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. {complink 577|Avnet Inc.}, 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.

15 comments on “Factoring Oversupply Into Supply Chain Relationships

  1. SP
    December 25, 2012

    With the speed we all are getting tech savvy and completely dependant on electronic gadgets, demand would be always more than supply. If there is ovesupply for current demand definitely it will be consumed in the near future after the holiday season. It is good that there is no expiry date for electronic components.

  2. prabhakar_deosthali
    December 26, 2012

    That speed itself makes those electronic gadgets obsolete in no time. So if there is surplus inventory at the end of the festive season you may find that there are no buyers for it as the manufacturers announce newer products for the upcoming season.

  3. Taimoor Zubar
    December 26, 2012

    I think the best way to cater to shortages and oversupply is to have more flexibility in your supply chain where you can move closer towards just-in-time production. Of course zero inventory is only a dream but you try to adjust your processes so that you produce at a short notice according to the expected demand in the next few weeks or so. I think adjusting your processes will be more beneficial than trying to make more accurate predictions about the demand.

  4. Taimoor Zubar
    December 26, 2012

    “It is good that there is no expiry date for electronic components.”

    @SP: Despite the no expiry date, the electronic goods run the risk of becoming obsolete in a short period of time. Given the fast pace of new technology, electronics, particularly consumer electronics, lose their charm fairly quickly as soon as newer models come out which of course means tons of losses. This is where it's also critical to have no excess supply in the electronic supply chain as well.

  5. SP
    December 26, 2012

    Agreed. Obsolescence and end of life are very critical for supply chain business. You might have to redesign using the oversupply of discrete ICs or other components.

  6. hash.era
    December 30, 2012

    Yes that happens practically everywhere. Its not easy to get things forecasted right to the dot but if the movement trend is properly analyzed you can get closer to it.

  7. Himanshugupta
    December 30, 2012

    @TaimoorZ, making accurate production is really difficult but maybe cutting down labour on demand can lead to some benefits for company. I know that lots of manufacturing companies keep contract labour which is exactly for this reason. These measures introduce some flexibility in supply chain though at some financial costs.

  8. Himanshugupta
    December 30, 2012

    Obselete products are not only a problem of electronic companies but many other industries such as garment, sports items etc. Timely discount is one way to clear inventories but flexible supply chain is for sure a more high-tech solution. If we can predict the accurat demand atleast half the time before the actual requirement of the product then we can finetune the production and supply chain. Such predictions are not impossible but better analytics and data crunching is required.

  9. Taimoor Zubar
    December 30, 2012

    @Himanshugupta: Yes, labor outsourcing is one way of bringing flexibility into your manufacturing process. The other is of course outsourcing a portion of your manufacturing to vendors so that you don't have to maintain a minimum level of production to cover overheads.

  10. Daniel
    December 31, 2012

    TaimoorZ, various outsourcing will help the companies to minimize their overheads but in one or another way it won’t be good for the companies. They don’t have any control on the outsourced employees and there won’t be any bond between employees and management. It’s more or less like a daily wage employee and hence there won’t be much involvement from employee side too. so the role of the company is limited to like a system integrator or assembling unit.

  11. dalexander
    December 31, 2012

    @Barbara…when tantalum capacitors were on allocation several years ago, my strategy was to place identical orders with several qualified sources and if Kemet was carried by several distributors, I would likewise place the same order with all of the approved distributors. My understanding was that they would aggregate my orders with other companies' orders and place the combined quantity on a single order to the manufacturer. I don't think the manufacturer could see who the end user was a a function of breaking out the single large order. As a result, I am covering my bases if just one distributor is able to give me the parts in total or if two or more were able to send me partials. Is it common to have an oversupply of inventory as a result of this kind of ordering after an allocation lift? Nowadays, it seems like for more part types, I am seeing requirements o complete NCNR (non cancel, non return) forms before the order is accepted. Is this why this form is more common today than ever?

    January 1, 2013

    Reverse logistics sounds like an interesting concept and I look forward to reading your next post.  In our industry I hear of many suppliers shying away from opps resulting in fully custom components as the risk does not warrant the reward in most cases.

  13. Barbara Jorgensen
    January 2, 2013

    Hi Douglas: Your practice–which makes sense for the buyer–is called double-ordering and does contribute to excess inventory. The fact is, distributors don't like to share order information with each other and suppliers don't consolidate orders in the way you describe. Suppliers consolidate orders for forecasting purposes, but if someone orders finished goods, the parts are usually shipped then and there. The order volume and customer ID is shared after the shipment. Unless a supplier has a system to compare Avnet's orders with Arrow's orders AND search for common customer names, the parts are already in the channel. There's also a stickier issue: Let's say a supplier does spot a double order, which one does he cancel? Arrow's or Avnet's?

    Real-time data could conceivably alleviate this, but suppliers still have to compare orders and search for common customer names. When all goes well, POS data is shared once per month between distrbutors and suppliers and chances are, orders have already shipped.

  14. bolaji ojo
    January 2, 2013

    Douglas, I recall the oversupply that emerged in the supply chain at the time you referenced and the reason behind it was many other buyers put in similar orders at different suppliers to “guarantee” they would receive their sometime “one” order. It resulted in more than $10 billion in oversupply and the industry's worst downturn when demand collapsed.

  15. Barbara Jorgensen
    January 3, 2013

    Bolaji–another good point. Customers were placing multiple orders with one supplier and multiple orders with second suppliers. Again, buyers were just hedging their bets and supliers/distributors weren't comparing or checking the orders. The result prompted a reaximination of the supply chian that has improved things greatly.

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