With the unprecedented disruption of the supply chain for electronic components in the rearview mirror, the market is finally beginning to stabilize. For the past three years, manufacturers found many critical electronic components hard to come by and watched prices skyrocket and lead times extend to almost a year in traditional distribution channels.
Thankfully, much of the dust has settled, but the work has only begun. With hard-earned lessons from the pandemic, many manufacturers are looking to secure their supply chain and prepare for what will be inevitable disruptions in the future. At the same time, they want to do so at reduced cost and capital outlay after paying a premium for electronic parts over the past several years.
“We just went through one of the biggest supply chain disruptions in history outside of a world war,” says Mike Thomas, vice president and global general manager at Classic Components, an independent distributor based in Torrance, CA. “Now, things are starting to settle down. Interest rates have risen sharply, which is having the expected result of slowing the economy and so demand is down. However, the supply chain is still highly vulnerable to present and future disruptions.”
In fact, change may be the only constant in the industry. Even though it was an unparalleled event, COVID-related supply chain shortages are not the only disruption to affect global manufacturers in recent years. In 2018, there was a worldwide shortage of multi-layer ceramic capacitors (MLCC) when demand outpaced supply. At the time, 60% of the world’s production of MLCCs was controlled by three suppliers. Even now, there are components in short supply due to the limited number of suppliers, geopolitical trade tensions and ever-changing technology.
As a result, manufacturers are taking steps to secure the supply chain over the long run. One of the key strategies is to be less dependent on China and more diversified in sourcing the electronic components they will need to manufacture their products, Thomas says.
There will also be a continued role for independent distributors. When franchised/authorized distributors were not able to supply the required parts, independent distributors stepped in during the pandemic and played a critical role in helping keep many manufacturers’ production lines running. Independent distributors can leverage their expertise and decades of strategic relationship building to find alternate sources through regional authorized/franchised distribution, manufacturer direct or surplus/excess inventories.
According to Thomas, many manufacturers are sitting on excess inventory due to stockpiling parts and ordering from multiple sources to ensure delivery. After having to pay exorbitant prices over the past three years to secure parts, many manufacturers are also looking for ways to reduce costs further, even as prices drop. Some are looking to take advantage of financial services that some independent distributors provide to minimize cash outlay while ensuring access to inventory. Fortunately, Thomas says these are services that independent distributors have been offering.
Reducing Excess Inventory
When manufacturers faced tremendous lead times on parts, many double, triple or quadruple ordered since they did not know who was going to deliver first, according to Thomas. “Now that all these parts were delivered, some manufacturers have excess inventory and aren’t sure what to do with it,” he says.
If it is true dead stock, an independent distributor can help liquidate the electronic components and get them off the books through various types of arrangements. For example, Classic Components has provided this type of service since 1985, and it can be initiated with a simple email list of surplus items with the original price paid. The company then searches its database to see if any other customers use those parts and can broker a deal between the parties.
“We have a global customer base and lots of information about the materials they use,” Thomas says. “So, if a manufacturer has excess inventory, we hopefully can find an opportunity to sell it to one of our other customers.”
Classic Components can also list and sell surplus inventory on consignment with, or without, taking physical possession of the inventory.
“Essentially, after coming to a consignment agreement, the list of items is uploaded to our website. We offer complete transparency throughout the consignment process. As we receive inquiries, we share the information so you can decide whether to sell [your surplus] at the offered rate,” Thomas says.
According to Thomas, Classic Components may even opt to purchase the inventory outright to resell it later. “We buy excess inventory every day and can make purchases on a line-item basis.”
Reducing Costs
With costs rising and inflation still not under control, manufacturers are also looking to reduce the expense of procuring parts. Some independent distributors have found ways to lower the cost of parts by leveraging their global relationships.
For example, independent distributors can procure material in all the local markets where they do business, and in some cases having global offices means they are not bound by regional price constraints. With a comprehensive global network, the independent distributor can make purchases in local markets that currently offer the lowest prices and pass the savings to their customers.
Customized Financial Services
Manufacturers may also seek financial or logistical services when their cashflow is constrained or they want to optimize their working capital.
To improve manufacturers’ cashflow, independent distributors may offer tailored programs of vendor managed inventory, which can simplify logistics, reduce the total cost of ownership and enable the redirection of capital to other spending categories. In some cases, they can even make speculative purchases for a customer and/or provide financing to purchase inventory when a qualified client has capital constraints.
While the specifics of any financial services arrangement will depend on many factors, the framework is always to facilitate a mutual benefit.
Protecting Against Future Disruptions
Thomas asserts that the up-and-down nature of the market means manufacturers need to prepare today for whatever will come next.
Thomas asks, “What happens in a year when the Federal Reserve decides to lower interest rates? There is still an incredible amount of pent-up demand. When the economy begins to return to normal it may not be like it was during COVID, but a spike in demand will cause [electronic component] shortages again.”
Another factor that could affect the supply chain is the reshoring effort spurred by the passing of the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act). “They may not be saying it, but parts built in the United States are going to cost more than the parts from Taiwan,” Thomas says. “It will start to affect pricing structures at some point.”
To combat this and any other future market volatility, Thomas advises partnering with a flexible independent distributor that can provide services authorized distributors cannot.
“You want to have that relationship with a partner that is flexible enough to shift gears in a moment’s notice,” Thomas explains. “You may be in shortage mode on Monday, and then Tuesday you have excess and want help selling it. Then on Wednesday, you decide you don’t want to sell any more and prefer we loan you money against it.”
With the market seemingly in continual flux, the only constant may be change. When manufacturers seek to successfully adapt to whatever comes their way in the market, partnering with a flexible independent distributor that can cater to their specific needs may be the best bet to survive the next supply chain disruption.
