Factoring Oversupply Into Supply Chain Relationships

For much of the past year, supply chain research and analyses have focused on risk management, particularly as it pertains to component shortages related to natural disasters. In mid-December, though, IHS said that chip inventory had built up in the electronics supply chain, and sales momentum had stalled. For high-tech companies, the risk of too much inventory is as real -- and potentially as costly -- as too little inventory.

The supply chain, perhaps more so than other electronics industry segments, has been badly burned by excess. In 2001, the industry produced itself into a component surplus of more than $13 billion by not reality-checking wildly optimistic forecasts. History isn't repeating itself to that extent, IHS says. Suppliers simply aren't optimizing their capacity; they are producing "solely based on historical demand."

Though that's a better indicator than just forecasting, recent history has been anything but typical in the supply chain. A year ago, hard disk drives were in short supply as a result of floods in Thailand. Not long before that, the earthquake/tsunami devastation in Japan called the chip supply into question.

Many of the strategies executed during shortages can be effective in an oversupply market, as well, according to SCM World's Chief Supply Chain Officer Report (registration required). "Chief among these [strategies], by some margin, is dual or multi-sourcing of key materials, components and products -- a strategy favored by more than three-quarters of respondents."

Sourcing product through a combination of supplier-direct and distribution relationships can give OEMs flexibility in returning products. Component makers tend to be more stringent about returns, particularly for custom products. Distributors have return practices built into their supplier relationships, though those vary by product category.

More frequent communications and better visibility should prevent inventory buildup and hedge against shortages. Along those lines, component vendors, OEMs, and distributors have been moving toward real-time information services hosted in the cloud. Avnet Inc. (NYSE: AVT), for example, is utilizing a Control Tower model hosted by E2Open. Instead of the one-to-one data sharing handled via EDI, cloud-based platforms enable multiple partners to share data. In addition to suppliers and manufacturers, such systems integrate logistics companies and other key partners to view overall demand.

Control towers can be set up to show structured information such as at-risk inventory for any given period, Rich Becks, E2Open's general manager for high technology, explained in the Webinar Enabling Supply Chain Course Corrections Through Control Tower Capability. Armed with the information, supply chain managers can react quicker to the problem. Cancelling an order is likely to have fewer consequences than trying to siphon off excess inventory.

This could be crucial to the supply chain if inventory shakes out the way IHS expects.

As the year ends, the market finds itself at a difficult juncture, with no significant drivers in sight that will increase demand for silicon suppliers during the near term. All of the initial orders for manufacturing electronics systems that were anticipated for the holiday selling season have already been completed...
Prospects brighten next year, with silicon shipments tentatively expected to climb 11 percent by the time the first quarter ends, when companies achieve equilibrium between inventory and demand. That, however, is more than three months away -- and anything could still happen to further derail the fragile growth scenario.

Unlike OEMs, supply chain partners are limited in their ability to slash prices and put products on sale. Custom semiconductor products, for example, are usually sold on a "you buy it, you own it" basis. Commodity products, such as standard logic and memory, can sometimes be pushed back in the channel. Distributors that reach a wider customer base than component makers often can absorb some excess.

There are a number of options when demand does not materialize or products and components become stale. Managing products at the tail end of the supply chain -- a process also referred to as reverse logistics -- increasingly is being embraced in the electronics supply chain. I'll look at this last leg of a product's journey in my next post.