Over the last few years, the electronics components industry has faced some very tangible challenges. Lead times, shortages, obsolescence, and tariffs were among some of the culprits that had onlookers worried.
Worried that we’re repeating a cycle, that the industry is doomed, that sky is falling, and so on.
The reality is that things are not as bad as they seem, and the entire industry is bending to conform to its new realities, gushing with resilience.
We had the opportunity to discuss some trending, and quite pressing, topics in electronics, supply chain, and procurement with Michael Knight, President of the TTI Semiconductor Group and Senior Vice President of Corporate Business Development, and discovered just how buoyant the industry is, as well as how that resiliency and expected future growth will demand a re-designed supply chain.
The Sky is Falling
The supply chain has been straining for nearly three years now. Times appeared tough—electronic component supplies tightened, demand remained normal, lead times rose, and tariffs shook things up.
The good news is that the electronics supply chain has simply been re-balancing itself and adapting its systems while customers adapt to the existing realities of their surrounding situations.
While lead times aren’t quite at their historical low-point, according to Knight they are coming off their historical high point. This perceived encouraging event comes along with much softer ordering for components manufacturers.
“There’s a growing belief that we’re in a down cycle,” says Knight. But this is far from the truth. “This is not a repeat of prior cycles. We’re into new territories here.”
And, as lead times lessen, pricing pressures once again take hold.
“Last year we were in a buyer’s market, where people were less concerned about pricing and more with supply,” says Knight.
This year, supply is becoming more assured and the industry has shifted its focus back on pricing. This shift plays a role in the ability to cover the cost of tariffs.
Yes, What About Those Tariffs?
When tariffs were initially applied, they impacted mainly steel and aluminum imports, but quickly, three more rounds of tariffs took hold. We’re now in the middle of the third round which will be the round to have one of the greater impacts on the electronics supply chain due to the potential influence on resistors, capacitors, microprocessors, and more.
Up until now, the industry may have been dealing with some minor confusion and disruption.
“We’ve all dealt with it remarkably well given the situation, but this next phase is going to be more problematic because it’s going to affect a bigger piece of the bill of materials,” says Knight. “I think we are moving into a different phase of this, whereas up until this point it hasn’t had that great of an effect on the industry. But I think this next phase will make it more difficult for us to recover.”
And according to Knight, the situation will get even more interesting with the ramifications becoming even more long-term and significant.
“The supply chain is going to look different when this is all said and done,” he predicts.
Some of the effects we’ll see will include Vietnam benefitting from the situation as things move from China to the country (and not necessarily moving back to China if, and when, things change) as well as a more domestically-focused China. China has been accelerating and developing its domestic components supply for some time now, Knight says, and these tariff changes are simply providing the Chinese with the incentive they need to further accelerate.
Despite the worry and fear that grip the supply chain when we utter the word tariff, there is still a sense of optimism and resiliency as Knight talks about the electronics industry.
“I’m expecting a surge in the industry once tariffs are resolved,” he says.
Along with potential surges that arise when tariff frenzies settle down, there’s also the rapid advancement of technology that will impact the electronics industry. But will the supply chain be ready?
One thing we know for sure is that the supply chain needs to evolve. Without a re-designed supply chain, it may not be able to effectively handle the changes that come along with new technologies – and at the rate they’re coming.
Plays Well With Others: Engineers + Procurement
A critical component that should not be overlooked as we examine the characteristics of a re-designed supply chain is that of the relationship between engineers and procurement professionals. We’ve talked before about the significance of redefining this relationship, but it will be more than a nicety—it will be a core element of success in the new supply chain.
“Once upon a time there was a function called component engineering that worked closely with procurement to create multiple sources, and in one of the industry’s downturns that got stripped out,” says Knight. Now the industry is combating way too much single-sourcing as a result of this gaping hole.
Procurement professionals need engineers. They need them to refresh the component database in order to adjust to other common industry problems in the industry, such as obsolescence. And they need them to vet replacement parts, but oftentimes, procurement teams are caught by surprise and with a manufacturing line waiting for parts while the clock is ticking.
“In the chronic shortage environment the industry experienced last year, part buyers discovered over and over that there was only one supplier and one part number on their bills of material. Murphy’s Law ran roughshod all over us in 2018,” says Knight.
And even with all the cross-reference tools out there, which appear to be of significant help to companies’ procurement teams’, they merely underscore the deeper need to align the two groups.
“Customers aren’t able and/or willing to take the recommendation at face value; they still need to follow their process for evaluating the part, which takes time. Even if it’s a commodity part, like a USB connector,” says Knight.
This means they need their engineers.
As we look to the future of supply chain activity, it will be critical to align procurement and engineering more closely, as well as take proactive steps to bridge gaps.
5 Steps to Re-Designing the Supply Chain
As resilient as the industry has proven to be, its supply chain will not be able to withstand the winds of change that are on the horizon if it doesn’t learn to adjust its sails. As the IoT takes over, as we see medical industries and agricultural verticals revolutionized, and as 5G becomes a household name, how can we thrive with a supply chain that rests on the laurels of its past?
According to Knight, the supply chain is taking a very linear approach to the expected surges, in terms of capacity and planning, and even partner planning. We cannot have a successful supply chain that works the same way it always has – because things are different now.
“The industry is so much bigger than it was in the past,” says Knight. “I think the industry is going to get bigger and bigger at a faster rate, and we [still] have a supply chain built to support the old cycles.”
Knight posits that we may not have a supply chain that can support the kind of growth rates we’ve seen over the last few years.
The key to bending will be proactivity. If what the industry has seen in terms of growth over the last few years is not a bubble, but in fact, a trend, then organizations will need to consider the following five things:
- Planning: Think about supply chain 4.0, the effect of automation of information, the cloud, and AI. The future of planning may not involve as much manual work but may include more data for SCM professionals to work with and conduct better forecasting. Think “Supply Chain Planner 4.0.”
- Pricing expectations: We can see this scratching the surface of importance this year, but more focus will need to be placed on looking beyond price and more on synergy and collaboration between suppliers and procurement teams. More emphasis on collaboration between the two groups will take a step beyond merely cost-focused purchasing.
- Engineers and Procurement gaps: As we mentioned, the bridge will need to be built in order to provide more effective and efficient analyzation of replacement parts, at the very minimum. These groups will need stellar communication to accommodate changes in design that will come along with rapid advances in technology.
- Proactive buying community: This is based on understanding what manufacturers want, not only today but also in the future.
- A greater understanding of component manufacturer profitability: Procurement professionals should keep a keen eye on the profitability of their component suppliers. In periods of protracted cost-downs, suppliers’ margins can get squeezed to the point that they lose interest in investing capacity expansion. It is the old “good money after bad” conundrum, which had a lot to with the widespread shortages in 2018.
Simply put: “Think about the future differently than you think about the past.”
“We All Got Through It”
The electronics industry is one of the most adaptive, creative, and robust industries and a perfect example of how supply chains can rebound and evolve.
“The best sign of just how resilient the electronics marketplace is is the fact that, despite the tariffs, despite the lead times, and this year’s inventory issues, end-customer demand is holding up pretty well. Even if we have a flat year, given the massive year we have come off, and all the uncertainty in the economy, I can’t help but think we will still have had a big year,” adds Knight optimistically.
