Anyone who had hoped that 2024 would bring some calm to the electronics supply chain world – following the havoc wreaked by the pandemic – is going to be sadly disappointed. Laurence Dellicott, Senior Director – EMEA Supply Chain, Avnet Silica, further discusses.
From too little water resulting in smaller numbers of ships being able to use the Panama Canal, to too much water flooding factories and disrupting transportation networks, climate-change-induced environmental challenges, with all the supply chain headaches they bring, are here to stay.
Then, OEMs have to add geopolitical issues into the equation. There is the ongoing ‘trade war’ between the US and China, uncertainty around potential conflict in Taiwan, continuing wars in the Middle East and Ukraine, and attacks on Red Sea shipping.
While inflation in regions such as the USA, UK, and Eurozone has fallen from what were significant spikes, it is still higher than it was in these markets for much of the 2010s, meaning costs are continuing to rise.
It’s time to build greater supply chain resilience
The uncertainty that these and other challenges result in means that smart OEMs must strive to make their supply chains as resilient as possible. But what does this mean in 2024? What can you do, against today’s backdrop, to minimise impact on your operations when the next inevitable unexpected events occur?
Putting aside all of the complexity and nuance involved, the challenges OEMs face in their supply chains come down to relatively straightforward supply and demand aspects.
Think about modern industry. From agriculture to manufacturing and logistics, there has been a colossal rise in the number of electronic components being used. Applications such as tracking sensors on containers, automated guided vehicles in factories, and production line robotics all contribute to this demand – and that was before considering all the supporting equipment these and other technologies need to work, such as gateways, routers, and servers.
Over on the supply side, a foundry producing the silicon wafers required for semiconductors has limited capacity. Even with the best will in the world, this cannot be increased overnight. To make any significant difference, OEMs are looking at multi-year, multi-billion-dollar investments.
Moreover, supply chains have historically been kept as lean as possible, to reduce costs and optimise efficiency. Techniques such as ‘just-in-time’ production gave companies competitive advantage and boosted their profit margins. However, things have changed, and the short-term mindset that comes with just-in-time production no longer really works.
We will come to the better alternative in just a moment, but we first need to briefly explore what got us to this point, and why it needs to change.
Why we all need to think about component sourcing
Traditionally, many manufacturers would not worry about the supply of components that made up the systems they were purchasing. Say you’re a logistics business buying in a new tracking solution for your containers, to enable you to enhance your service offering to customers. Historically, you would simply tell your tier-one vendor how many units you needed and leave it up to them to think about the supply of components required to fulfil your order. However, say an upstream component supplier had a shortage. That supplier would need to consider how much product it allocates to each customer. You, as the downstream logistics provider, will have little to no visibility of this shortage until it actually hits.
Historically, this type of shortage has tended to be relatively short-term and straightforward to resolve. Because ‘just in time’ tended to work, short-term thinking has often prevailed.
A new approach
But neither this shortage of supply capacity, nor humanity’s insatiable demand for electronic components, are going anywhere. So, while it would have been easy to blame world events for the current situation, and look forward to things going back to normal, that is not realistic. The truth is that demand will continue to far outstrip supply, meaning that everyone involved in manufacturing goods that rely on electronic components needs to focus on future-proofing their supply chains, to protect against disruption.
Forward planning is part of the solution. In the automotive space, for example, we are seeing discussions happening that will ensure sufficient volumes of semiconductors are manufactured to meet demand for new vehicles in 2026. Whichever industry you’re in, by having these conversations with your own suppliers, supply chain partners, or distributors, you help anticipate and mitigate possible challenges.
But beyond this, how do you create a truly resilient supply chain that will empower you to respond effectively when the unexpected happens, not just over the next 18 months, but for years to come?
The three pillars of resilient supply chains
The key is to increase the resilience of your supply chain. Resilience is all about being able to resist, absorb, recover from, and adapt to disruption. If something happens that you were not anticipating, could you still meet your goals? Better still, could you rebound and prosper?
To build resilience into your supply chains, we advocate a three-pillar approach.
The first pillar is transparency. The further ahead you can see potential issues coming, the more time you have to react. The key for this is relationship-building. In an ideal world, you need to get to know both your immediate suppliers, and those further up the supply chain. The latter can be challenging, particularly at the moment: so many OEMs are knocking on busy suppliers’ doors asking to start these conversations. To get around this, a proactive supply chain partner or distributor is a key ally. They will have those relationships in place already and be having regular conversations with organisations all the way up the chain. Frequent check-ins with a proactive supply chain partner or distributor will give you insight into what is happening, such as new component availability, end-of-life plans, bottlenecks, and the like. Armed with this information, you will put yourself in a strong position when it comes to spotting potential problems before they bite you.
The second pillar is agility. Once you see something coming at you, how fast can you respond? If demand increases today, how soon can you get product into customers’ hands? Assuming you have the capacity to increase production, do you have access to the components you will need?
And thirdly, there is assurance. This is all about how well you are able to withstand the initial shock of a major disruption. If attacks on Red Sea shipping mean your consignment is forced to take the long way around Africa and is delayed by several weeks, what will you do? Equally, what happens if the next extreme weather event forces a supplier’s factory to close? Putting in the necessary safeguards will likely see manufacturers shifting away from ‘just in time’ to building up component reserves, ‘just in case’.
Start planning your way forward today
As with so many things in the world of manufacturing, every organisation is unique, so there is no one-size-fits-all solution to today’s supply chain challenges. Instead, these three pillars provide a framework for assessing where your supply chain needs supplementing, refining, or overhauling.
You may be comfortable with your forecasting and ordering methods, but decide to hold larger part inventories, to ensure continuity of supply. Cost of inventory will remain a consideration, of course, so an option may be to outsource your buffer inventory to a partner that is able to do this at lower cost. Alternatively – or additionally, you might feel you want to work on developing that all-important upstream visibility.
Whatever you decide to do, the time to act is now. Supply challenges around electronic components are here for the long term, meaning that historical ‘just-in-time’ approaches need to evolve. Companies that think strategically, by building greater transparency, agility, and assurance into their supply chains, will be the ones in the best position to survive and prosper, even in these turbulent times.
