Navigating stormy waters

Smith’s president, Americas, Todd Burke

As component purchasing departments continue to face sourcing headwinds, independent distributors offer a solution to accessing previously untapped supply lines.

With long lead times, obsolescence and limited component availability all impacting the supply chain, purchasing professionals have been challenged over the last 12-months. 2021 witnessed surging technology deployments including 5G, electric vehicles, medical and consumer products. Couple this with increasing electrification of the world and component manufacturers have understandably struggled to meet demand. In some cases, orders are facing >92-week lead times and increasing.

John Neuffer, CEO of the Semiconductor Industry Association reported that global semiconductor sales in November 2021 were $49.7 billion, an increase of 23.5 per cent compared to November 2020’s $40.2 billion. The cumulative annual total of semiconductors sold through to November 2021 reached 1.05 trillion, which is the industry’s highest ever annual total.

Mix in shipping cost increases, inflation, reduced inventory, pandemic induced hiring difficulties and it’s enough to give buyers sleepless nights.

The IPC’s January 2022 Economic Outlook report found that component shortages continue to hamper production levels and lead times remain long, with supply chain challenges lingering well into 2022 and in some instances into 2023.

Fusion Worldwide’s chief revenue officer, Luke Lesaffre, said: “The independent distribution market channel is more of an integral part of a supply chain rather than where a buyer goes in case of emergency and as a last resort.

“Business has not showed any signs of slowing down. There are no signs that there will be any change in supply and demand for the year. As a result, buyers will continue to look to independent distributors for chips and other components. Every indication that we have is these current supply conditions are going to continue through the year and into 2023.”

One reason independent distributors saw a sharp increase of demand was that there were more electronics buyers who entered the open market for the first time because of shortages caused in part from the pandemic.

Smith’s president, Americas, Todd Burke, said: “With new disruptions to the supply chain continually adding to the current market strain, it is likely that the ongoing global semiconductor imbalance will persist for the foreseeable future. Smith has worked tirelessly to support our customers throughout the shortage situation, shipping over 30,000 unique manufacturer part numbers and increasing our IC sales by more than 1,000 percent in 2021.

“Demand for semiconductors and other electronic components is not slowing down, creating a mounting supply deficit worldwide. Independent distributors like Smith sit in a unique position within the electronics supply chain by both selling and sourcing components in the open market, providing us many viewpoints from our wide range of customers across all industries.

“Smith offers our partners around the world unique support by: utilizing our incisive market data and analysis to diversify and strengthen their sourcing channels; expediting turnaround times with our in-house quality control and testing; drawing on our decades of industry expertise to solve complex supply chain challenges.

“Data analysis, quality control and industry expertise are crucial criteria that purchasing professionals need to consider when evaluating an open-market distribution partner. These resources can help buyers successfully navigate the open market, more strategically source product and keep their lines active. As the world’s leading independent distributor of electronic components, we pride ourselves on offering our partners the essential tools they need to keep their lines running during the current market turbulence and beyond. As we move forward, we will continue to build long-term relationships and provide flexible, custom solutions for our global partners that can complement any market conditions.”

A2 Global’s CEO, Frank Cavallaro

Obsolescence management strategies, particularly for the aerospace and defense sector are another challenge facing buyers.

A2 Global’s CEO, Frank Cavallaro, shared strategies designed to help long-term planning, informed decision making and avoiding redesigns: “Though exacerbated by the current chip shortage, the defense and aerospace industry’s position in the electronic components market has significantly reduced over the years. Rapid technological advancement is driving suppliers to abandon low-demand, older technology products at a faster pace, while the US Department of Defense (DoD) seeks to prolong the life of weapon systems. This means components used in military systems are becoming obsolete before the product lifecycle is finished, making it increasingly difficult to find replacement parts.

“Commonly known as Diminishing Manufacturing Sources & Material Shortages (DMSMS), it is a critical consideration when planning an obsolescence strategy. As component lifecycles decrease, defense and aerospace manufacturers are left with limited options to keep end products functioning reliably.

“There are three strategies manufacturers should consider to stay ahead of component obsolescence: strategize for obsolescence at the design phase; leverage supply chain networks to plan appropriate inventory needs and storage; and expand sourcing channels and vendors to account for specific parts.

“Obsolescence management is a complex issue for defense and aerospace, made more difficult by DMSMS. Having a strong obsolescence management system in place can help planning, making informed decisions quickly and avoiding redesigns or fines.”

4 Star Electronics’ director of operations, Scott McKee, added: “The open market, while inherently higher risk than authorized channels, can also be used effectively, if buyers carefully choose quality independent distributors. They help procure material from the open market when other options are unavailable and provide value with thorough purchasing support. Top tier independent distributors have sophisticated processes in place for bill-of-material and lifecycle analysis, vendor management, kitting and full purchasing outsourcing.

“Most quality independent distributors have developed comprehensive inventory management programs that can identify sources of material. This is a result of years of experience dealing with counterfeit and obsolete components, plus an understanding of how to get components from people who have them to people who need them.

“While independent distributors may have many sources of supply, including excess or surplus OEM inventory, OCM direct purchases, authorized distributors and multiple open market stocking sources, buyers need to use some discretion when sourcing from the open market. There are two reasons for this: thorough management of a large number of vendors can be difficult and costly; and utilizing a large number of broker or independent sources tends to drive up component costs when a limited source of supply exists for obsolete parts affected by the shortage.”

ESNA asked Sensible Micro Corporation’s president and co-founder, Chris Torrioni, for insight on how component purchasing professionals can work with independent distributors to get maximum value out of the independent channel during the current market turbulence.

Chris said: “First, I would say go visit your independent supplier and conduct a site audit. There are lots of independent distributors in the industry, but only a small percentage have actually made the necessary investments in education, training, certifications and inspection capabilities to mitigate risk properly for obtaining new and original parts. Digging into your independent’s quality management system and understanding how they manage their suppliers and inspection process is key.

“Secondly, make sure you have a transparent and trusted relationship in place with whoever is handling your account on a daily basis. In this global shortage market, time is of the essence and purchasing professionals need fast and accurate information to make critical decisions. Slow communication or lacking important product information is frustrating and a lot of opportunities to secure material will be missed.

“Google is not a replacement for conducting due diligence on a new supplier. Do not pay anyone in advance if you do not have an established relationship. I cannot tell you how many times we obtain a new customer because they have wired in advance to some company they found on Google claiming to have their parts, but never deliver or have delivered substandard/counterfeit product. The emotional response to finally finding the parts you need can cloud any logic of following a diligent sourcing plan which can expose the buyer to incredible levels of risk.

“Lastly, do not send your shortage RFQs to every independent you know. Many times, pockets of inventory are released and you have ten independents chasing the same inventory. Whoever is holding that inventory now believes they have the hottest part in the market and the price is going to skyrocket. Make sure you are properly aligned with two or three IDs that have the experience and quality infrastructure in place to handle your business effectively. If they cannot locate the material you need, chances are there just isn’t legitimate inventory available in the market at that time.”

To conclude, IBS Electronics’ global marketing and PR manager, Matthew Amato, said: “With a heightened demand for electronics that is rapidly increasing among all industry sectors, the global supply chain has struggled to meet the requirements of manufacturers causing lines down and slowed time-to-market. Interestingly, over the past two years the topic of supply chain has become so prevalent people who have very little understanding of what a supply chain is, now know about supply chains.
“Prices and lead times for materials from semiconductors to indirect materials required to manufacture electronics continue to soar leaving executives focused on their supply chains.

“Oden Technologies 2021 State of Manufacturing report indicates supply chain as a priority for most manufacturing executives. Survey respondents indicated 71 per cent are redesigning their supply chains, and 58 per cent are increasing their supplier base while also stating their biggest challenges were related to certifying new suppliers (67 per cent) and onboarding them (57 per cent).

“Now more than ever is the time for manufacturers to explore reinventing their supply chains with multi-source strategies, designing in alternative components to overcome allocation challenges, and doing so by developing relationships with independent distributors who offer greater flexibility and stability for their supply chains.
“Independent distributors such as IBS Electronics Group with ISO:9001, AS9120B and AS6081 certified quality management systems, can provide access to a seamless global network unleashing a powerful global marketplace and effectively adapt dynamically with market conditions to reduce supply chain complexity. This enables manufactures to essentially procure the entirety of their bill of materials from a network of suppliers delivered by one single certified source. This independent distribution model is greatly aiding manufacturers in overcoming the biggest challenges of certifying and onboarding multiple suppliers who are restricted by limited product portfolios or territory.

“Here are three qualifications the most effective independent distributor will offer: certified quality management system; value engineering for introducing pin-to-pin alternative components; and global presence for optimal supply chain efficiency.”