Outsourced Manufacturers Struggle With Uncertain Demand

Despite sustained industry efforts throughout 2012, the goal of accelerating inventory velocity remains elusive for the global outsourced manufacturing business, contributing to the sluggish growth outlook for the first half of 2013.

To be sure, the new year has delivered some reasons for optimism, with improvements in select macroeconomic data such as a boost in China's gross domestic product, rising purchasing indexes and stimulus-led growth in major markets like Japan. Nonetheless, IHS believes the outsourced manufacturing industry is likely to experience tepid growth for the first six months of this year, based on current estimates of a 4.5 percent expansion to yield revenue just slightly north of $400 billion.

Accompanying the soft growth is the slow velocity of inventory, which is driving up costs and delaying time to market.

Improved inventory velocity was a key theme for the outsourced manufacturing industry in 2012. And at the start of last year, the impetus for hastening inventory velocity was in strong evidence for outsourced manufacturers.

Where's the beef?
Companies across the electronics industry believed victory was within reach, as they expected demand to modestly improve, supply shortages stemming from the Thailand floods to abate, and a heightened internal focus to all culminate in better inventory velocity. The year started off on a strong note, with demand rising in several end markets such as notebooks and consumer electronics.

Fast forward 12 months later, and the hoped-for improvement has not really materialized. Looking at IHS data for the largest outsourced manufacturing companies, inventory-to-sales ratios are right back to where they were one year ago. In fact, for many companies, the ratios are at their levels five years ago, just before the start of the Great Global Recession.

So what happened?

First, the demand momentum at the start of 2012 failed to hold through the rest of the year.

Unclear picture: In 2013, customers are more apt to ask for longer
inventory holding periods amid uncertain demand and new production ramps.

Second, new non-traditional markets for outsourced manufacturing -- such as aerospace/defense, industrial and life sciences -- all experienced varying growth patterns throughout 2012. When combined, these segments increased their outsourcing activity at a rate faster than underlying revenue expanded. This was because companies involved in the areas ramped up new programs and further embraced outsourced manufacturing.

Segment, customer variability
As a result, revenue growth rates for outsourced manufacturers varied dramatically from product to product and from customer to customer.

The combination of mixed growth, along with a large quantity of new program ramps, left more than just a few outsourced manufacturing partners saddled with a higher volume of inventory than planned.

Looking ahead to 2013, IHS still sees improved inventory velocity as a key theme for the outsourced manufacturing industry. However, the effort may not be much more successful than it was in 2012.

While periods of relatively sluggish growth historically have translated into much faster inventory velocity, the outlook this year for future growth is much more uncertain.

This means customers are more apt to ask for longer inventory holding periods amid uncertain demand and new production ramps. And once again, such a development will slow inventory velocity.

The key, then, for the outsourced manufacturing industry in 2013, will be how much discipline it maintains in accelerating inventory velocity when confronted with copious customer accommodation requests.

To learn more about this topic, look to the IHS iSuppli report titled "Outsourced Manufacturing Forecast Unchanged, but Macro Headwinds Linger."

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