The electronic components market today is in an odd place. Despite historic levels of growth and revenue on both the OEM and OCM side, it’s hard to have a conversation with either without hearing the word “fear.” Fear is manifesting itself in many forms: fear of OCMs not able to ramp up production to meet skyrocketing demand, fear of another impending market crash that would leave thousands of OEMs with unused inventory, fear of price inflation and allocation designations and rising lead times, and a general fear of simply being left behind in industries that are growing increasingly competitive by the year.
The worst part about fear, however, is that fear begets more fear. The very existence of fear prompts OEMs to make decisions that, in the long term, go against their own self-interest. One such decision that is becoming increasingly common is a resurgence in the practice of double ordering.
The act of double ordering in itself is an understandable one. As OEMs continue to see trends regarding supplier inventory levels, lead times, and increasing market demand, they may feel a need to place two orders simultaneously to “bulk up” their current inventory levels, thus hedging against future shortages and securing the lifecycle of their products.
In a vacuum, this sounds like a non-issue – but context when analyzing this “strategy,” for lack of a better term, matters. The issue comes in later when the OEM makes the decision to cancel one of the two orders. One canceled order is not going to swing the pendulum either direction, but when hundreds of orders from hundreds of manufacturers are all canceled in quick succession, it creates a plethora of unintended consequences. On the buyer side, the influx of phantom orders artificially inflates demand, which directly affects prices and lead times for all involved in the market.
Even more worrisome, however, is the issues double ordering presents on the seller side. Recall from your childhood, if you will, the classic “boy who cried wolf” parable. Eventually, the boy falsely claimed there was a wolf so often, the townspeople stopped believing him – much to the boy’s displeasure once a hungry wolf actually showed up. Component manufacturers, in this analogy, are reminiscent of the townspeople; if hundreds of orders mysteriously vanish just as they are attempting to increase production capabilities, then the OCM is left with a significant quantity of inventory on hand with no buyer in sight. Skepticism, in essence, forces them to doubt what their own data is telling them.
This is the doomsday scenario OCMs envision as they consider just how many double orders in their backlog will disappear in the coming months. Many still remember vividly the struggles they faced following the 2008 market crash, and even today they are still wary to ramp up production for fear of being left hanging in the wind. The result? As long as double ordering remains prevalent in the marketplace, component manufacturers will continue to account for it by deliberately producing less than what the market demands. If left unchecked in the coming years, this trend could threaten to stagnate production across all industries and elongate what has already been the most significant electronic component shortage in a decade.
An OEM’s instincts to increase their on-hand inventory to secure their supply chain and avoid the issues related to a component shortage are good, but double ordering and the irreparable harm it causes the industry is not the appropriate solution. Instead, OEMs should consider committing to their inventory upfront through a single bulk purchase early in their product’s lifecycle. This strategy alone, however, has one significant drawback: the working capital required to make such a purchase is significant, and unrealistic for all except only the highest tier OEMs
The EDX Last Time Buy Solution changes that. While it has been used by customers to complete last time buys, it has applications that stretch far beyond that. During a component shortage, for example, many EDX customers have used our solution to purchase all of the inventory necessary to support the entire lifecycle of their product without any upfront loss of working capital. Instead, EDX will purchase the entirety of the inventory on the customer’s behalf— often at a reduced price due to bulk purchase discounts offered by the OCM — as well as store it in our ISO-certified storage facilities for as long as required. Then, at the time of assembly, EDX will bear the entirety of the shipping burden by fulfilling the inventory anywhere in the world on a personalized delivery schedule.
And not only does this provide our customers with guaranteed business continuity, it also allows the component manufacturers to have a clearer understanding of what the market demand for their product actually is. If more OEMs adopted this model, the motivation for double ordering would be all but eliminated, and OCMs would be free to ramp up production without any reservations that their efforts might be in vain.
A Last Time Buy Solution allows the market to function as intended — with component supply matching component demand in equilibrium, and no boy who cried wolf in sight.
For more information about how a Last Time Buy Solution can solidify your supply chain, click here.