A Deeper Dive: Component Shortages – Are We Asking the Right Question?
By Jennifer Read, Editor, EMSNOW
As anyone who has conducted a Google search knows, to get the right answer you must frame the question properly. And of course, it helps to have the right source. We wanted to know more about why the component shortage issues seems to be getting worse and now is not forecast to be completely resolved until late 2022 at best. We have written about this before.
The question we came up with is this: Are the current component shortages a result mainly of not enough components because of demand explosion, or not enough of the right components in the right place at the right time because of demand shifts?
So, like the toilet paper shortage in the U.S. at the beginning of the pandemic — where the toilet paper manufacturers had packaged more toilet paper for office consumption, and not home use. As soon as they were able to shift more toilet paper to home use packaging, everything got better very quickly. Is the component shortage like that? In which case, more supply chain visibility and transparency is the answer. But if there just aren’t enough components ANYWHERE, then that’s a different solution.
We went first to our best source for component information: the Electronics Components industry Association (ECIA).
David Loftus, President and CEO of ECIA thought the Perfect Storm analogy summed up the situation:
There is an unprecedented demand explosion due to pandemic recovery, but every time the industry comes out of a slump (last one started 3Q 2018) there are some shortages as demand outstrips supply on the upturn. I liken the shortage to the perfect storm as the market was just coming out of the downturn in early 2020 when Covid hit. Everyone shuts down for several months, then the economy comes roaring back, exacerbated by the unique factor of global government stimulus. So, you have the upturn, everyone trying to ramp production and replenish their inventory points in the supply chain when trillions of additional dollars are pumped into the economy. That means demand rises even faster. And it will take some time to level off and suppliers to catch up.
I use the toilet paper analogy also. My point is that toilet paper companies will not build new toilet paper factories to satisfy the unique demands at the beginning of the pandemic as consumers rushed to their local stores to hoard TP. They build for steady state demand, otherwise there would be way too much capacity in normal times. It’s the same for semiconductors. Fabs are incredibly expensive and time consuming to build. Companies will size their capacity to deliver reliably to customers in steady conditions, not waste money to immediately satisfy demand in this most exceptional period.
ECIA Chief Analyst Dale Ford agreed:
This is a great topic. As you recognize, there is more than one challenge here. There is also an issue where lack of supply of specific parts inhibits demand for other parts. Not all components are in a shortage situation. In terms of lead times, the electro-mechanical components barely saw a blip and the impact on passives was much more muted than on semiconductors. In the semiconductor world, the impact on all components has been felt as companies increase orders to create a buffer for future uncertainty. Component manufacturers and distributors are experienced with this dynamic and work to manage this type of “double ordering” dynamic. Within semiconductors, there are specific types of chips in each segment that have created this difficulty. For example, not all MCUs are in shortage with long lead times. But there are popular components that are impacted. The inability to source these products then has a ripple effect across the ecosystem.
There are a variety of solutions that companies pursue to address this issue. In a recent development, GM stopped including certain features in some of its popular pickup trucks to get around the inability to acquire parts to provide this feature. Companies are changing the configuration of the computers they buy to support their staff so they can meet demand. In other cases, products are redesigned to design out the “problem” components. This is a much longer process.
ECIA’s Vice President of Industry Practices Don Elario added:
One other point might be the pressures of today’s cost management practices. The continuous improvement methodology has become a way of survival to keep up with profit margin shrinkage. And as companies have had to reduce costs and workforce, without re-thinking and/or re-inventing internal processes, lots of things have been lost…like tribal knowledge. There is nobody to do what was being done before; individuals are picking up more responsibilities who are overworked, and then things start falling through the cracks. These can all contribute to inventory misses: not responding in time, not seeing the signs and being slow to react.
So, mainly a toilet paper situation. Then visibility is key.
We asked Michael Ford from Aegis Software to comment. Shouldn’t digitalization have prevented all this?
From what we have been hearing. It has been predominantly a “toilet paper” issue. Procurement software these days includes (either automatically or manually) the ability to respond to perceived supply threats – which was done because of prior material shortage events. Some “AI”s in this area have been extreme, ordering many years of stock in order to mitigate any shortages.
The difference between electronics and toilet paper though is that with toilet paper, you only need any one of the plethora of brands and variations out there. In electronics, a shortage of any one of a thousand materials will prevent production from executing (unless there is a plan to add the missing material later – very difficult in most cases).
Since many companies are buying stock in advance, of both critical and common materials, the shortages become worse, and the reports of further shortages create a negative spiral effect in availably. Even common materials are seeing a lead times of 12 – 18 months for those who do not have special arrangements.
Michael went on to point out the two more serious problems coming out of this:
- We see a rise in the number of counterfeit components, incorrectly substituted and poor quality parts being introduced into the supply-chain, with customers too desperate to fully qualify and test them. Many suppliers, both components and end products, are facing penalty clauses in their contracts for late delivery.
- There is now a large overstock of certain materials in many companies. Some companies have even procured materials that they did not need, to be able to sell them at a profit once they became scarce. The problem is with the trust of “second-hand” materials, which some applications, such as military, cannot accept. Many materials may end up being written-off, despite being in short supply in the market. There are so many poor quality components, it is difficult and costly to have to inspect and test them. The cost of storage, and environmental control represents additional cost.
As we are seeing further genuine causes of material supply limitation occur, the problem keeps compounding. What are some solutions? Michael suggests a good MES solution, naturally. For ECIA’s David Loftus, the answer is use the authorized distribution channel. Clearly, every company needs to keep an accurate inventory and stop the panic ordering.
The industry is working on a solution for next time. Michael is chair of IPC-1782A Secure Supply Chain, which the U.S. Department of Defense has recently adopted, though it hasn’t been implemented yet. He says the protocol is intended to enable over-ordered material to be confidently re-introduced into the supply chain without risk.
Until this gets resolved, it is going to be a bumpy ride. Christmas might not include a new Playstation after all. Might have to come up with something else for the kids this year. Maybe forget about presents and go visit Grandma.
For fun, we asked Google for the funniest joke of today. Here’s the response:
What do you call an alligator wearing a vest? An investigator.
We must have asked the wrong question because that is not very funny.