Backlogs May Be the New Normal

Supply chain managers buying parts for mobile phones may want to brace for a bumpy ride. Recent news coming from Asia indicates shortages for several important components could trigger supply chain disruptions, hike prices, and make backlogs a new norm for a while.

Industry sources cited by DigiTimes reported that several key smartphone components, including high-end camera modules, touchscreen panels, and multi-chip package memory chips, are getting harder to find.

As these kinds of trends usually go, increased global demand for popular consumer devices, most notably Android and Apple smartphones, plus the manufacturing complexity associated with some of these parts, requires constant vigilance to keep these components in stock, at the right price.

Of course, if you happen to have Apple or Samsung written on your business card, you may have more luck securing parts. The battle for global smartphone dominance between these companies is proving how product quality, device innovation, and well oiled supply chains help triumph in the consumer electronics space, Forbes reported.

But, even these companies are not invincible, as noted in a report from The Street. Last fall, despite selling more than 5 million iPhone 5s, Apple's shares hit a rough patch when it faced supply shortages and rioting at one of its Foxconn partner's manufacturing plants. Earlier this spring, mobile phone operators Sprint and T-Mobile acknowledged that they had to delay the Samsung's Galaxy S4's rollout because of inventory challenges at the Korean electronics manufacturer, the article said.

The news ripples down from there. Chinese handset companies Yulong, OPPO, and Xiaomi have said that their suppliers are struggling to keep up with demand, according to The Street's report. And Taiwan-based HTC is having a hard time keeping up its phone production, too, because camera sensors aren't being manufactured fast enough.

If this weren't enough to cause jitters, uncertainty around how the world will respond to increasing political tensions between North and South Korea complicates matters further. EE Times Asia recently reported that a collapse in Korean parts production would have worldwide implications and particularly hit the DRAM, NAND flash, and LCD panel segments.

None of this is new, nor should it come as any major surprise. Anyone who has earned their stripes in this business knows all too well how these supply-demand fluctuations come and go. These cycles seem to be more the norm than the exception these days.

What's new about this is that it's hitting the almost-untouchable smartphone market. Smart supply chain professionals should have predicted this would happen, eventually. There's a pattern: A product comes out, and, as worldwide masses latch on and the technology becomes trendy, shortages show up sooner or later. It happened many times over with PCs, laptops, high-definition TV screens, and any other device the world wanted. Now it's the smartphone sector's turn.

How well prepared is this segment of the supply chain this time around? Are we going to double booking for parts and inventory building for key parts? Will there be more spot-market buying when parts get really hard to find? Or are people already anticipating this and finding better, more predictable ways of matching manufacturing build plans with customer orders? Tell us in the comments section.

11 comments on “Backlogs May Be the New Normal

  1. kilamna
    May 28, 2013

    Backlog has been the norm from the begining of time; even if it was for a short time. I am sure you meant 'delinquencies' OR 'long lead times'.

    Not very different from the hog cycle or the aluminum cycle: Increase in demand. Lengthening leadtimes. Extra bookings. Double bookings (ie more than need, and at multiple suppliers). Manufacturers increase capacity in anticipation of continued high demand and growth.  Demand returns to normal. Leadtimes shrink. Overcapacity. Price collapse.

    This story reminds me of a conversation between two salemen I heard years ago:

    Salesman #1: “I just booked an order with 104 weeks leadtime.”

    Salesman #2 (not to be outdone): “That is nothing. I just booked an order with a leadtime of 2 years.”

    About 6 weeks later the leadtimes were 'from stock'; ie the worst semiconductor 'recession' was on.

    Is it time for a correction in the markets (components, real estate, stock)?



  2. Taimoor Zubar
    May 28, 2013

    I think the main reason behind backlogs in the electronic supply chain is the volatility in both demand and supply. The volatility in demand is there because of changes in consumer preferences and new inventions while the supply varies because it's linked to natural events such as floods or crop harvest. This dual nature of volatility makes the situation complex in the electronics industry. Other industries normally face variations in only of demand or supply and not both.

  3. Taimoor Zubar
    May 28, 2013

    One of the reasons why companies integrate vertically is to reduce the gaps in supply and ensure a smooth and constant supply of raw materials and hence prevent any backlogs. It's pretty common in the other industries but I don't think the electronics industry has recently seen a lot of vertical integration. What could be the reason?

  4. kilamna
    May 28, 2013

    TaimoorZ: agree. My comment was triggered by what I think is incorrect usage of the term 'backlog'. To me backlog is the existence of an open order for delivery at an 'agreed' date. The meaning that is implied in the original article is as if 'backlog' is a 'problem'. Backlog is a problem only if the lead times are extending or not being met (ie delinquencies to open-order commit dates), as well as being indicative of an ('imminent') correction.

  5. Tom Murphy
    May 28, 2013

    Taimoor:  I beg to differ.  A backlog to me represents the inability to deliver an item for sale and, therefore, a condition that is driving down profit.  Sometimes, it represents unexpected demand for product — a nice problem to have, but also a lost opportunity.

    Remember the PT Cruiser?  When it first came out, it was on backorder.  By the time the factories cranked up many, many more of them, the car lost it's initial appeal. It no longer looked like something new and different, and reviewers started admitting it was a pretty mediocre car at that.  Lost opportunity — and a supply chain headache.

  6. prabhakar_deosthali
    May 29, 2013

    With so many tools available now  for forecasting, one should be able to predict the highs and lows in a demand supply situation and be able to synchronize the production based upon the consumption to keep the lead times at a predicted level without causing non moving inventories.

    But in reality this  is a tough balancing act which could be easily jeopardized by change in political scenarios, natural calamities, labor problems and what not.

    Compared to what used to happen say 20 years ago, when in-spite of larger lead times the businesses were able to plan their purchases and predict the sale of their products on along term basis as the pace of the whole business was so slow.

    In today's fast dynamics, only the agile companies will be able to keep the right balance between the back log and overstocking.


  7. Taimoor Zubar
    May 29, 2013

    A backlog to me represents the inability to deliver an item for sale and, therefore, a condition that is driving down profit.”

    @Tom: I agree. The lost profit is in the form of opportunity cost and is generally not recorded in the books as per the accounting method. Companies are often not able to quantify the true cost of not being able to meet a sale.

  8. Taimoor Zubar
    May 29, 2013

    In today's fast dynamics, only the agile companies will be able to keep the right balance between the back log and overstocking.”

    @prabhakar: Agility is indeed the key towards avoiding backlogs and surpluses. And the first step towards agility is to move towards JIT where you cut down on the lead times and setup times and produce just according to the demand. Companies like Toyota are way ahead in this and already successful because of this.

  9. ahdand
    May 29, 2013

    I think its not the new normal, its something which we have created to suit our needs. Backlogs are mostly stuff which you cannot perform by your own. So its something which we create to cover our backlogs.         

  10. ahdand
    May 30, 2013

    @Taimoor: I think its because its linked to many.       

    May 30, 2013

    It is notoriously difficult to forecast such things and so I cannot see how we can avoid the backog issue.  One way to do it is to ensure supply contingencies are in place to respond to demand but this is expensive to implement.

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