vital to keep open lines of communication with suppliers and to embrace the available data. While not all of it may be accurate, there is enough to glean valuable insights and develop a sounder strategy. This approach is essential in navigating the complexities of the market and ensuring a company’s procurement strategy remains resilient and adaptable.
It’s been a complex period, but it’s these challenges that drive us to innovate and adapt in our industry.
This article originally appeared in the February issue of Procurement Pro.
