Rethinking supply chain management

How companies are reviewing sourcing practices to combat disruptions and build resilience

The COVID-19 pandemic exposed weaknesses in supply chains around the world, so a major rethink is underway. Lockdowns paralyzed production, suddenly cutting off access to critical materials and components. And when restrictions eased, there followed a massive reallocation of resources to deal with the spike in demand for medical supplies and equipment, and the inputs needed to manufacture them. Sourcing norms, optimized over years of globalization, were upended. High availability, reduced prices and short lead times, key to maintaining competitiveness, all but disappeared.

This is not new to the electronics industry. Beginning in late 2017, a series of component shortages resulted in higher quotes and longer lead times, and affected the flow of passive components. “Suppliers were quoting lead times averaging 20 to 30 weeks—and this is all before the pandemic,” said Graham Scott, Jabil’s vice president of global procurement. However, the situation eased in 2019 as suppliers boosted capacity and output. “By the middle of the year, the passive components market was relatively balanced.” The relocation of some production processes in response to the trade war has also helped, fueling overall optimism that 2020 would be the year of recovery.

And then the pandemic happened and with it came a whole new set of challenges. The restricted supply of components means a delay in product launches, and as economies have been impacted, this has depressed demand – what experts call a double whammy of supply and demand shocks.

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In a paper published by the Production and Operations Management Society, Panos Kouvelis and Morris A. Cohen added three R’s to the long-standing Triple A framework of successful supply chains. “Short-term agility has to be complemented with robustness for real-time responses across a wide range of scenarios. Adaptability to long-term technology and macroeconomic trends needs resilience to future shocks and the new (ab)normal world. Moreover, alignment of incentives of existing supply chain partners requires realignment to deal with evolving business models, changing consumer needs and preferences and a newly defined value system. The era of turbulence of the next 20 years needs a Triple-A-&-R portfolio of excellence capabilities in supply chains.”

Diversifying suppliers

One key lesson from this disruption of supply chains is the risk of single-source dependency or relying on one factory, supplier or region for key components and materials. This was felt not only in the MLCC shortage in 2017 and the beginning of the trade war the following year, but also in the 1997 Asian financial crisis and the 2011 tsunami in Japan.

Reexamining supply chains to identify weaknesses down the line is an important step. For instance, companies usually turn to a number of suppliers and subcontractors for specific components. This commonly adopted arrangement offers flexibility, but can be risky once one supplier, which may have just one factory and one location, is compromised.

To address this, finding more sources in other areas is the first option even if it means higher prices. With the pandemic, it has become an acceptable alternative just to ensure a steady flow of components.

Another course of action is tapping into regions nearer destination markets and making sourcing more geographically distributed. “North America might be served by shifting labor-intensive work to Mexico and Central America. To supply Western Europe with items used there, companies could increase their reliance on eastern EU countries, Turkey and Ukraine,” said Willy C. Shih, Harvard Business School’s Robert and Jane Cizik Professor of Management Practice in Business Administration.

“Long before COVID-19, Industry 4.0 technologies were already fostering a reorganization of global  value chains involving significant relocation (and reshoring) of productive activities,” said UNCTAD economist Piergiuseppe Fortunato. He added that most analysts think the current pandemic will reinforce these trends, and make offshoring an uncertain venture.

Stockpiling supplies

Maintaining a just-in-time (JIT) inventory system may have proven beneficial to achieving efficiency and keeping wastage to a minimum, but it provides little flexibility during surprise disruptions.

“The savings from those practices have to be weighed against all the costs of a disruption, including lost revenues, the higher prices that would have to be paid for materials that are suddenly in short supply, and the time and effort that would be required to secure them,” said Shih. Companies with no other suppliers to turn to should hold intermediate inventory or safety stock, he added.

In fact, it is predicted that “all supply networks, regardless of their organizational structure or management, will see an increase in inventory holdings to cushion a larger number of, and more intense, blows,” said Frank Pisch, assistant professor of international trade at the University of St. Gallen.

Still, JIT systems can work, promoting regionalization instead. Pisch said that this will be as a response to realize resilient and robust supply chains rather than a form of protectionism.

Component shortages in 2021?

As COVID-19 cases continue to increase and hit new heights in the first quarter of the year as feared, there are concerns among buyers of electronic components of more lockdowns that will affect production.

Some of these anxieties stem from the expected acceleration of developments in various industries, which were slowed or put on hold by the pandemic. “It may take some time before standard lead times return,” said Shabnam Shaghafi, vice president of supply chain for EMS provider Benchmark Electronics in the US, in an Electronics Sourcing article by James Carbone. “Products such as MOSFETs, IGBTs, sensors, microcontrollers to mention a few, are anticipated to stay constrained through the first half of 2021.”

Another worry is supply base consolidation, which can make the market less competitive. It adversely affects customer prices and product choices, said Shaghafi. Still, there are cases where supplier consolidation may help increase a customer’s leverage by allowing for consolidation of spend and increased negotiation power, she added.

In whatever way 2021 will turn out and maybe end the current impasse, one thing is clear – the landscape has changed.

Suppliers’ outlook

Based on interviews conducted by Global Sources Electronic Components with 24 suppliers from Taiwan, the general outlook for 2021 is hopeful. Almost all realized higher sales in Q3 2020 and maintained momentum until the last quarter. In the months ahead, these component manufacturers are anticipating steady demand recovery driven by trends for the Internet of Things, artificial intelligence, 5G, electric vehicles, smart home and robotics, while requirement for components in medical applications remain high.

“Some of our factories are operating at full capacity right now,” said SPK Electronics Co. Ltd, which ships crystal oscillators, GPS modules and antennas, Bluetooth modules and connectors to Europe, the US and Asia. Heavy Power Co. Ltd, which specializes in wire connectors and exports them to the US, France and the Middle East, said it has already been running at capacity since Q4 2020.

It will be better than in 2020, but the growth rate will not be very fast, according to Ace Sound Enterprise Co. Ltd, a supplier of battery holders, snaps and contacts exporting to Europe, the US, Asia and the Middle East.

Hsuan Mao Technology Co. Ltd is looking forward to higher sales in 1H 2021. The manufacturer of connectors, wire harnesses and cable assemblies expects this upward trend as “made-in-Taiwan products will be more popular than before” in the US.

Suppliers also acknowledge challenges ahead. “Shipping modes have changed and the international situation will increase product cost,” said Showwell Group Co. Ltd, which exports transformers, chokes, coils and inductors.

A few, including motor and motor parts specialist Hennkwell Ind. Co. Ltd and TWT Compact Gear Reducer Motor, are taking a conservative approach to this year’s market, citing continued uncertainty due to the pandemic. Aid Electronics Corp., which markets capacitors, expects improvements after the third quarter yet with broader vaccine deployment.

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