The COVID-19 pandemic has upended global supply chains, as logistics stakeholders struggle with sourcing amid rising and waning infection trends across countries. The volatility with supply and demand has inevitably hit lead times, as suppliers struggle to source raw materials during shutdowns and trade wars.
With highly global sourcing patterns and complex use cases, the electronics value chain has become one of the hardest-hit supply chains during the pandemic.
The core manufacturing capacity for key commodity groups in the electronics supply chain is centered around China and some regions in Southeast Asia, aside from limited capabilities in nearshore European and North American markets. Even before COVID-19, commodity lead times in the electronics segment were in a tailspin over the past three years, suffering due to trade wars and resulting tariffs.
“For instance, the average lead times in ceramic capacitors used to be between four and 12 weeks, which is a general trend when you reserve capacity or place volume commits,” said Richard Barnett, CMO at Supplyframe, an electronics value chain intelligence platform. “This has worsened now. In many cases, the shift in lead times is not related to the physical logistical lead time, but shifts in capacity allocations across downstream markets.”
This is due to the rising interest in electronics from allied markets like automotive, health care and media. Increased consumption and the need to have more sensor-based controls in a variety of verticals have led to a shift in capacity allocation.
Barnett contended that this scenario had led key suppliers to make capacity allocation decisions to downstream markets based on consumption reliability, price stability and higher margins. On the other end, the core electronics industry is a lot more competitive and cutting-edge, lessening margins while putting consistent price pressure on suppliers. With the COVID-19 situation adding to this issue, lead times within the electronics supply chain have considerably lengthened.
“Now, we see capacity reset and get back to China to almost pre-COVID levels. What we witness across the world is a massive demand spike for work-from-home-related electronics. So categories like peripherals, webcams and keyboards went out of stock globally. Companies had to quickly ramp up and shift capacity allocation to these categories,” said Barnett. “For instance, Dell and Lenovo shifted massively to support laptops and computers for kids and officegoers working from home.”
In essence, the shift brought about by the pandemic has led stakeholders to not just strategically alter sourcing processes, but also alter products and their design to suit trends that cropped up, helping make better trade-off decisions.
“The best practice in this volatile environment is to drive as much resiliency in the design phase as possible,” said Barnett. “But teams within organizations who do track this near-term volatility do not share information with teams that make decisions on the design process. We believe that to solve for downstream resiliency issues coming up later, it is important to share and act on intelligence.”
To optimize for margins and risk, Barnett explained that companies would do well to look at the lead time, resiliency and demand as a part of the overall product life cycle. For instance, automakers and their contract manufacturers suffer today due to demand uncertainty, causing them to overbuy or commit to larger inventories than they can handle.
“For manufacturers, it is about protecting margin and profitability through whatever volume they are pushing, rather than trying to optimize for a net profit gain over time,” said Barnett. “Shifting metrics and thinking drives different decision making — be it at the point of design, sourcing or even transportation lanes. Optimizing for uncertainty should be the focus while looking at the protection of product margin and the total cost over the products’ life cycle.”
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