2018 has officially come and gone, and for many professionals involved in the manufacturing supply chain, the end couldn’t have come soon enough. Despite the electronic component market increasing approximately 8% – with even faster growth expected in 2019 with the rollout of 5G networks – supply has consistently failed to match the skyrocketing demand. Lead times for passives have stretched beyond 25 weeks, chip resistors beyond 52 weeks, and available data suggests a disturbing trend of double ordering. Even worse, over-reliance on distributors and brokers for component sourcing over direct suppliers has led to strained profit margins that, if left unchecked, could hamper manufacturers’ potential for long-term growth. As OCMs are feasting on record revenues, their customers are experiencing famine.
The hope of electronics OEMs moving into the new year is, of course, to bring this ratio into proper balance as suppliers continue to ramp up production. Such a ramp up, however, has been slow to materialize. So, as 2019 kicks off, we would like to offer manufactures three New Year Resolutions that can ensure the lifecycles of their products without sacrificing plans for long-term growth and development.
In an industry becoming increasingly defined by allocation issues, a financial commitment to sourcing the full amount of electronic inventory at the front-end of a product’s development cycle. While this sounds unrealistic considering modern OEM’s already well-documented problems maintaining a valuable reserve of working capital, supply chain partners such as EDX have responded to this inherent market need by offering a last time buy solution capable of securing ten or more years of inventory using our own working capital. In other words, we will buy the inventory directly from the seller on your behalf in a single bulk purchase. When the necessary inventory is already in-hand ready to be fulfilled when needed, wherever needed, without struggling to quickly source a critical electronic component affected by allocation or obsolescence?
With so much attention being paid by analysts to the act of sourcing electronic inventory in today’s market, it’s easy to neglect the net loss that occurs once the inventory is on-hand. Assuming the OEM even has the capacity to store sensitive electronics in their own facilities long term, it’s common for annual inventory carrying costs to amount to 25-35% of the inventory’s original value. While this loss doesn’t directly show up on a quarterly report, it is still felt – and distributors prioritizing inventory turnover ratios over customer loyalty are in no reasonable position to accommodate such a need for longer than 18 months. EDX fills this market void by offering customers industry-leading climate-controlled facilities to store critical inventory without term limits. Throughout the service, all inventory is overseen by ISO-certified processes and a team of experienced professionals well-trained in the handling and fulfillment of sensitive components, including raw die and wafer. When these features are used in conjunction with our Last Time Buy Solution, OEMs save an average of 42% in annual inventory carrying costs on top of any bulk purchase discounts suppliers might offer. Whether we buy the inventory, or you already own it, we can store it and guarantee continuity throughout your supply chain.
Few things can sour the relationship between an OEM and a CM partner quite like the issue of last time buys. Obsolescence of a critical electronic component can happen unexpectedly, and when it does, the discussion of who is responsible for the ensuing last time buy can prove problematic. Contract manufacturers, due to the competitive nature of the industry, must operate on extremely narrow profit margins usually between 5 or 6%. While these margins can help win a position on OEMs’ boards, it also places them in a precarious financial position of not being able to offer any reasonable last time buy service for their customers. For OEMs who have grown accustomed to the CM’s growing role in the supply chain, this may come as something of a shock. For 2019, take the time to proactively create an obsolescence management strategy with your CM that benefits both parties equally. A little transparency and the aid of an outside supply chain partner can turn a common cause of contention into the catalyst for mutually successful, long-lasting working relationships.
If the resolutions above are all taken to heart, they should open a significant reserve of working capital. What was in your company’s long-term growth strategy that last year’s struggles prevented you from achieving. Whether it is expanding your workforce, entering new markets, or upgrading your current infrastructure to cater toward new tech, this is the year to follow through with your newfound financial flexibility. Automotive and IoT are just two markets that are primed for unprecedented growth in 2019, even despite predictions of the current component shortage to continue, so there’s no time like the present to prepare for the future with EDX. That, in itself, is a resolution worth keeping.