Understanding Component Shortages (and How to Survive Them)
Managing 700,000+ parts across more than 27,000 suppliers at any given time provides us with unique insight into key commodity trends, strategies and component shortages. Therefore, as you might imagine, it's been an interesting few years for global procurement.
Since late 2017, companies managing electronic components have been facing challenging times with successive waves of supply shortages, price hikes and lengthening lead times. A major surge in demand on one side and a critical materials and parts shortage on the other strained capabilities to meet demand, especially for more standard passive components, such as multilayer ceramic capacitors (MLCC), resistors, transistors, diodes and even memory. Suppliers were quoting lead times averaging 20-30 weeks—and this is all before the pandemic.
Throughout 2019, market dynamics actually improved steadily as the investment plans made by suppliers increased their capacity and correlative output. We also saw original equipment manufacturers (OEMs) execute new multi-source strategies in order to reduce supply risk.
In a 2019 Supply Chain Trends Survey, 48% of the surveyed supply chain decision-makers at OEMs said they were revising their approved vendor lists. Furthermore, 45% were evaluating multivendor sourcing strategies.
There were no major supply shortages in 2019, and by the middle of the year, the passive components market was relatively balanced. In fact, 74% of survey participants said they thought the market would be even better in 2020. This was true for the first few months of the year.
COVID-19 Stifles Production and Shifts Suppliers' Operational Focus
Then the COVID-19 pandemic hit, and market capacity shrunk significantly. The pandemic's epicenter—Wuhan, China—is home to many electronic and mechanical suppliers. When the area went on lockdown and factories could not produce at full capacity or at all, there was not enough supply to meet demand, but the greater impact was felt as the virus spread throughout China.
As the coronavirus spread around the world, so did the components shortages. Factories in Malaysia, the Philippines and Indonesia couldn't produce or ship parts. As a result, OEMs worldwide could not manufacture their own products either.
Ultimately, it did not matter where the supplier was or where the end product was produced; entire supply chains were clogged by the pandemic, and all the inventory and flexibility had been sucked out of the market. The lead time for high-end semiconductors, which is usually long, doubled from 18 weeks to 36 weeks.
On top of that, supply chain issues related to COVID-19 have cost companies millions of dollars. According to Jabil's Special Report: Supply Chain Resilience in a Post-Pandemic World, about two-thirds of surveyed OEMs lost $50 million or more because of these issues. About one-third lost more than $100 million, and 8% lost more than $500 million.
What has been the negative financial impact on your company’s business outcomes as a result of supply chain issues related to COVID-19?
When components suppliers were able to manufacture, many shifted their operations to prioritize parts for the healthcare industry. At the start of the pandemic, there was a worldwide shortage of ventilators as well as rising needs for X-ray machines, diagnostic tools and other medical devices that use electronic components. Appropriately, suppliers contributed their capacity to lifesaving efforts.
However, as those needs are being fulfilled, component manufacturers are starting to shift back to pre-COVID-19 operations. Back then, these companies were making calculated investments to support leading-edge technologies that primarily support the automotive, smartphone and 5G/Internet of Things (IoT) markets.
How the Automotive Industry Influences the Electronic Components Market
The automotive industry has been experiencing a rapid transformation, with products incorporating automotive electronic components at an unprecedented rate. Although we may be a few more years away from fully autonomous vehicles, cars are evolving to become even more sophisticated with embedded software, sensors, artificial intelligence, connectivity and yes, electrification.
Think of today's standard combustion engine car, which has somewhere between 2,000 and 3,000 capacitors. As the electric vehicle gains market share, this creates an overwhelming growth in content with as many as 22,000 MLCCs required in a single car. This number will continue to grow as more functions become electrified.
Automotive electronic components sell at higher price points because of the additional requirements related to warranties and liability. Demand from the automotive sector also is somewhat stable with accurate forecasts. This makes the automotive market a high priority for component suppliers.
McKinsey and Co. predicts that the global automotive market will grow by at least 1-5% in 2021, partially because demand for new vehicles dropped in 2020. However, if governments offer incentives to car buyers, the segment could grow by 28-36% from the 2020 level. This would create even more demand and opportunities for the electronic components industry.
Smartphone Miniaturization Leads to Component Shortages
Like the automotive industry, the smartphone industry is constantly on the move. As consumers expect the release of a greater model each year, leading smartphone launches have become anticipated events. For passive components and memory products, smartphones represent a significant part of overall consumption.
The math is simple but insightful. There are approximately 1.5 billion smartphones manufactured per year, and each flagship model contains roughly 1,000 capacitors. This means that smartphone manufacturers use about half of the roughly 3 trillion MLCCs produced globally each year. This makes the smartphone market the primary driver of consumption and technology.
However, demand from this segment has been decreasing in recent years. The smartphone market was already slowing down prior to 2020, and the COVID-19 pandemic drove the global smartphone market into its worst decline ever, according to Gartner. Global shelter-in-place guidelines combined with economic uncertainty resulted in a 20.2% decrease in smartphone sales. Similarly, smartphone manufacturers had to stop or slow down operations because of temporary closures early in the pandemic.
As the market reaches a new normal, smartphone demand could increase again, and the supply-demand picture could flip. Smartphone companies that primarily rely on physical retailers or carriers to sell their phones will have a tougher time regaining sales, but as more smartphone providers shift to online sales and make their products more accessible, sales will likely rise again.
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How Does the IoT Boom Affect Electronic Component Shortages?
Although Gartner predicted that there would be more than 20 billion IoT devices deployed by this year, the actual amount could be higher. According to Verified Market Research, the IoT market is expected to grow from $212.1 billion in 2018 to $1,319 billion by 2026. Two major drivers of this are increased use of smart payment technologies to minimize the human contact involved in transactions as well as increased connectivity demands for remote monitoring through smart devices as more people work from home. Furthermore, as COVID-19 continues to dominate the healthcare sector, there is more demand for IoT devices for remote patient monitoring, inpatient monitoring and interactive medicine.
Where Are Electronic Component Shortages Headed?
As technology keeps developing, there is plenty of demand for more passive components and semiconductors. At the same time, suppliers will likely focus on newer types of parts that are in higher demand. This leaves a high-risk environment for mature, less-profitable product families. Suppliers that continue to manufacture components for legacy products will only produce parts at profitable levels, leading to price increases for the wider customer base.
Of course, there is still a lot of uncertainty in the market as a result of the COVID-19 pandemic. It's hard to know how many waves of the coronavirus are ahead, what the effects of those waves will be, when recovery will happen and what the new normal will look like. For now, we know that component shortages are still affecting a variety of different industries.
According to Jabil's 2020 report, component shortages, limited materials or other sourcing issues have had the following effects on companies in the past year:
- 62% of participants saw delays in production delivery or time-to-market.
- 43% of surveyed companies saw their profit margins narrow.
- 36% of companies lost revenue.
- 32% were forced to raise prices.
- 26% struggled with quality issues as they investigated options.
These effects also varied by industry. For example, about 70% of healthcare participants struggled with production delivery or time-to-market delays. About 40% of consumer electronics participants said they had to raise their prices.
How have component shortages, limited materials or other sourcing issues impacted your business in the past year?
The macroeconomic conditions and supply-demand cycle are very hard to quantify and predict for the next few years. But one thing is for sure. The current conditions amplify the need to have supply chain orchestration in all areas of your business, from design and pre-production all the way to end-of-life management and product delivery. If you miss out on any of these areas, you run the risk of having a disrupted product.
In an Electronic Component Shortage, Relationships are Key
When supply is short of meeting demand, a component supplier allocates a percentage of its output to each customer. This means that each customer may only get a percentage of the demand they have for a specific part, which results in their own production disruptions. The allocation process is tough on all components buyers and requires constant contact with the suppliers to ensure receipt of needed components, rather than the ones the supplier wants to support.
During shortages, suppliers determine who to support—not the other way around. We can't emphasize the importance of supplier relationships enough. Whether you are doing the work yourself or outsourcing to a manufacturing solutions provider like Jabil, strong supplier relationships are essential to surviving component shortages. But let me clarify: These strong relationships don't begin during supply shortages. They must be established during a buyer's market with a mindset of "win/win" that needs to be demonstrated over a prolonged period of time.
To build your relationships, take time to meet with your suppliers, whether virtually or in person, when safe to do so. These meetings should not be escalations or opportunities to have conversations about expediting orders. Instead, you just want to establish a friendly relationship with your supplier and stay top-of-mind. Learn about their operations and supply chains, their successes and their struggles. See where you can expand your collaboration and where you can help.
For example, at the start of the pandemic, Jabil helped its suppliers acquire masks and prove their essential business standing as part of the healthcare supply chain so that they could safely and legally continue operations. Suppliers were appreciative of these gestures to help them keep their operations running.
Jabil also worked to keep the lines of communication open with its suppliers. We asked our suppliers about their situations to see how we could help. Sometimes this involved approving an alternate part or an alternative facility. Jabil team members also issued frequent updates about our own operations and shared tips about how we were managing new challenges. This sometimes inspired our suppliers to put similar safety protocols in place. As a multinational company, Jabil tends to have more resources than its suppliers, so this type of information gives small companies insights into best practices and new ideas.
In turn, our strong relationships with our suppliers, particularly with their executives, helps us to learn more about their operations and challenges-both now and during non-pandemic times. Many suppliers will not disclose details about their supply chains or material flow. However, our relationships with executives as their trusted partner have given us access to more information. It also helps that we understand their supply chains and ask lead-in questions to help us find the information we need. At the end of the day, investments in your electronic component supplier relationships can be your greatest tool.
Surviving a Component Supply Shortage as an OEM
This year has shown OEMs that they have to have the tools to truly be prepared for anything. The component shortage was easing earlier in 2020 but was exacerbated by the start of the pandemic. Although the situation seems to be improving again, it's important to remember that future waves of the coronavirus pandemic—or a new pandemic—as well as localized or widespread lockdowns could happen at any time, diminishing market capacity for raw materials and components.
The decisions you make right now will affect your longevity. These types of supply shortages separate the good from the bad, and there are companies that will struggle to meet their production goals if they are not taking today's market seriously and responding to the component and technology evolution.
Although there are no silver bullets to success, there are several steps companies can take to stay ahead of the market:
- Continually evolve product design to align with supplier's technology and production roadmaps.
- Add new alternative suppliers.
- Increase collaboration and visibility among product design, procurement and supply chain organizations.
- Move away from single-sourced parts.
This last tip is critical. As basic as it sounds, having multiple sources per part is no longer just a nice-to-have; it is a requirement. In today's market, with options becoming limited, having the ability to rapidly select alternative qualified suppliers and keep your products on schedule is even more critical.
No matter what the future holds for component supply, it's important to have a robust supply chain strategy, complete with sourcing plans and strong supplier relationships, in order to protect your own operations. And if good times are around the corner, it still is prudent to plan ahead for the next component shortage or big disruption.
Special Report: Supply Chain Resilience in a Post-Pandemic World
Insights from over 700 supply chain decision-makers at OEMs with more than $500 million in revenue on how they are managing their supply chains in light of COVID-19 and other market dynamics.