When disruptions to the electronic component supply chain occur they are painful. Lead-times can extend overnight, prices can treble and in some cases, parts are placed on allocation or discontinued altogether.
This can leave both Original Equipment Manufacturers (OEMs) and Contract Electronics Manufacturers (CEMs) with limited options when it comes to securing material for production requirements.
Unfortunately, right now, the component market is once again in the middle of being disrupted. After several years of slow growth and minimal investment, coupled with a number of significant M&A’s and an increased demand for memory products, the supply chain is once again struggling to keep up.
In the last few months more companies have announced extended lead times and products on allocation. The memory sector appears to have been hit the hardest, with all Toshiba products on allocation with a lead time of over three months, and Micron facing similar problems. News outlets and industry sources are also predicting a delay to Apple’s iPhone 8 release due to supply constraints.
These concerns amplify the need for CEMs to have practices in place for dealing with supply chain disruption. In this blog, we discuss four ways your CEM partner can mitigate risks to your supply chain.
1. Maintain close relationships with suppliers
A good CEM partner will have long-standing relationships in place with a global network of reputable suppliers. Their suppliers should have an in-depth understanding of the market and be equipped to deal with changes in demand. Regular business reviews should take place between the CEM provider and their key suppliers so that quality, delivery, and pricing issues can be monitored and discussed. In addition, market intelligence and production demand should be shared freely between both parties to ensure there are appropriate supply chain solutions in place.
2. Firm up ‘call off’ demand into firm purchase orders
During times of disruption your CEM partner may consider advancing their letters of intent to firm orders as a way of securing stock ahead of others. Turning a ‘call off’ annual order into a firm drop provides an extra level of commitment and can help the CEM negotiate stock from their suppliers. However, this can be a risk for the CEM, particularly if you are not prepared to mirror the same level of commitment. In a worst case scenario the CEM could be left liable for covering the costs of the unused stock so you may find they will expect a similar level of order coverage from you first before they go ahead and do this themselves. This tends to be more of an issue for customers that are running annual Service Level Agreements (SLAs) with their CEM partners as opposed to placing firm monthly purchase orders.
3. Artificially increase order coverage
Increasing order coverage over and above what is actually needed can be another way of helping to safeguard stock when the supply chain is struggling. In this scenario the CEM has the chance of being seen as the ‘bigger’ customer (based on the suppliers existing order book) and then prioritised as a result. Money talks and the more spend a CEM has, or is willing to place during times of turmoil, the higher up the queue they can go. Of course, this does pose a number of risks. If demand is already too high and an allocation situation is in place, these additional orders will only heighten the problem and could lead to further challenges and price rises. It could also backfire on the CEM and their customer as the supplier might end up delivering everything they were asked for, impacting the CEMs cash flow. Be careful what you wish for…
4. Look at all the alternative parts available
A good CEM should review your Bill of Material (BOM) and build data to ascertain if other components can be used as a replacement. Quite often multiple semiconductor manufacturers can be used in a design, providing they are the same fit, form and function. The CEM won’t want to keep swapping between manufacturers and suppliers but as a short term solution, buying in alternative devices, approved by you of course, can be a quick win and is often overlooked. And if you haven’t listed any suitable alternatives in your design, your CEM partner should have strong product knowledge and access to suitable alternatives through their network of suppliers which they can then discuss with you.
When faced with any form of disruption, communication is fundamental to a successful partnership. There should be a clear, open and frequent line of communication about any risks and what your CEM partner is doing to eliminate them. But it works both ways too. It’s important for you to keep them abreast of anything that could have an additional impact on the supply chain. For example, by bringing to light any possible increases in demand you have planned for the future or a new product design you plan to bring to market soon.
There are many things that can disrupt an electronic component supply chain, from natural disasters, to price hikes of oil and copper, general economic conditions, and political unrest. Even annual events, like Chinese New Year and Christmas can impact production schedules. The best CEM partners are committed and keep their fingers on the pulse, communicating actions and proactively suggesting solutions to help you mitigate any additional costs or lead-times associated with supply chain issues.
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