Security of Supply in Uncertain Times

It wasn't that long ago that the supply chain was worried about components shortages following the earthquake and tsunami in Japan. Now the pendulum has shifted: semiconductor inventories in the channel have risen to levels not seen since 2008. (See: Supply Chain Turmoil Looms.) The supply chain is entering a period that is going to test relationships, and it's going to be interesting to see how it plays out.

Back in March, distributors were getting calls from customers anxious to know if their standing orders could still be filled. What was striking about this time period was the customers calling distributors weren't newcomers seeking a new source of supply: they were existing customers with longstanding relationships. These relationships were expected to stand for something when it came to getting the parts that were needed. Most distributors were able to meet those obligations.

Now that the industry is facing an oversupply, procuring parts won't be a problem. Customers may be trying to rid themselves of parts they just can't use. In some cases, suppliers can take those parts back; in other cases, distributors can channel the excess parts to other customers that need them. In both cases, having a strong relationship with distributors can make the process easier.

During periods of supply imbalances, though, there is always a third option: the open market. If inventories continue to build, as IHS iSuppli expects they will, there will be opportunities to buy up products for a rainy day. The problem is, excess is usually sold for pennies on the dollar, only to be marked up when a shortage reappears. The companies that specialize in this process, brokers, usually don't depend on long-term relationships when supply gets tight. The open market allows the opportunity to buy low and sell high, and it's been around as long as anyone can remember. It's a short-term solution to a long-term problem.

Component makers, distributors, and customers all say they are working together to make the supply chain better. If that's true, the oversupply we're facing may not be as bad as expected. But it's going to take some work throughout the supply chain. Tomorrow, distribution executive Lindsley Ruth, executive vice president of global distributor Future Electronics , will join the editors of EBN for a live chat at noon EDT. Find out how the distribution channel can help you manage your inventory better by joining the discussion here.