Six months have passed since the first supply issues with microcontrollers arose, and production of a critical product is now at risk of ceasing. Should experts redesign the product with the available components? Should they pay a premium to other suppliers and wait for delivery of the required components in time? Or will the team of experts not be able to keep their promises of delivery to their customers?
Components will occasionally become short. The important thing is how you manage the event. The above scenario describes the typical struggles of companies that have to produce products with electronic components. The events unfold in the boardrooms of the companies and in the technical departments of their suppliers and customers.
The New Reality of Supply Chain Volatility
However, for the vast majority of industries which use electronic components, they have become a long lasting feature of the supply chain and cause problems on an on going basis. There are now items which were once available within a few weeks now have lead times of several months and sometimes even longer than a quarter. In most cases a single event at a single factory in a single part of the world can cause problems months later.
The effects of a factory shutdown of a single supplier in Southeast Asia can last for months. Then there are also the cases where a shortage causes other shortages. For instance, the current semiconductor shortage causes shortages in the automotive industry and at the same time in the medical devices market and also in the consumer electronics market. In the first place, the shortages are caused by shortages of components that were abundant a moment ago. Now these same components have become allocation items.
A product made of dozens of different components is prone to failure of a single part. And if this part is used by many manufacturers around the world, finding an alternative part in a timely manner is often not possible.
Building Buffer Strategies
It is very important to note that smart procurement teams are proactively trying to work around shortages of certain key components before they actually occur and become a problem for a company’s production schedule.
Many companies hold an inventory of semiconductors as a cost to avoid late-delivery charges. This capital can go bad quickly in today’s fast-changing products. The strategic stock of long lead time components or those single sourced (i.e. risk of supplier allocating to another customer) can help avoid these potential losses. Components that are purchased just in time and are readily available have only the cost of holding inventory against the cost of not having it on time.
To combat the problem of supplier inventory shortages, a procurement strategy of supplier diversity must be put into place. As previously mentioned, having a single supplier for a critical component puts a company at risk for delays and/or increased cost due to part allocation to a higher priority customer. By qualifying multiple suppliers for a given component, the potential risks to a company associated with suppliers’ inability to meet promised delivery dates can be mitigated. Although the cost of holding inventory for components that have been sourced from a diverse group of suppliers as well as the increased coordination efforts to manage multiple suppliers will increase, in the long run the production delays that can occur when critical components are in shortage will decrease significantly.
When Crisis Hits
Of course, there are times when even with the best planning a supply disruption will occur and negatively affect a company. The most important thing in times like these is how the company deals with the situation and tries to minimize the damage.
When a shortage occurs, it is essential that procurement and other departments are informed and that there is a good communication. The procurement team must have an in-depth understanding of the engineering requirements, production schedule and customer commitments not to be moved. Furthermore, the procurement team must receive the most honest assessment from the suppliers regarding their realistic delivery time frames. Often these are not the delivery time frames that the supplier would like to share with the procurement team and can be difficult for both parties to have the conversation.
Other alternative components may be sourced from specialist distributors or even from a component broker such as Fusion WW. However it is crucial that the procurement team are 100% certain that the component(s) purchased are 100% genuine and of the correct quality. This is particularly important when the component(s) are being procured off the Internet and under a lot of pressure to find an alternative component. It is very easy to purchase what appears to be the correct component only to find that it does not perform as required when it is actually used. Therefore the procurement team must verify that the components that they are purchasing are the correct quality by putting in place strict verification procedures.
Design Flexibility as Strategic Asset
When design decisions are made regarding the best components for a particular application, those selected must be available on the market today and suitable for use in the end product. In addition, designers and procurement professionals must also select components that are available from multiple sources to help to ensure that they will not become a single point of failure in the supply chain. Developing a supply strategy that allows companies to address any component shortages that do occur is a strategic aspect of the design process and one that designers and procurement teams must work together to address.
Designing a product to be as flexible as possible in regard to key components is a challenge that all companies face in today’s global marketplace. However, by having procurement and engineering teams work together to find the most suitable components to fit within a budget, companies can build resilient products which can withstand any shortage that may occur. Additionally, when designing products, it is wise for a company to consider the range of available components and make decisions about the components that will be used, prior to starting production. This will ensure that the final product can be built and delivered to customers within expected time-frames.
Long-term Adaptation
To address these supply chain issues in the electronic component market, procurement managers must understand that these types of events will occur frequently in the future. The key to a successful supply chain is having the technology to know all of the components required for a product and all of the possible suppliers from around the world for each of those parts. The best way to ensure that a company can receive the parts they need quickly, while paying the best possible price, is to establish relationships with as many possible alternative suppliers as possible, prior to an actual shortage, while they are still negotiating the best terms and conditions.
Procurement, however, needs to change and to be seen to change. As risk managers, they must move away from being purely cost-orientated and realize that the cheapest possible part is no longer automatically the best. This is because it may well come from an unstable supply chain or, more commonly, from a supplier who treats larger customers better than smaller ones and allocates his stock on a preferential basis to his bigger customers when supplies are running short and need to be allocated.
Of course, with concentrated manufacturing, complex global supply chains and such huge variability in demand, there are many external factors which are outside of the procurement function’s control. The function can only develop strategies to deal with these where possible, build a flexible supply network and have the best communication with the engineering teams to get the very best delivery to customers. As mentioned above, failure to achieve this will mean that another company will eat your lunch whilst you explain to your customers and suppliers why you are late with your delivery.
