With the unprecedented, once-in-a-lifetime disruption of the supply chain for electronic components in the rear-view mirror, the market is finally beginning to stabilize. For the past three years, manufacturers found many critical electronic components hard to come by, watched as prices skyrocketed and lead times extend to almost a year in traditional distribution channels.
Thankfully, much of the dust has settled, but the work has only begun. With hard-earned lessons from the pandemic, many manufacturers are looking to secure their supply chain and prepare for what will be inevitable disruptions in the future. At the same time, they want to do so at reduced cost and capital outlay after paying a premium for electronic parts over the past several years.
“We just went through one of the biggest supply chain disruptions in history outside of a world war,” says Mike Thomas, who is vice president and global general manager at Classic Components, a premier independent distributor based in Torrance, California. “Now, things are starting to settle down. Interest rates have risen sharply, which is having the expected result of slowing the economy and so demand is down. However, the supply chain is still highly vulnerable to present and future disruptions.”
In fact, change may be the only constant in the industry. Even though it was an unparalleled event, Covid related supply chain shortages are not the only disruption to affect global manufacturers in recent years. In 2018, there was a worldwide shortage of multi-layer ceramic capacitors (MLCC) when demand outpaced supply. At the time, 60 percent of the world’s production of MLCCs was controlled by three suppliers. Even now, there are components in short supply due to the limited number of suppliers, geopolitical trade tensions, and ever-changing technology.
As a result, manufacturers are taking steps to secure the supply chain over the long run. One of the key strategies is to be less dependent on China and more diversified in sourcing the electronic components they will need to manufacture their products, says Thomas.
GROWING THE ROLE FOR INDEPENDENT DISTRIBUTORS
There will also be a continued role for independent distributors. When franchised/authorized distributors were not able to supply the required parts, independent distributors stepped in during the pandemic and played a critical role in helping keep many manufacturers’ production lines running. Independent distributors can leverage their extensive expertise and decades of strategic relationship building to find alternate sources through regional authorized/franchised distribution, manufacturer direct, or surplus/excess inventories.
According to Thomas, many manufacturers are sitting on excess inventory due to stockpiling parts and ordering from multiple sources to ensure delivery. After having to pay exorbitant prices over the past three years to secure parts, many manufacturers are also looking for ways to reduce costs further, even as prices drop. Some are looking to take advantage of financial services that some independent distributors provide to minimize cash outlay while ensuring access to inventory.
Fortunately, Thomas says these are traditional services that independent distributors like Classic Components have been offering for almost four decades.
REDUCING EXCESS INVENTORY
When manufacturers faced tremendous lead times on parts, many double, triple, or quadruple ordered since they did not know who was going to deliver first, according to Thomas. “Now that all these parts were delivered, some manufacturers have excess inventory and aren’t sure what to do with it,” he says.
If it is true dead stock, an independent distributor like Classic Components can help liquidate the electronic components and get them off the books through various types of arrangements. The company has provided this type of service since 1985, and it can be initiated with a simple email list of surplus items with the original price paid.
Classic Components then searches its extensive database to see if any other customers use those parts and can broker a deal between the parties.
“We have a global customer base and lots of information about the materials they use,” says Thomas. “So, if a manufacturer has excess inventory, we hopefully can find an opportunity to sell it to one of our other customers.”
Classic Components can also list and sell surplus inventory on consignment with, or without, taking physical possession of the inventory.
“Essentially, after coming to a consignment agreement, the list of items is uploaded to our website. We offer complete transparency throughout the consignment process. As we receive inquiries, we share the information so you can decide whether to sell [your surplus] at the offered rate,” says Thomas.
According to Thomas, Classic Components may even opt to purchase the inventory outright to resell it later. “We buy excess inventory every day and can make purchases on a line-item basis,” he says.
With costs rising and inflation still not under control, manufacturers are also looking to reduce the expense of procuring parts. Some independent distributors have found ways to lower the cost of parts by leveraging their global relationships.
For example, Classic Components procures material in all the local markets where they do business and has offices all over the world so is not bound by regional price constraints. With a comprehensive global network, the independent distributor can make purchases in local markets that currently offer the lowest prices and pass the savings to their customers.
Besides its 60,000 square foot facility in Torrance, California, Classic Components has established twelve regional offices in strategic locations throughout the world to support its global distribution business. The company has nearly 200 employees who specialize in various aspects of the business including supply chain, quality, technology, and logistics.
The buyers can develop an intimate knowledge of regional supply chains with the expertise to find and manage quality component suppliers. These experts then leverage these relationships to bring the best price and delivery to their customers.
“By using regional quality centers and logistic hubs, we have the flexibility to purchase components from any country, in any currency, and then ship them to anywhere they are needed,” explains Thomas.
CUSTOMIZING FINANCIAL SERVICES
Manufacturers may also seek financial or logistical services when their cashflow is constrained or they want to optimize their working capital. In some cases, they can even make speculative purchases for a customer and/or provide financing to purchase inventory when a qualified client has capital constraints.
To improve manufacturers’ cashflow, independent distributors like Classic Components offer tailored programs of vendor managed inventory, which can simplify logistics, reduce the total cost of ownership, and enable the redirection of capital to other spending categories. In some cases, they can even make speculative purchases for a customer and/or provide financing to purchase inventory when a qualified client has capital constraints.
While the specifics of any financial services arrangement will depend on many factors, the framework is always to facilitate a mutual benefit.
“Financial and logistical services can be customized to the manufacturer’s particular needs and situation, which may evolve over time. The goal is a win-win partnership that mitigates their capital and logistical concerns,” concludes Thomas.
PROTECTING AGAINST FUTURE DISRUPTIONS
Thomas asserts that the up-and-down nature of the market means manufacturers need to prepare today, for whatever will come next.
“What happens in a year when the Federal Reserve decides to lower interest rates?” says Thomas. “There is still an incredible amount of pent-up demand. When the economy begins to return to normal it may not be like it was during covid, but a spike in demand will cause [electronic component] shortages again.”
Another factor that could affect the supply chain in the reshoring effort spurred by the passing of the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act). “They may not be saying it, but parts built in the United States are going to cost more than the parts from Taiwan. It will start to affect pricing structures at some point.”
To combat this and any other future market volatility, Thomas advises partnering with a flexible independent distributor that can provide services authorized distributors cannot.
“You want to have that relationship with a partner that is flexible enough to shift gears in a moment’s notice,” explains Thomas. “You may be in shortage mode on Monday, and then Tuesday, you have excess and want help selling it. Then on Wednesday, you decide you don’t want to sell any more and prefer we loan you money against it.”
Flexibility also involves a level of customization because no two deals are the same. “An independent distributor has to be flexible enough to adjust to whatever the manufacturer’s specific requirements are,” says Thomas.
With the market seemingly in continual flux, the only constant may be change. When manufacturers seek to successfully adapt to whatever comes their way in the market, partnering with a flexible independent distributor that can cater to their specific needs may be the best bet to survive the next supply chain disruption.
FOR MORE INFORMATION
Del Williams is a technical writer based in Torrance, California. Classic Components, an independent distributor based in Torrance, California. Classic offers unrivaled flexibility and reliable material management solutions to many of the world’s largest engineering companies and electronics manufacturers. Classic continues to set the industry standard through our tireless commitment to customer service, high quality standards, and industry-leading counterfeit detection methods. For more information, call 310.539.5500, email email@example.com, or visit www.class-ic.com.
MODERN PUMPING TODAY, August 2023
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