Adding or subtracting a link in the supply chain is never easy. A single substitution of a component, for example, affects other components on the board; pricing; delivery considerations; and even relationships. But buyers have to hedge their bets to ensure a single component doesn't hold up production — a function that falls under “managing risk.”
Numerous considerations fall under the category of “risk management.” The risk of any one thing going wrong between design and production is considerable and is one of the challenges that keep supply chain managers up at night, according to research conducted by UPS and IDC.
There's no shortage of options in risk management: companies can calculate it internally; consultants are widely available; distributors consider it part of their core competency; factories hedge against not filling an order; and even logistics companies are entering the fray. An overall risk management strategy involves cross-functional groups within an OEM and C-level executive involvement. But buyers play a significant role in reducing the number of variables as well. Much of this involves relationship management with supply sources and dealing with issues that aren't automated, known as “exception management” situations.
The classic situation is the hard-to-find component or the part that can't be sourced at the last minute. Most OEMs develop an approved-vendor list (AVL) that designates two or more sources for a particular component. These parameters can be programmed into a system and automated. But the typical forecast window — six weeks or more — means that component leadtimes change or there can be rapid shift in supply and demand, as the industry experienced during the 2011 Japan earthquake/tsunami. This is where buyers contribute most to an effective supply chain.
The first line of defense in a shortage is the component supplier. In times of scarcity, however, the reality is the supplier's largest customers will be first in line in getting their parts delivered. In the semiconductor market, no matter how good forecasting is, it takes 16 weeks to manufacture a component.
Distribution is usually the next stop. Distributors, like suppliers, manage their inventory to customer forecast, but build in both upside and downside parameters for inventory buys. Because distributors serve hundreds of customers, chances are if one customer cancels an order, there are other customers that also use that part. This minimizes the risk that inventory excess will build up. Strategically, smart buyers will manage relationships directly with suppliers and also with distributors: like suppliers, distributors will try to respond first to their largest or most dependable customers.
However, for distributors, orders change every day — not just in times of crisis. Suppliers or customers may go out of business or discontinue certain product lines. These factors go into inventory purchasing decisions every day. Distributors are likely to have buffer stock for hard-to-find parts, or have an order on the suppliers' books if there's a shortfall in finished goods.
When all else fails, buyers can go to the open market or through independent channels. They are not necessarily the same thing: the open market often operates on pricing swings where brokers can buy and sell based on the possibility of shortages and higher prices. Independents may follow the same practices, but more often they will help OEMs siphon off excess inventory by buying this inventory in the hope of selling it at a later date.
Buyers face several issues in the open market, however. Parts may reach the open market from factories but don't carry the manufacturer's warrantees unless they are sourced through an authorized channel. Counterfeit parts also enter the channel through open market deals where bogus parts are mixed in with legitimate components. Typical testing doesn't always weed out these parts because batches and lots are tested: not every component is examined. Many independents are beginning to offer such services, but authorized channels are still skeptical of the screening procedures.
There are sources of authentic parts available. Authorized distributors — ranging from big broadlines such as Avnet and Arrow to niche players such as Rochester Electronics and e2v — will buy inventory when a part reaches its end of life (EOL) or buy the die, masks, and IP from the original component vendor. When necessary, some of these companies can manufacture components using all the original specs. This solution tends to be costly, however, as these businesses don't typically own their own fabs and parts aren't manufactured in massive volumes. However, this solution is often recommended as the most secure option for hard-to-find parts.
Once parts are secured an accounted for, logistics becomes the next challenge. I'll look at logistics options and strategies in upcoming blogs.