The electronics supply chain landscape in the current scenario
The electronics supply chain landscape in the current scenario
In this episode of The Honeycomb Global Electronics Hub podcast with Guy Dann of Rutronik, we discuss the ongoing semiconductor chip shortage, the recent spike in booking numbers, credit lines and payment methods of the current electronics supply chains, the situation and responsibilities of the franchise distributors today and the significance of collaborative relationships between buyers and the distributors. We delve into understanding how a more dynamic pricing system could mitigate risks posed in the industry today, and Guy’s inputs on what it will take for this chip shortage to normalise.
“And the truth is, in electronics, there's a lot of commentary around ‘it can't be rocket science to make these chips.’ Actually, many would argue it's more complicated than rocket science to produce these goods.”
“I think it is a very, very exciting time for electronics generally. I think for many years it's been a high growth market, and I think from what we can see is that that's speeding up rather than slowing down. Yeah. So if it hadn't been for Covid, I'm confident we would also be embracing all the current technologies we talk about around EV, around Internet of Things, more and more wireless products and connected products.
I think that's a strength of our industry today. That will only grow the next couple of years.” – Guy Dann, Rutronik.
RANJANA: Hi. Good afternoon, everyone. This is Ranjana Pathi from Honeycomb Global for the podcast of The Honeycomb Global Electronics Hub. Today I have with us Guy Dann, who spent two years working with Rutronik in the UK and Ireland as the Managing Director. And he spent 15 years at RS Components, 5 years with private labels and 10 years in sales & leadership roles in Asia and Europe. So he's got a commendable grasp and experience into the electronic distribution chain.
So hi Guy. How are you doing today?
GUY: Good afternoon, Ranjana. Nice to spend some time with you, and yeah looking forward to the conversation.
RANJANA: Okay, so we're going to speak about the electronics supply chain landscape in the current scenario. And we want to look at the ongoing chip shortage. What kind of costs it bears on the entire supply chain industry with the components specifically, and to understand how low and we can get into it, get caught into it. And what are the ways, you know, franchise distributors could potentially solve certain issues. So this is what we're speaking about today.
Guy, when we're looking at the ongoing semiconductor chip shortage, what are your views on it? And in how long do you predict it'll bounce back in? Just assuming that the worst of covid is behind us.
GUY: Yeah, so thanks for the question.
I think I've been in electronics distribution for over 20 years, and, uh, every few years there's an interesting cycle that gives us some challenges that we have to face head on. And I think it's fair to say that probably the last two years and looking forward the next couple of years, are probably some of the most challenging. I think it's for two key reasons this has happened.
One is because of covid; there was a lot less transportation and logistics solutions for our suppliers, as well as for us to send products around the world, huh. And of course, many, many customers and many manufacturers also slowed their requirements down at the beginning of the pandemic.
And then, really, since summer of last year, we've seen a huge boom in requirements which has been restricted by both production capacities as well as logistics, which has been just an incredible last 18 months, huh? So in terms of what could change that situation moving forward, we have seen some of the large automotive companies reduce their production and capacities due to these constraints.
And, of course, so some of it will be ultimately down to how much demand we can take out of the system in the short term, like some of these automotive companies, as well as how quickly can we scale up the production capacities in the manufacturing?
And the truth is, in electronics, there's a lot of commentary around “it can't be rocket science to make these chips.” Actually, many would argue it's more complicated than rocket science to produce these goods, particularly when you understand, you know, where the materials come from, how these are brought together, finally into either a real or two. Yeah, and probably we've all learned more than we learned historically about how that happened, so I would say that the demand doesn't seem to be looking to go down it's significantly for the next 12 months, and production is going to take you know, probably many years really to drive up.
So I think the challenge really, for all of us is to collaborate together to try and smooth out some of these big changes that I've shared. Certainly, the customers who can plan forward are the ones that we can help the most. I think there's still some question marks around new design, which maybe we can touch on a bit later. But how we can work better together to try and drive new designs and new products where by default, you can't plan two years out because it's a new design. You’re not yet sure of the production requirements.
So unfortunately, I guess Ranjana I would say we have at least 12 months, if not a lot longer, to really manage the challenging situations around supply.
RANJANA: Got it, yes.
Okay, so in terms of the credit line and the payment times, it's being extended out, because of necessity. How far do you see it extending? And you see it causing a real problem at some point?
GUY: Yeah, so I think for all of us in electronics, so what we're seeing at the moment is for each supplier where a customer has a requirement, there are different lead time constraints or different availability of product. So one of the ways customers have quite understandably, try to mitigate the risks of this current electronics supply chain shortage is by bringing as much stock as they can find out in the market place.
So we are seeing and when I talk to our customers, mainly in the UK and Ireland, but also overseas, they've probably never had more stock on hand, but not all the right stock to be able to produce their finished goods.
And so that's what's causing you know, one of the challenges in cash positions. We're all spending a lot of money to bring in the stock, but not necessarily have all the components necessary to produce the final product and then ship it and invoice the customers.
So some of the ways we're working with our customers and across the supply chain is to understand, where does payment terms fit in in terms of helping that solution? So, yes, we're seeing many customers try and manage that to their advantage, we understand.
But I would also say we try and be as flexible as we can be to understand that our normal ways of working from maybe three years ago yeah, of 4 to 8 week lead times customers place orders within a set number of weeks, produce those goods and then invoice. We are seeing cases where some of some customers have two or three months of a gap between bringing stock in and being able to finish those end products.
So clearly, that's where you have to win, talk and work together to understand how do we support one another for the long term benefit. And so that's where we're seeing cash play a much bigger role in conversations than we would have done before this current pandemic and supply chain challenge.
RANJANA: You know, I'm going to come back to that point a little later though.
I also want to understand how the situation is changing the dynamic for franchise distributors. And it's also become a cost versus availability sort of debate, right?
GUY: Yeah, exactly.
And I think for all of us in the supply chain, we've had to adapt to the different questions that we now pose to one another. So again, pre pandemic it was, as always, electronics are very competitive marketplace, where all buyers who are SIPs trained would be looking to tender three quotes a minimum, compare what the commercial advances are of different partners, huh? And then ultimately make a decision with the quite understandable assumption that the supply of goods would be equal.
Yeah, and so I think at the moment what we've seen really since summer last year is, um certainly speaking from Rutronik side, where we have the best relationships and have the strongest collaborative approach to working together. Those are the companies where we've really been able to move past purely supply and customer and really start to analyse what their forecasts and demands are both in the short term and the midterm.
Overlay that with where the supply constraints might be and really, therefore, we're spending really since summer last year, and I would say I would expect all of this year and into some of next year, we're spending all our time talking to customers about the availability and the supply of the parts that they have on order, and less about trying to win day to day business with those customers. So it's more about making sure their business thrives, yeah, and that they have the products they need to produce for their customers. And that's a really interesting and, I think, hopefully long-term change in relationships.
That of course, commercial pressures are there for everyone, and price will always be important. And I'm sure there will be challenges moving forward on price.
But I think the last 18 months has really re-engaged our customers with what value we can offer outside of purely shipping products to them.
Uh, and so I think availability is clearly key. And I think moving forward supply chain solutions and different ways to mitigate risk around availability will become more and more important.
RANJANA: Right. So research has also shown that across the market, we're seeing a massive increase in booking numbers.
Is it because people are also stockpiling, or how much do you think it will actually turn into billing? Would there be a real problem in helping you plan and assess the customers' requirement? The true requirement?
GUY: It's certainly a question we all ask ourselves at the moment. We have seen record levels of order entry of bookings. Yeah, and at the moment, what we see is the vast majority of that was a function of the change in lead times. So clearly as products have longer and longer lead times, the amount of product that the customer might need to cover that lead time plus moving forward does necessitate much larger order upfront.
And so the only times that we have so far seen any change to those order books, the vast majority would be because they have decided to decommit on their products, their end products for a period of time and wait for a more sustainable supply chain world to launch something new. Yeah, or where we have supported them on redesign certain components again to try and mitigate some of these shortages that we're seeing out there.
We have not seen too much double entry from what we've seen in cancellations so far, and I think we're still very much in the part of the cycle where product is desperately needed and customers would love to get it received. And we've not yet seen any kind of surplus, which may require purchase orders to be cancelled or changed or postponed.
So very little, yes, but nothing like the amount of order entry have seen come in in the last 12 months.
RANJANA: That's excellent then. That's a really good thing to know.
Well, of course, The Honeycomb Global Hub is all about collaborations, but from understanding from our conversation, it also seems like the lines between the distributor and the customer is kind of blurring, into more of a collaborative one, where you work with each other in planning for the demand and with what's available.
How would these collaborations actually materialise, according to you? In your perspective, what did it look like?
GUY: Yes, well, I think about working with our customers in a really collaborative way. There's really two strength to it, or there must be two strengths to a distributor.
One is all around the new products that we represent from our partners from the manufacturers, and making sure that we can understand the different needs of our customers. And when is the right time to propose potential new technologies or new components that can assist them? And I would say at the moment that's as much about availability and technical advantage as often was the case previously around cost advantages to redesign.
So I think that's where again, just understanding our customers well and sharing information at the right times. You can only do that when you're truly collaborating with the engineering community and the customers. Understanding their product roadmaps and ultimately knowing what are the pain points for those people at the moment. And for the vast majority, it's less, as I said, about cost down component count and more about availability and technical advantage and unique.
So that's one area that we very much focused on working closely and collaborating with the engineering teams.
But for sure in the last, again, couple of years, so much of it is about supply chain and working with the purchasing community to understand both sides, I think on what value we can offer one another better. Yeah, and as I said earlier in our conversation, the classic view of how well you should trust the salesperson’s approach and how loyal a buyer is, I think that has had to be really challenged because neither of those two classic views of side of the table her sales of us is procurement is effective when you talk about the challenges that we've been facing the last 18 months.
So in my way, I very much so think we need to be sitting on the same side of the table. Yeah, and looking out and saying “What are you trying to deliver? What are the pressures that you're under?”
This is what we're seeing out in the marketplace today and really being as transparent as possible around the challenges and the realistic time frames of some of the products, as well as then deciding together. “Do we need to look at this differently? It's not just about price and lead time. We may need to do something more drastic to make sure that the production lines can keep going.”
And that can only be done through ultimately trusting one another really strongly to allow that collaboration. That's been a really exciting 18 months.
RANJANA: I’m sure that it would open up new avenues eventually. But what would the cost of not doing that be, not collaborating with the customer be?
GUY: Yeah so, I guess where we're seeing this the best is any customers that come to us for the first time, either through digital channels, through our website or maybe phoned us up for the first time and haven't been heavily involved in producing components so far and may be very much focused on design.
What we're seeing is their unawareness of the supply constraints, not just for full production volumes, but even for small quantities, yeah. Past, I would say sampling can be really constraining at the moment.
So one cost of that lack of collaboration is we might be sharing bad news that their new product might be a year away before they can source all components, even to test fully, never mind get into production volumes.
So one side of it is certainly that yeah. And the other side is obviously, I guess, for larger customers there's significant investments clearly in people and design and their end customers.
And if we're not close enough to one another, yeah, that's when you can see these gaps of availability. Even with all the best efforts, I have to say it's not impossible to happen, but without collaboration certainly you'll see more and more line stops or misunderstandings around availability. Because the world is moving so quickly, you have to keep on top of it.
And so I'd say the costs of collaborating are either lack of new design being able to be produced, or more and more production line stops in larger accounts.
RANJANA: Yeah, that sounds scary.
GUY: Yeah, I guess if you think about Toyota, they had to manage a few years ago, a really serious situation with the Fukushima plant after the Tsunami. And so they had re-looked at their supply chains to check the resilience of something similar to that happening again, huh? And I think it's open knowledge what they had to do with their production volumes last year.
So even with the biggest suppliers and what they looked at in last few years, what they need to do to be more protected, I guess from this, even still, it's proved too big.
But I think that's a very different size of customer to the ones we work with. Yeah, and so we have been able to smooth out some of those constraints in customers where we have been close to and knowing 3 to 6 months out what their requirements might be here.
RANJANA: That's fantastic then.
So if we look at the purchasing system side of things, you think there's scope for the dynamics to change, and it could be a more dynamic pricing system, perhaps? So that the risks are shared across the industry across everyone in the industry rather than the distributors alone feeling the onus of it.
GUY: So certainly, I would say where a number of customers have become aware of the vulnerability of the supply chain at the moment that when there are, you know, we're an industry that's growing very fast.
Yeah, that has some very big players in terms of production and can handle significant scale. But it is a very complex supply chain, huh? And so what we have seen, I think, which is new is in companies that are more in the start-up phase, they are heavily investing, for example, in both hardware engineers but also software engineers.
We've had more and more conversations in the last year around seeing stock as an asset. As a, I guess, a strategic asset for the commercial teams. As much as what used to be the case. A lot of quite understandable metrics around lean, reduction of capital employed within the goods in warehousing areas.
Yeah, that we're seeing that a lot of our customers are seeing that actually, it can generate competitive advantage now by seeing stock in a different way and bringing the components in earlier. And I think that changes quite a lot of dynamics in terms of relationship between a distributor and the supplier, because obviously we can offer different solutions when it comes to holding stock for customers. Yeah, and different ways of doing that both on premises and off premises.
But also customers have realised that it is important for them to also to understand that they need to carry a little bit more stock they have done historically. And again, I would say the reason I frame it like that it that just reaffirms that I think the purchasing teams have had a low inflation high availability market for most of the last 20-25 years.
Yeah, there's obviously been exceptions in particular technology areas. Um, everyone will remember 2018 about, MLCC capacitors, but never globally across all technologies across all franchises like this.
And so I think that will definitely have long term impacts on how both the procurement community will be put under potentially different KPIs.
Yeah, but also how they see distributors informing them being sort of, I guess, an early warning support to any supply chain constraints out there, rather than purely a sales organisation trying to sell them more and more products.
RANJANA: But you don't see any changes to the pricing system itself, in terms of, you know, of course, it is run on credit lines at the moment.
If that were to change a bit in terms of the payments, so to say, the weightage of the payments being made in advance. Would that impact the system, in your opinion?
GUY: So I think if I understand your question, there are certainly different ways of paying for goods. Yeah, through different finance options.
And there are certainly customs who are taking advantage of these, I guess, relatively new ways of factoring either against invoices or against procurement.
And I think definitely customers are looking for ways to protect cash. While in the end, like we talked about her making sure they have availability of components on stock. And that's certainly something that companies should look at.
Yeah, but I also expect that, you know, after this period of time, there will be a correction back to better availability than we have today. Yeah, I think it can't continue that we're looking at 52 weeks plus. Yeah, it's a pretty exceptional period of time.
RANJANA: Okay, so before we close the discussion, I want to understand what you're looking forward to for the predicted correction soon after that. Is it going to be a time of, say, flying colours for the industry? What do you predict?
GUY: You know, I think it is a very, very exciting time for electronics generally. I think for many years it's been a high growth market, and I think from what we can see is that that's speeding up rather than slowing down.
Yeah. So if it hadn't been for covid, I'm confident we would also be embracing all the current technologies we talk about around EV, around Internet of things, more and more wireless products and connected products.
I think that's a strength of our industry today. That will only grow the next couple of years. Yeah. And so when this crisis does finally resolve, we're still seeing, and all indicators show very, very strong demand for the next five years, and many are predicting that the market will be doubling size from the 500 billion it is today. So, yeah, we should all be very excited that this will generate huge opportunities for us around the world.
But I'm sure we're all looking forward to a slightly more balanced supply and availability position than we are today.
RANJANA: Yes. Okay, great. It's been lovely to hear your views. And, this whole discussion has been very insightful. Thank you for your time.
And is there anything else you'd like to add before we close this?
GUY: Uh no. I just want to say thank you very much for the opportunity, Ranjana and, yeah, thank you very much for your time today.
RANJANA: Thank you.
Key Takeaway Points
The last 2 years has been challenging because of:
Covid – there were a lot lesser transportation and logistics services for suppliers and distributors to send end products to their customers.
Many manufacturers also slowed their requirements at the beginning of the pandemic.
The boom in demand seen from summer of 2021, is restricted both by production capacities as well as logistics.
The key solutions lie in understanding how much demand we can take out of the system, like some of the automotive giants have done. As well as how quickly we can scale up production capacities in the manufacturing facilities. It might take 12 months or longer for us to get out of this situation.
One way in which companies can mitigate the risks of lead times and product availability is by bringing as much stock as they can find in the market.
However, companies are spending money in buying stock, but not necessarily have all the right components required to finish a product. This is one main reason for the cash crunch and the extension of credit lines and payment times.
Customers and distributors need to work in collaboration to really understand the lead times of components and plan their workflows and purchase orders accordingly and find different ways to mitigate risks around availability of parts.
There has been a record level of order entry bookings. This is due to the extended lead times, and not because of stockpiling.
Collaborations along the supply chain could be seen in the following forms:
One is on new products that distributors would represent from the manufacturers, and proposing it at the right time after understanding the customers’ needs.
This could only ensue in a collaborative relationship with the engineering teams, where the distributors understand the customers’ product roadmap and the pain points they would face at each stage.
This is much about availability and technical capabilities rather than about cost advantage as previously envisioned.
The classical views about how well you trust a salesperson’s approach and how loyal a buyer is, has been challenged in the last 18 months, it is now a case of being as transparent as possible about the challenges and realistic time frames about the products, and then making decisions together has been the key.
The costs of collaborating are either lack of new design being able to be produced, or more and more production line stops in larger accounts.
An example of such a cost could be seen with Toyota, with their Fukushima plant a few years ago, after the Tsunami. Even the biggest suppliers need to be protected, and are re-looking at their supply chains for resilience of something similar to that happening again.
Over the last few years, more and more people have seen the vulnerabilities around the current supply chains, and some customers are now seeing stock as a strategic asset, by seeing stock in a different way and bringing components in earlier, thus creating a competitive advantage. Rather than the old, lean methods of warehousing.
So there have been a lot of changes in the dynamics between the customer and the distributor, and the franchise distributors can now offer different solutions to holding the stock for a customer.
The customers would now see distributors as an early warning support to any supply chain constraints, rather than purely as a sales organization trying to sell more and more products.
There are now different methods of payments through different finance options, in addition to the traditional purchasing systems with long credit lines. Customers are factoring in payments either against invoices or against procurement, in order to protect cash, while making sure they have availability of the components on stock.
We are now looking at 52 weeks + lead time, but there will be correction soon, back to better availability than we have today.
Irrespective of the recent slowdowns, it is a very exciting time for electronics generally. It has continued to remain a high growth market. That’s a strength of our industry today, that it will only grow for the next couple of years. But the industry is looking forward to a slightly more balanced supply and availability position than we are in today.