From trade wars to environmental regulations to component shortages, manufacturers and distributors are facing a “perfect storm” of supply chain hurdles right now. New intelligence can help smart companies effectively ride out the storm and come out ahead of the pack.
Unpredictable supply, international tariffs, changing environmental legislation, and age-old challenges like component obsolescence are impacting the way manufacturers do business in increasingly complicated ways. New tariffs can increase component costs up to 25 percent while environmental regulations like REACH—an EU regulation addressing the production, import and use of chemical substances—recently added lead (Pb) to its candidate list of “Substances of Very High Concern, SVHC’s.” The move added another 18.8 million different part numbers into the required reporting mix. Although when initially released, REACH was not viewed as having significant impact to the electronic component industry; now there are almost 58.2 million parts requiring REACH reporting.
In an environment where simply staying ahead of component obsolescence is a full-time job, companies’ information needs are expanding and gaining in complexity. To offset these challenges, firms are demanding reliable engineering/technical data, testing and simulation data, and information that supports accurate reporting, monitoring and tracking.
In this article, we explore the major challenges that both manufacturers and distributors are grappling with right now; show how these obstacles are impacting their profitability and sustainability in the industry; and reveal the best practices that companies can follow in order to successfully navigate increasingly complex, worldwide supply chains.
The Challenges Continue to Mount
New tariff, reporting and compliance challenges are piling up and making it more and more difficult for companies to navigate a tumultuous business environment. The RoHS legislation in the EU and China, for example, restricts the use of hazardous substances in electrical and electronic equipment (EEE) and promotes the collection and recycling of such equipment. In the U.S., Cal Prop 65 requires businesses to inform Californians about exposures to certain chemicals.
These and a handful of other regulations are putting new constraints on the component supply chain, whose challenges don’t end here. In fact, there’s a “perfect storm” in the air right now and it’s being fed by surging global demand (which is outpacing manufacturing capacity for some device types), dwindling inventory quantities, and extended order lead times. This surge in demand has resulted in parts going on allocation or orders being limited to fixed quantities per month.
For OEMs, these realities translate into major procurement challenges as buyers work to secure the component supply chain. Further, widely reported short- and long-term supply chain disruptions have, in turn, created production delays. Ultimately, this perfect storm of procurement challenges is constraining sales (compared to last year’s sales volumes).
No End in Sight for Tariffs
Because supply chain expenses are one of the biggest costs for businesses, anything that varies can impact margins and profitability while throwing off the delicate balance that a procurement professional has taken the pains to establish and cultivate. Slap a 25 percent tariff on top of a company’s existing costs, for example, and the entire supply chain gets thrown out of whack. The current United States’ administration has already imposed three rounds of tariffs on more than 800 electronic products and more than 6,000 tariff product types—this does not bode well for the organization that’s already grappling with other supply chain challenges.
For OEMs, understanding and absorbing these cost increases have become extremely difficult. To fully grasp their impact on a specific organization and its end-to-end supply chain means knowing specific Harmonized Tariff Schedule (HTS) codes, countries of origin, sources of alternate parts and other key data points. In the absence of this intelligence, companies simply can’t make the best possible sourcing decisions.
Distributors are facing their own set of tariff-related obstacles right now with the main question being, “Exactly which components are impacted by tariffs and are, as a result, 10 percent to 25 percent more expensive than their counterparts?” Again, without the accurate HTS codes, countries of origin and component packaging labels, distributors are forced to play a guessing game in a business environment characterized by razor-thin margins and increasingly-demanding customers.
Navigating the Perfect Storm
Unfortunately, the worldwide component shortage isn’t going away anytime soon. According to EPS News, electronic component supplies got even tighter during the fourth quarter of the year, with demand remaining at or above normal levels in the automotive, IoT and industrial markets. “Capacity ramp-up may not bear fruit until the end of the year or 2019,” the publication reports, “and tariffs are likely to unravel an already-stressed supply chain.”
Investment firms say that the ongoing electronic component shortage is only worsening. “Lead times remain elevated across a number of components, including capacitors, resistors, memory, and certain discretes, according to our analysis of distribution data,” Stifel reported. “We continue to see signs of double ordering as customers scramble for parts. The multi-layer ceramic capacitor (MLCC) shortage is the most severe, with many parts seeing order-rescheduling requests from customers waiting on MLCCs or other parts.”
Digging down deeper, BOM Intelligence by IHS Markit singled out capacitors (MLCCs and special capacitors), resistors (fixed and network), transistors (bipolar transistors and power FETs), diodes (Zener and Rectifier), and RF relays as just a handful of the components that are experiencing long lead times right now. Distributors are observing average lead times extending beyond 52 weeks.
It’s in the Data
Combined, the obstacles outlined above come together to create a “perfect storm” of disruptions for any firm that depends on a global supply chain to get its products from design to manufacture to market. From the manufacturing/planning standpoint, for instance, simply being able to get basic components on time and ready to go into final products has become a crapshoot—bad news in a world where customers are placing more orders and demanding faster delivery times.
Meeting those customer demands while maintaining profitability requires internal company systems that can be quickly referenced, exchanged, shared and updated—all in the name of being able to ramp up quickly to meet demand. Armed with a reliable and comprehensive source of component information for extensive and current parts information, firms can effectively integrate their related internal content and then leverage that content across all of their internal systems. This not only helps to eliminate information silos, but it also equips all stakeholders with the trusted internal and component information that they need to make the best possible decisions in a turbulent sourcing environment.
In return, companies can rest assured that the parts that they’re buying are environmentally-compliant, their reporting is accurate, and any pending component obsolescence is squarely on their radar screens. Then, organizations can take the steps necessary to ward off any issues that could interfere with the smooth running of their own supply chains.