Symphony Consulting: Newsletters

Symphony Consulting Newsletter – Q3 2004

"Surviving in a Tighter Component Market"

We knew it would happen one day. After three years of short lead-times and readily available supply, the market for electronic components has shifted. Longer lead-times and spot shortages are the norm. Some specific component families have been on allocation since the end of 2003. When supply is at risk, revenue is at risk. What strategies can you use to keep products flowing and avoid citing supply chain issues as an impediment to meeting your revenue plan? Here are some thoughts:

In the short-run, it is all about resource bandwidth. You need to accept that working in a supply-constrained market takes more time for the people directly involved in securing supply and managing builds. From our observations, managing a shortage takes 2-5 times more effort than managing a problem-free transaction. Depending on the frequency and the magnitude of misalignments (the gap between need dates and due dates) you might need a lot more resources focused on resolving these issues. In one recent study we completed, our client was facing large misalignments (> 14 days) in 16% of its component orders. We would expect that to take 30-80% more resources to resolve successfully.

Does that mean that you have to go on a hiring spree? NO. You should consider this extra workload and determine the best way to respond. Can you pull resources from other areas? Can you give focus to the efforts by identifying critical products and sacrificing others? Can you narrow the scope of big projects that affect this pool of resources? If there are no good alternatives using internal resources, then you may need to look for outside help. There is some cost in each of these decisions but you need to balance these costs against the impact on the customers, the company, and the shareholders if you miss shipments.

If you are working through a contract manufacturer, these same questions apply. Do you know the level of misalignment in the CM’s supply chain? If not, you should find out now. What is the CM doing to deal with the tight markets and the increased resource demands? What role can you play in helping the CM? What is your CM doing differently now than they did in 1999, ensuring that continuity of supply does not lead to the excess inventory figures of 2001? This is one case were ignorance is not bliss.

While you have to react to the situation and make some trade-offs in the near-term, few leaders want to stay in that environment. The conventional approach in this circumstance is to “just order more” or to “bump up” the forecast. You have only to look back at the inventory write-offs of a few years ago to realize that this is a Faustian bargain. The real path out is to protect your supply chain through product specific programs to buffer against supply uncertainty and to provide real flexibility. Even in a tight supply market, you can begin building programs to protect your revenue stream. It may take longer to get all of the pieces in place but the sooner you start, the sooner you buy some relief for your company.

We had covered some of this is a previous Symphony Newsletter but here is a brief overview of some of your options:

Postponement or last minute configuration:
For high value items, look for ways to delay customization and hold inventory at a lower-cost, more generic position. You get the protection of extra inventory but with less inventory risk. It also gives you more flexibility to respond to last minute mix changes. This approach can be applied internally with your products and for items you purchase from suppliers.
Component buffer:
For lower value items (e.g. the bottom 10% of your spend that account for 70+% of the active parts), a simple, broad approach is effective. With relatively little monetary exposure, you can eliminate the majority of your parts as potential shipment stoppers by adding safety stock/time. For the higher value parts that cannot benefit from the postponement approach outlined above, establish your buffers based on risk factors (e.g. lead-time, cost, demand variation, number of suppliers, number of “where-used”, influence with suppliers) and on performance requirements (e.g. 40% upside within 30 days). The key is to make sure you have a robust process for maintaining the numbers. You do not want to live with stagnant inventory buffers in a dynamic world.
Sourcing:
Ideally, you would have more than one qualified source that can meet your needs for every part. It may be worthwhile to qualify extra sources before you have a supply crisis. In some cases, you may have a part where only one source is available. It is good to recognize that early because your only choice may be to carry some strategic buffer based on the risks.
Information velocity:
If your company is like most, it may take weeks for a change in demand from your customers, to make it all the way through the multiple tiers in your supply chain. If you can get the message to right place more quickly, the supplier can have a head-start on preparing products for you.
Lead-time differentiation:
Instead of offering all products and all configurations as off-the shelf items, it may make sense to use a time strategy (i.e. stretch lead-times to your customers) on certain items. The more notice that your customer has to give you, the less you have to guess and hold inventory to buffer against swings in demand.

The good news is that we have an improving economy. The bad news is that longer lead-times and shortages are putting revenue at risk. We have tried to outline a few solutions in this newsletter. If you find that you need guidance or bandwidth to mitigate your supply risks, Symphony has extensive experience and capabilities in these areas. Symphony also teaches a workshop (“Improving Supply Flexibility while Reducing Inventory Liability”) that you may find of value. Contact us if you would like more information.