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Black Swans of 2011 Reshaping Supply Chains

On the heels of several 2011 natural disasters, the electronics industry has been met with new pressures as it continues to work towards stabilization.

As we have been seeing, the first quarter of 2012 brought the supply chain closer to “normalcy.” Unfortunately, forecasting is never precise and lean inventory stressors will continue due to the global macro-economic uncertainty, adding new levels of complication for the supply chain to overcome. Now it is time for the industry to look back and reassess market exposures, developing new ways to hedge risk going forward.

Lasting impacts from the 2011 bottlenecks call for better pro-activity and responsive strategies. Sole- or limited-sourcing left many supply chains without the requisite parts to meet delivery or demand. OEMs are forced to revisit the viability of sole-sourcing as nearly all had to work aggressively with qualified alternative partners to keep production lines moving.

Consolidation of many manufacturing facilities within or across manufacturers is ongoing, requiring existing facilities in other regional locations to expand capacity or divest to accommodate. This reaction has forced revisions to retool previously profitable strategies for regional logistics and inventory management.

This year, we expect to see an increase in diversified sourcing solutions by OEMs, moving the EMS sector to expand the number of regional facilities to reduce risk in the event of geographically-centered disasters. Vetted, quality, global sourcing partners are critical to this new diversification model.

We also believe that risk management of inventory and assets has been highlighted throughout the industry. Add to the existing challenges the problematic, global macro-economic situation still plaguing the mature economies, plus the present transitions to new architectures and wafers, it is of little wonder that OEMs and the EMS sector are shifting their manufacturing and sourcing strategies.

Two areas of particular importance in this setting are the day-to-day component costs and effective return on end-of-life assets. Smith & Associates has a long-standing history of customer-focused, dedicated services to mediate the volatility of our industry. Two of our services are directly designed to help global OEMs and EMS companies best manage inventory and assets, from purchase through disposition, PPV Plus, and our asset disposition services.

Maximizing our global market positions through scale and agility, Smith is able to help companies consolidate and reduce vendors without sacrificing flexibility and while buffering customers from the risks of traditional sole- or limited-sourcing. With a leading and trusted partner, updating critical supply chain strategies has never been easier, or safer.

14 comments on “Black Swans of 2011 Reshaping Supply Chains

  1. Barbara Jorgensen
    February 23, 2012

    there have been inaccurate forecasts. The supply chain is doing better than it did a decade ago, during y2k and then the glut of 2001. Still, the fundamentals of forecasting counfound the best minds in the indsutry. As long as that is the case, there will always be a role for distribution.

  2. mfbertozzi
    February 24, 2012

    I agree with you Barbara; in my vision, that role is so much important mostly because local distributor could better enforce relationship with final customers (for either business or retail sector) in the way to be “closest” to them, respect to major vendors or producers of which role is to conceive and then bring on the market tested and good products, aligned to final users needs.

  3. Eldredge
    February 24, 2012

    It sems like the economic pressures vie for consolidation of manufacturing facilities, but risk management creates pressure for multiple sources, preferably from different geographical regions, putting pressure on diversified production. It will be intereting to see what actually happens in response.

  4. Eldredge
    February 24, 2012

    The one sure thing about a forecast is that it will be wrong. The goal is to be wrong by the least amount!

  5. Barbara Jorgensen
    February 24, 2012

    @eldridge: LOL. It still strikes me as funny we all just assume the forecast is wrong. It is; it is a reality of doing business; and the best one can hope for is to mimimize the risk. Still, we should set the bar higher, don't you think?

  6. Barbara Jorgensen
    February 24, 2012

    @mfb: it is interesting that you note that. The “local” distributor went the way of the dodo bird in the 1980s and 1990s but is making a comeback of sorts. Distributors aren't storing inventory in every market like they used to–overnight shipping has taken care of that–but they are opening local offices again. It seems to be strking a chord with customers. These guys don't have the kind of money to dally with–these offices are deliberate and the marekts have been researched for some time now.

  7. Eldredge
    February 24, 2012

    @Barbara – I guess that saying reflects poorly on the person doing the forecasting, but it is more accurately a statement about how difficult the task of forecasting really is!

  8. Mr. Roques
    February 24, 2012

    I agree that inventory risk management is pretty important. Although I'm not sure that companies have studied this too well.

    Do you think they are prepared to change suppliers very fast? in case one of them stops producing (for any reason)? It's really hard to do, and costly but it's the only thing that could work in case a natural disaster (e.g.) would affect the supplier.

  9. Eldredge
    February 25, 2012

    If a company is concerned about not having a single source situation for a critical component, secondary sources should be identified and qualified fairly early in the product life cycle, and should be procuring product from multiple sources prior to a supply issue. Then, transition from one source to another is a simpler (but not necessarily simple) matter. But what if the supply line issue comes from scarcity of a raw material required by either supplier? Or miltiple suppliers are all located in the same geographic region? Risk mitigation is easier when you know what risk you want to protect against…but when you are expected to protect your company against any eventuality, that is a difficult matter!

  10. bolaji ojo
    February 27, 2012

    Dustin, If the natural disasters of 2011 are still shaping the electronics industry supply chain what happens if new ones occur in 2012? These occurrences don't announce their plans and the industry has been caught unprepared before. In your opinion, as the industry tries to control the negative effects of the last disasters are the players also putting in place mechanisms to reduce the impact of any future events?

  11. Ashu001
    February 29, 2012

    Dustin,

    When it comes to Black Swans you can never,ever count out Crude Oil.

    Crude Oil is super-critical in ensuring large-scale Supply Chains work normally.

    And as prices have hit the roof recently,a lot of supply chain managers are having to think twice about how they deal with this issue.

    Creativity is the name of the game.

    I also saw some interesting articles which show how badly the Shipping business has been affected by the recession.Some of the big shippers are offering Free Fuel to avoid their Ships going empty.

    Thats how bad things still are in the Global Economy.

    Ashish.

  12. Ashu001
    February 29, 2012

    Barbara,

    And you cant really blame them for this either.

    After all,the forecasters are only human themselves too.

    We humans tend to be more often than not creatures of habit and enjoy repeating things;whether forecasters like it or not this very inherent bias creeps into their thought-process every now and then.Thats just the way things are.

    Ashish.

  13. Dustin Ford
    February 29, 2012

    Bolaji, We've seen reductions in AVL's from principals to distributors (authorized and independents) over the years in order to reduce costs through consolidation and to mitigate risk up and downstream. That retraction creates new hybrid opportunities for all channels to reinvent themselves.

    Smith & Associates is increasing our market share globally as a result. Principals are still divesting their low margin lines putting our channel on the front lines for lead time issues, price increases and end-of-life/inventory solutions. As a result, we've seen large players this year qualifying new channels to diversify.

    In theory, rainy day buffer at tolerable levels is the best answer to soften the cost average in the wake of these devastations, however tell that to the shareholders.

  14. Mr. Roques
    March 30, 2012

    Is that something that is done normally? Do you stop at your backup – or do you go for the second backup? create contingency plans and DR and business continuency.

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