The surge in artificial intelligence (AI) applications throughout 2023 triggered unprecedented demand for the components that power them. The notable moment in the AI market shift was the launch of ChatGPT. This had an immediate impact on the consumer electronics industry, which then cascaded into personal computing, automotive, aerospace and defence, contract manufacturing, and others. The market is now saturated with demand as all these industries are vying for the same electronic components to support AI applications.
A report from 650 Group stated that, “AI/ML will be disruptive to all verticals but at different times projected over the next decade.”
This evolving technology shows no signs of slowing down. Forecasts indicate that the current supply and demand imbalances will not slow in the wake of this AI boon. The question is – how will procurement teams strategically navigate the AI effect?
State of disruption
650 Group’s data indicated that AI, machine learning (ML), and high-performance computing (HPC) network bandwidth will see over 100% growth each year. However, this extraordinary growth has come with a unique set of challenges.
2023 brought a sudden wave of demand from AI customers, colliding with reduced production capacity amongst key component suppliers. This caused an imbalance between supply and demand and resulted in skyrocketing prices. By the end of the year, solid-state drive (SSD) costs were changing daily, and manufacturers were pushing customers to sign long-term agreements to receive priority allocation. As lead times expanded to a minimum of six to eight weeks, server customers turned to the open market to secure continuity of supply. However, cost savings opportunities were consequently limited as demand became widespread.
Nvidia, a primary AI technology manufacturer, and its competitor, Advanced Micro Devices (AMD), are still experiencing declining graphics processing unit (GPU) inventories. Similarly, memory module and SSD manufacturers like Samsung, SK Hynix, and Micron have also felt the pressure of mounting demand, as availability and pricing have fluctuated significantly between December 2023 and January 2024.
These manufacturers’ components are vital to data centres and deep learning servers, which serve as the infrastructure that supports AI’s applications and workloads. With prices for SSDs likely to continue increasing throughout Q1 of 2024, the chance of constrained supply is now a looming reality.
Sourcing strategies for proactive procurement
“Amid the boom of generative AI, distributors encourage manufacturers and companies to think strategically to source the parts they need for the short and long term,” says Fusion Worldwide President Tobey Gonnerman.
Learning from the 2023 trends in the AI market will lead to more strategic business decisions in 2024. Employing proactive procurement strategies now will enable you to traverse supply chain turbulence better, regardless of industry or vertical. Here are a few tips on how to move with the market and adjust to AI’s continued growth.
- Expand your vetted supplier network. Establishing a diverse network of global suppliers and cultivating long-term relationships with those partners gives you a significant advantage. Adding a trusted independent distributor widens your range of vetted sourcing partners, protects your supply chain against the risks of market fluctuations, and allows you to identify and acquire components from alternative sources quickly.
- Maintain a comprehensive view of your supply chain. Supply and demand trends are in constant flux, necessitating contingency plans to prevent current and future out-of-stock issues. This is especially important if you purchase buffer stock. Optimise inventory levels and your approach to procurement by utilising a comprehensive inventory management system and professional demand forecasting knowledge.
- Strengthen your business through data. AI and the semiconductor industry maintain rapid innovation cycles, making market intelligence an essential resource to keep up with the lifecycle of components. Market intelligence serves as an indispensable cornerstone, enabling proactive sourcing strategies within the dynamic landscape of the electronic component industry. You are better prepared to navigate and respond to potential supply chain risks by analysing industry trends and recognising emerging component technologies.
Understanding and preparing for the AI effect
The AI market has activated numerous opportunities for growth within the electronic component industry and will continue to do so as technology pushes innovation to new heights. The applications for AI expand beyond personal and enterprise computing, as other industries like automotive, gaming, and healthcare are already researching ways to integrate AI into their newest products. While AI’s potential seems exponential, it will bring many new challenges if procurement teams are unprepared for the ripple effect of shifting demand.
Managing the inevitable supply chain shortages accompanying this pace of change requires a combination of multi-supplier cooperation, risk mitigation strategies to ensure continuity of supply, and data-driven decision-making.
This article originally appeared in the February issue of Procurement Pro.
