Distributors are bearing more of the responsibility of managing risk in the supply chain, as more semiconductors and other components are sold through the channel.
Helping OEMs and electronics manufacturing services providers manage supply chain risk is not a new task for distributors, but that role seems to have become more important and is now an integral part of the distribution business model.
Outsourcing, shorter product lifecycles, increased government regulation, trade wars and tariffs have increased risk in the supply chain. That’s in addition to “normal” supply risks caused by supply/demand imbalances which can result in longer lead times, shortages and price increases.
The supply chain has become more complex and as risks have increased, electronics buyers and their companies have become more dependent on distributors to help identify potential new risks and manage and mitigate them. In fact, distributors are in a good position to identify and manage risk because they have a birds eye view of the supply-chain.
They receive purchase orders from customers and often receive forecasts from them. In addition, they often have close relationships with suppliers, and are privy to a lot of market intelligence that can be used to manage risk.
“Minimizing risk in our customer’s supply chain is TTI’s number one priority,” said Jeff Ray, vice president product and supplier marketing for TTI. He said in the past, fluctuating or extending lead times would be the distributors largest challenge. “Today that challenge seems to be one of the least threatening, at least comparatively,” said Ray.
Range of risk
He said risk for distributors today ranges from the impact of raw material cost increases to freight challenges, both in the cost and availability of commercial air as well as ocean freight shipments. He noted the freight challenges are less pronounced when products are procured within the same geographic region as they are manufactured.
“Cyber security threats, counterfeit and product obsolescence are also supply chain risks that are on the increase,” said Ray. He said buyers should work with suppliers and distributors that are fully compliant with all industry quality regulatory requirements such as: NIST, Anti-Counterfeit and Anti-Corruption to reduce those risks.
Some supply chain risks, like cyber security threats, have increased over the last 10 years while others like product obsolescence and lead time extensions have long been a part of supply chain management, according to Ray.
“I think the supply chain challenges that have presented themselves as a result of outsourcing and less vertically integrated manufacturing have also increased,” he said. However, the increase of multi-location component manufacturing footprints and the relocation of these additional sites closer to the point of consumption has aided distributors and customers with supply chain management, said Ray.
There are many steps that are taken to identify and reduce risk including market intelligence, systemic controls, as well as institutionalized processes and procedures to protect the supply chain during volatile market conditions, said Ray.
Guiding lifecycle management
OEMs rely on distribution to guide them with product lifecycle management. “ As component manufacturers continue to rationalize their product portfolios, it is critical to have a distributor that will support bills of materials as products move from production, to NRND (not recommended for new designs), to EOL (end-of-life), to obsolete,” said Ray.
He added distributors are uniquely qualified to assist customers with additional and/or alternate sources. The communication of product change notices is a “primary communication vehicle for both the component manufacturer as well as the distributor,” he said.
An area where the industry could help customers in this process is to standardize the timelines associated with the migration from standard to product through obsolescence, especially for automotive grade and hi-reliability products, according to Ray.
“Too frequently the customer does not receive enough notice from the manufacturer for long running end product applications that require production part approval process (PPAP) or other agency testing approvals,” he said.
Peggy Carrieres, vice president for global sales enablement for Avnet, noted the component industry is cyclical and the supply chain is complex and unique. Supply/demand imbalances are inherent in the market so close relationships with suppliers can help mitigate risk.
“We have strong relationships across many suppliers and can reduce the level of risk through early warning and approved vendor list (AVL) expansion of customers’ bills of materials (BOM) to give options for sourcing,” said Carrieres. Avnet is “uniquely positioned with strong supply chain expertise to manage risk through inventory buffering and robust forecast management capabilities,” she said.
Most buyers and their companies depend on distributors to identify potential risks and help manage them. “The end-to-end ecosystem between supplier and consumer is complex and connected,” said Carrieres. She notes the supply chain is dependent on multiple triggers and depends on the forecasting between customer, distributor and each supplier. However, many forecasts are not accurate and customers rely on distributors’ supply chain capabilities to buffer forecast variability, anticipate and analyze long term signal changes and adjust proactively to ensure customer lines keep running smoothly, she said.
Dave Doherty, president and chief operating officer for Digi-Key, said that forecasting is getting more accurate than in the past, but it is still an “inexact science” because there is more variability. One reason is suppliers are offering more variations of parts so there are more stock keeping units (SKUs). “It has become more fragmented,” said Doherty. “Forecasting likes the law of big numbers.” It is easier to have an accurate forecast for a broad category of parts than for a specific SKU.
Black Swan events increase risk
While there are always risks in the supply chain at any given time, the severity of those risk can change on a dime when a “Black Swan” event such as an earthquake, a tsunami, flooding or other catastrophe occurs in a region where there is a lot of electronics production. Such events often wreak havoc on the supply chain and boost risks exponentially. The latest such event of course is the COVID-19 pandemic.
When the pandemic started to impact North America last March, risk priorities changed for many distributors.
“Keeping our people safe was the number one priority” when coronavirus hit the United States, said John Hufnagle, vice president, North American sales and engineered solutions at for connector and cable specialist distributor PEI-Genesis. The company focused “heavily on keeping our facilities safe and operational by instituting safe distancing, cleaning and shift policies and working with the local government to identify the business as essential was key,” he said.
Customers were also a priority. “We reached out to our customers to pulse the level of readiness, the need for tailored support and general market conditions early on,” he said. PEI-Genesis was able to help reduce customers’ risk through inventory programs, business reviews and insight on emerging market trends and supplier situations,” said Hufnagle. He added the distributor kept customers at large apprised “with its operational status in all regions.”
In addition to communicating with customers to reduce risk during a particular event, longer term it is also important to make sure staff at a distributor keeps pace with changes in technology. Training, upgrading of technology internally and externally, staying current with products and enhancing the user experience are all key components of risk mitigation necessary for future success.
Doherty says that while distributors can help OEM and EMS companies reduce risk, not all take advantage of distributors’ capabilities. For instance, Digi-Key and other distributors can assess the risk of a bill of materials to determine if lead times on the BOM have stretched or if some parts have gone end-of-life or will for EOL soon.
“There is no charge for that service. So many distributor partners have information that could be utilized but is not leveraged by many customers today,” he said.