How We Have Been Managing Electronic Component Shortages
The electronic component shortage has been dragging on for over a year now and shows no sign of abating. In this short article I highlight some of the measures we at Porticos Asia have been taking in managing electronic component shortages.
The Origins of the Electronic Component Crisis
A 2021 article by Attinasi et al. for the European Central Bank noted how demand from the automotive industry collapsed during the second quarter of 2020 due to the pandemic. This drop was more than offset by an increase in sales of computers, smart phones, video conferencing equipment and gaming consoles. People were forced to work and study from home and so demand for these electronic goods surged.
The car industry eventually bounced back but the production capacity hasn’t been sufficient to meet this return in demand. What’s more, fires and droughts affecting large plants have exacerbated problem.
Factories have responded with plans to increase capacity but this will take time. For example, the expansion of chip maker TSMC won’t come online until the second half of 2022.
When Will Things Return to Normal?
EMS Now recently solicited feedback from industry leaders on the challenges they are facing and expectations moving forward. The issues highlighted varied from the risk of counterfeits to short term spikes in pricing and last minute cancellations of component deliveries. Also, all of the 20 executives agreed shortages would persist for some time. Alfred Birgmann, Vice President Global Procurement at Zollner summed up the gloomy sentiment stating that he thought the shortage of “passive components [would] relax mid- 2022”. He added that in the active component area improvements wouldn’t be seen “until the end of 2022/start of 2023.”
Dealing with Uncertainty
Strategies for managing the disruptions caused by electronic component shortages fall into three categories:
- Designing for disruption. This involves designing or modifying products to minimize exposure to hard-to-buy components.
- Operations innovation. Using supply chain based solutions such as maintaining inventory or encouraging customers to plan for the longer term.
- Ecosystem innovation. Simply put, greater supply chain transparency. It could be argued that supply chain transparency is a characteristic of any healthy customer/supplier relationship. Nevertheless, it is especially important in volatile environments.
With the following case studies we detail how we have managed the adverse impacts at Porticos Asia using one or a combination of these solutions. Customer names have been omitted in line with confidentiality agreements.
Case Studies in Managing Electronic Component Shortages
Telecommunication Products in the Public Safety Sector
This first example involves a telecommunications product for law enforcement, fire, utilities and emergency medical services. We manufacture this product for a Fortune 500 company.
The design was developed by our partner, Porticos Inc. before electronic component shortages were a concern. On sourcing materials for repeat production orders we found some components were out of stock with our regular suppliers. Furthermore, lead times had increased to over 50 weeks. In this instance we have been able to secure components from alternative reliable sources and also avoid disruptions to the production schedule. As we will see from other examples we haven’t always been so lucky.
For follow up telecommunications product for which the design development has recently kicked off an alternative strategy was used. We knew in advance that there is a general shortage of chips that will persist. As a solution, the customer identified a chip set to be used not only based on its suitability but also on its availability. Furthermore, the decision was taken to advance buy sufficient quantities for the first few years of sales. Naturally, in instances where products are being developed for which there is no accurate forecast then it might not be feasible to advance-buy. The downside is of this solution is customers are forced to tie capital up in materials well ahead of generating sales revenue.
For a medical device that aggregates hospital data for a leader in the B2B medical hardware sector the longest lead time for components has doubled to over 90 weeks. Furthermore, component suppliers have implemented more onerous terms such as the non-cancellation of orders once placed. In this instance components are available on the spot buy market. However, because the additional cost is over US$40K per order of 5K units the customer has decided to forego this option and instead place the order well in advance. This solution is feasible because the customer has an accurate, long term forecast.
An additional challenge that we have had to be overcome is the unavailability of one component. This was due to a fire in the only facility producing this part. The solution in this instance was a design change implemented by our partner Porticos Inc. A straight component swap wasn’t possible. There were no alternative components with the same specifications and footprint. Therefore, the only choice was a redesign of the PCBA to accommodate a substitute.
In a separate case, in a different B2B medical sector, that of cardiac monitoring systems, a hybrid approach was taken. Having determined that standard lead times for some components had increased to unacceptable lengths of over 100 weeks, we purchased these components on the spot buy market at a greatly increased cost. For example, an IC with a regular price of around $4 approximately was purchased for approximately $12. This was a painful decision for the customer to take. But having confirmed the authenticity of the component and recognizing its extremely limited availability we took the decision to pay the large additional cost. At the same time the PCBA was redesigned so that alternative components that were available could be used.
It should be stressed that it was not possible to establish a buying strategy in advance and implement it. The electronic component market is highly unstable. Components become available or unavailable on a daily basis and prices changing equally quickly. Thus, an iterative process is necessary, adjusting the strategy as new information becomes available.
Transparency and Communication are Critical
The current environment is highly disruptive. It’s simply impossible to devise and implement buying plans as we have been accustomed to. Unwelcome decision involving design changes and increased costs have to be taken quickly. On the other hand it is sometimes possible to avoid changes and higher prices with the use of alternative suppliers and parts. But in these instances extra care needs to be taken to ensure component quality. We have heard stories buyers relaxing normal quality procedures in desperation and finding that the components they have bought are fakes.
The key to managing this extremely difficult environment is transparency across the supply chain. Open communication channels may not soften impact of long lead times and increased costs. But they allow for faster reaction times and build trust.