Part supplies are getting tighter. Here are new rules for dealing with the constraints.

One point electronics supply-chain management professionals all currently agree on is demand is outstripping supply for many types of components. Two of the biggest industries driving this consumption are automotive and data processing. On the automotive side, China is incentivizing the manufacture and purchase of hybrid electric vehicles, while car buying by more affluent consumers pushes up demand. A number of articles highlight the shortages of rare metals this move is bringing and the need to find alternatives. The electronics industry is also seeing an impact on the commodity side, however, due to increased demand for copper foil, increased prices of printed circuit boards, and hybrid vehicles requiring significantly more automotive-grade passives than gasoline-powered vehicles.

While this is going on, automobile electronics content in general continues to be on the rise globally.

On the data processing front, development of the cloud and concomitant data storage center requirements for companies like Amazon, Google and Microsoft is also driving increased consumption of memory devices and many other components.

If those two new sources of increased demand aren’t enough, Apple’s new iPhone has taken significant amounts of components off the market, the global economy is picking up, and several large-scale natural disasters will be driving a need for replacement appliances and automobiles at an unprecedented scale.

Merger and acquisition activity among component manufacturers has limited some sourcing options and reduced capacity. While component suppliers are now working to increase capacity, in the short-term shortages and allocation will abound.

From an electronics manufacturing services (EMS) provider standpoint, this has serious implications, particularly in companies that have embraced Lean supply-chain principles. For example, in a typical Lean manufacturing model, customer annual forecasts were fine-tuned, and bonds were established with a distributor that guaranteed a supply of components based on the forecast. The problem is not all distributors were tying down the full amount of the bond. Some were simply ordering to vendor’s lead-time, plus a few weeks. When lead times began stretching in fall of 2016, they were surprised. Fortunately, today distribution is now carrying more inventory.

Today’s reality is many Lean supply-chain rules need to be suspended to deal with a market where demand exceeds supply. Here are a few of the new rules at SigmaTron:

• Plan further out. At SigmaTron, we are now looking at a 15-month planning horizon with many of our customers.
• Hard orders beat forecasts. Suppliers can see the difference between orders and forecasts in their systems. Orders win every time.
• Increase your number of suppliers. Everyone is ordering from the best-known suppliers, and their stock is in the shortest supply. Some lesser-known suppliers of comparable parts still have stock at reasonable lead-times. Expanding the supply base and qualifying those parts with customers ensures better options.
• Pick up the phone. We have daily conferences with some suppliers on critical parts. Human interaction needs to increase until the market moves to normal availability levels because changes in component availability are often not visible in systems until it is too late to address the issue.
• The marketplace dictates it is smarter to carry more inventory. However, the customer and EMS provider need to discuss where the right balance is and how to handle liability and added cost.
• Work hand-in-hand with customers. The dynamics of the current market ensure there will be purchased parts variance (PPV) in pricing, and available components often have to be tied down immediately before someone else buys them. Taking an open book approach that highlights the realities of the situation and reaches agreement on the range of PPV the customer can accept can improve availability options. Market-driven PPV is often a miniscule increase to overall product cost, while an empty product shelf is a missed sale.

One rule of Lean supply-chain management should not change. Wherever possible, avoid sole-sourcing parts.

It is important to also note Lean principles should not be suspended in manufacturing. In fact, use of Lean principles to increase schedule flexibility and throughput is even more important when market factors are driving more variation in production schedules.

The need for increased human interaction does not mean systems should be abandoned. While automated ordering processes need to be monitored more carefully, the use of systems to track material availability status, demand, work-in-process and shipments is even more critical.

For example, at SigmaTron materials systems are linked globally to provide company-wide visibility into inventory levels and materials status. The tools are also linked to customers and program managers. This level of system linkage increases efficiency of centralized supply-chain management. For example, if a production schedule is changed, the IPO in Taiwan can see the requirements up on the system, view the AVL, the stocking levels and demand. This lets them determine immediately how urgent the part requirement is and whether air or sea is the best shipping option. It can also help identify available inventory within SigmaTron’s global network of facilities.

Dealing with the realities of extended lead-times and allocation proactively helps ensure production stays on schedule. While the rules of the game may have changed temporarily, the goal remains the same: ensure each customer’s product is where they want it, when they want it.

John Sheehan is vice president – director of materials and supply chain at SigmaTron International (sigmatronintl.com); john.sheehan@sigmatronintl.com.