Supply chain regionalisation and allocations

Picture of James Carbone
James Carbone – Contributing Editor

Editor’s note: Chris Hood is vice president of global purchasing for EMS provider Plexus. Electronics Sourcing North America (ESNA) recently interviewed him about the purchasing and supply chain Plexus and other electronics companies are expected to face in 2021.

Q) Do you expect there to be enough production capacity for semiconductors and other components in 2021? Is there any significant risk of component shortages, allocations, or longer lead times for components?

From a buyer’s perspective, there is never enough capacity. However, our team continues to leverage our robust supplier management and risk assessment tools to manage through longer lead times. Shortages and allocations are challenges that are not unique in our industry, even outside a pandemic landscape.

We have observed some pockets of memory lead times increasing. In semiconductors, there are some indications of high foundry capacity utilization, but so far it has not translated to constraints for us. We continue to monitor areas like tantalum capacitors, sensors and some relays which lend themselves to allocation challenges. Microcontrollers and programmable logic are seeing large lead time increases that we continue to manage. PCB laminate materials, which have seen extraordinarily long lead times.

Q) Prices for copper and other metals and materials used in electronics have increased this year. Will rising metals prices be an issue in 2021 and are you concerned it will impact the price of parts?

Certainly, in the PCB space we are feeling the price of gold, which is up 25 per cent in 2020. But the application of gold on a raw PCB accounts for only a fraction of the overall raw board cost, making this impact a single-digit increase to the total unit price. While this is still a challenge, it is not as much as people might think. In theory, resins and polymers benefit from falling oil prices. Commodities rise and fall, sometimes offsetting each-other. But, as with the PCB example, raw material is just a slice of the aggregate cost in electronics. The bigger concern is how wage inflation and increased logistics cost affects the value-chain, plus long-term currency trends – namely a slide in the US dollar.

Q) Over the last five years, there has been a lot of supply base consolidation in electronics. Is reduction in the number of suppliers an issue for purchasers in that it could lead to reduced competition? Or is it a positive thing for buyers because it results in a healthier supply base?

The pressure point in our business is balancing supply and demand. Our customers’ competitive end markets can generate demand volatility. I’d like to see source/supply markets with ample capacity to offset that demand volatility risk. But in my opinion, electronics market consolidation threatens to make an existing problem worse. Sure, we’re pleased when one of our preferred suppliers is the acquiring firm. We have many strong relationships with our suppliers, and that extends into supply chain coordination on supply/demand via IT integration and contracted inventory programs. But speaking for all buyers, more competition is always preferred in order to maintain rational prices and lead times.

Q) To what degree will the continuing trade conflict between China and the U.S. be a concern for buyers in 2021?

Shortly after the U.S. government was weighing restrictions on Chinese semiconductor firm SMIC, we heard Taiwanese firms saying capacity on 200mm wafers was tight and prices will be increasing. So yes, when governments change the rules of the game, it can be felt by the supply chain. Increasingly, our customers are asking us to quote production at multiple sites and in multiple regions not only for more flexibility in the midst of trade concerns, but also for general risk mitigation, which the pandemic has underscored. At every site, we evaluate total landed cost from origin-to-destination and build supply chains accordingly. Sometimes China-based suppliers make sense, sometimes not. I don’t see an ‘across the board’ kind of impact, though.

Q) Are there other purchasing/supply chain issues that you are concerned about?

Yes. First, there is a potential risk mitigation trend driving increased regionalization of supply chains. Our customers take a first-tier view of the problem and feel better having production closer to end-users. Second, considering the third-tier of the supply chain, we still see widespread dependence on Asia. To fully mitigate risk, component manufacturers need to think about redundancy all the way through the supply chain. We have tools and processes in place that identify risk based on source location. But even the best databases don’t have full visibility to the sub-tiers. As a result, I’m increasingly partial to supplier partners who are more fully integrated.

Lastly lead times have be a top priority on the minds of any component manufacturer or design engineer. We think of electronic components as the “high tech” industry, yet Toyota can build a car from start to finish in 18 hours while most component manufacturers quote lead time in double-digit weeks. For buyers, it is just intolerable. Combined with broad catalog options that fragment demand, and volatile end markets, part shortages are inevitable. So, I’d like component manufacturers to achieve lower lead times, and in parallel I’d like to see engineers selecting for lead time and continuity of supply as much as any other metric.