Four Pillars of a Supply Chain Resilience Strategy
Today, the electronics supply chain is experiencing an unprecedented imbalance with supply falling far short of demand. This has affected a broad range of electronic commodities from semiconductors and microcontrollers to resistors, transistors, diodes, memory and multilayer ceramic capacitors (MLCC). At best, OEM's are facing lead times of six to 12 months, limiting flexibility. Often they must halt production or change their product designs to incorporate available components. These unusual market conditions are causing OEMs and their suppliers to question their supply strategies and their supply chain resilience.
Capacitor distributor TTI explains that this shortage is based on economics. In the past, the plentiful supply of capacitors has pushed the capacitor industry to lower its prices, reducing profits, reducing capital expansion and reducing the capacity of these suppliers to respond to market demand. To counter this, suppliers shifted their focus to higher-value products, including smaller case sizes and products for the automotive and smart phone markets, which tend to have more reliable demand. This, in turn, has reduced the available capacity to produce older and soon-to-be-obsolete technology (legacy) parts.
Now the industry is struggling to increase capacity to meet this exceptional demand. The small group of suppliers that makes capacitor-production machines is currently backlogged with orders. This means that suppliers cannot quickly update their machines or expand, which in turn limits production capacity and capacitor availability. And as true demand for these items increases 30 percent or more year-over-year, according to TTI, capacitor suppliers keep falling behind on the supply curve.
All companies managing electronic components are impacted by this shortage in at least one of three ways:
- They cannot acquire the parts they need, so they must slow or halt production.
- They are grappling with price increases.
- They must change their designs to incorporate available parts.
Customers that modify designs frequently can upgrade their solutions to the newer technologies that are readily available, as is the case for consumer electronics and smart phones. These markets update their products frequently, which make them an attractive target market for the supply base. Automotive OEMs and their suppliers are considered prime markets for suppliers as well, so they are given priority. Regulated industries like aerospace, medical and industrial utilities do not change their designs very often and use a large variety of older technology parts, therefore these industries have been impacted the most.
How to Build a Supply Chain Resilience Strategy
How can companies minimize disruptions in their supply chain? Affected companies need more resilient supply chains to ensure that they can continue production in the face of component shortages. A good supply chain resilience strategy has four pillars: people, process, technology and design.
Companies need enough manpower to complete the work, but they also need skilled workers with the knowledge to help their employers tackle tough challenges like these. Scout for knowledgeable engineers, procurement specialists and supply chain managers who can supplement existing talent and help the company navigate a difficult business environment. Also look for people with market knowledge, who can help the company stay abreast of market trends. Manufacturing will never become slower, so you need the right people to help you stay abreast with the pace of business.
Once you have the talent you need, structure your organization for success. Organize a commodity management team and a supplier relationship team. Commodity managers focus on short-term goals and should be experts in their specific commodities markets. This means they are constantly aware of new products, supply chain developments, pricing changes and other market activities. Such awareness can help mitigate issues related to cost increases and component shortages.
Supplier relationship managers work with a long-term technology roadmap. These individuals do not handle price negotiations or the short-term business of their commodity counterparts. Instead, they are focused on building relationships with suppliers at the executive level by understanding their core business strategies and proactively approaching these partners with opportunities for mutual benefit.
This type of organizational structure should help cover your bases. If this type of structure seems unrealistic for your business needs, you may want to consider partnering up with a manufacturing solutions provider like Jabil, which can help with supply chain resilience.
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Employees do their best work when they are empowered by effective, robust processes. To manage component shortages and obsolescence and to increase supply chain resilience, companies need to bolster their processes in the following areas:
- Forecasting: No matter what, you need to understand what's necessary. This helps secure supply with good information. Then, think about what you need in the long term. If you start ordering parts two weeks before they're needed (because you didn’t forecast effectively), you'll have a very low chance of procuring what you need in time. But, knowing in advance that you have demand in the pipeline from good forecasting, you may have time to secure supply and stay ahead of shortages.
- Inventory: Look at low-volume parts that might impact the availability of high-value features. Add safety stock to reduce the risk of a production slow down or halt.
Also, focus on supply assurance versus shortage management. Shortage management is a strategy that looks at how many of a specific item is needed by a specific date and guides purchasing managers to procure based on this information. Supply assurance looks at all the needed parts over a very long horizon, taking into account possible shortages and obsolescence, and develops supply plans for those parts.
- Supplier relationships and sourcing: Make sure you have a good reason for working with specific suppliers. Stay away from single-source relationships and work to expand your supply network. Developing a solid supplier-customer relationship takes time, and it’s usually best to start building this relationship in a buyer’s market. Then, when times are tough for you, your supplier partner should return the favor and help you procure the items you need.
- Market awareness: You need to make sure you’re as smart as everybody else and staying on top of market trends. Keep tabs on what products are available in the market, where you can procure them, as well as the latest standards of design and best practices for managing your supply base. Also, keep an eye on the needs and trends of the specific market you serve. This can help you manage your business and make more effective decisions.
As part of this, also monitor the technology curve for parts and design. You want to stay on the leading edge of it, not the lagging end, to stay ahead of legacy part shortages. Make product design a regular conversation—your company depends on it.
Technology can help organizations complete these processes more easily and accurately. For example, real-time analytics and decision support tools, including enterprise resources planning and electronic data interchange platforms, can help provide baseline data which, in turn, justifies investments in spend, supplier and commodity analyses. Together, these provide enriched data sets that can help managers better understand the dynamics of the procurement process; make decisions related to customer needs, production schedules, logistics, and delivery requirements; anticipate upcoming challenges, including shortages and respond quickly to market shifts.
Another market shift is happening in the design arena. Companies previously did not need to allocate engineering resources to handle qualifications, requalifications or approvals of new parts and suppliers. Now, priorities are changing, and engineers need to spend more time redesigning products and future-proofing when possible. This means there's a need to update the parts selection process and evaluate components for current and future market availability. Engineers also must stay abreast of what parts gain legacy status and ensure they're not included in new product designs. This is all part of making your supply chain more resilient.
Again, paying attention to trends in the supply base can help guide design processes. For example, the supply base has been indicating for a long time that it’s time to miniaturize. Engineers who have been aware of this trend know to choose the smaller passive components that are more likely to be available as this trend intensifies.
Companies also need to be aware that it will be difficult to keep product designs stable throughout the next 10 or 15 years. Suppliers will most likely discontinue parts — or at least make fewer of them — so products should be designed with some flexibility to incorporate the different parts that will be readily available in the future. Or, at the very least, companies will need to be prepared to redesign products to keep pace with the components market. An unexpected redesign process can set your product and company back considerably.
Planning ahead with a robust supply chain resilience strategy will help your company tackle future component shortages, protect production capacity while being at the forefront of the technology curve. And most importantly, delivering the highest quality products and services to meet your customers' rapidly changing needs.