Securely warehousing inventory for an extended length of time accumulates exponential costs. It’s easy to overlook, but every moment it is within the OEM’s possession represents an increase in tied up working capital. Once the expenses associated with packaging, handling, and maintaining proper climate control regulation are all considered, it’s not uncommon to see annual carrying costs as high as 25% of the component’s original cost.
This doesn’t even consider the infrastructure investments required to compete in the electronics market. According to a report published by Credence Research, the market for application-specific integrated circuits is expected to be worth approximately $28 billion by 2025. Benefits from such a trend include drastic improvements to efficiency, greater IP protection, and increased product differentiation in a crowded marketplace. Proper storage of ASICs, however, require highly-specialized equipment capable of regulating humidity at levels suitable for raw die and wafer. Working capital is what makes such purchases possible.
To cut these costs down and free up the working capital it represents, the most important thing is to realize that the economies of scale do not operate in the OEM’s favor. Innovation will always remain a cornerstone of any manufacturer in the electronics industry, but when equal attention is paid to in-house handling and warehousing, both initiatives suffer as a result. The old “divide and conquer” stratagem does not work in manufacturing.
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Instead of taking this dual-focus approach, I would recommend OEMs narrow their focus. In fact, I would go as far to say that OEMs should coalesce all their resources around a single goal: innovation in the field they know best. It’s a simple concept, and one that companies such as Amazon and Apple have used to rise to the pinnacle of their respective industries -- but it’s also one that requires a degree of humility. It’s difficult to be the best at something, but it’s impossible to be the best at everything.
One quick look around the industry and it’s easy to see that there are supply chain partners who have adopted this mindset. Instead of innovating through the introduction of new products, they have opted to innovate in the areas their OEM customers are lacking. There are supply chain partners who specialize in legacy component procurement, others who specialize in maximizing ROI on excess inventory, and others still who specialize in the proper storage, handling, and fulfillment of critical electronic inventory.
Do not be afraid to seek these specialized partners out, because their success is dependent on fulfilling a defined role better and more efficiently than what a customer could accomplish itself. This flips the economies of scale back in the OEM’s favor, and it can result in substantial savings.
What’s the secret to crunching your cash conversation cycle? It all starts with an honest reflection of your supply chain’s limitations. After that, the rest is easy.