With the current crisis in electronic components shortages, product developers (original equipment manufacturers) are looking for ways to address the problem. While there is no easy short-term fix, this article provides some practical tips to return to a more sustainable procurement footing in the medium term.
Our tips are:
1. Improve your planning – by forecasting up to 18 months in advance using analytical tools that account for uncertainty.
2. Build your manufacturing relationships - by sharing strategy and performance metrics, and agree on regular collaborative problem-solving sessions.
3. Adjust your purchasing practices – by establishing supply agreements to stay ahead of shortages and component price fluctuations.
4. Manage customer expectations – by explaining the current supply challenges, and including them in your improved planning processes.
5. Be more flexible in design – with strategies that allow for multiple component options.
Improve your planning
It’s time to get serious about sales forecasting and this needs to be as accurate as you can for about 18 months out. There are many different methods of forecasting. The traditional method is a time series approach whereby past sales are extrapolated into the future to estimate demand. However, the pandemic has seen the weaknesses of that method.
A more appropriate method in times of uncertainty is causal analysis, which examines the underlying causes of demand to estimate future sales. Trial rates and diffusion models are other methods and the approach you select will depend on data availability, the time frame you are considering, the lifecycle stage of the product and how much you are willing to spend to obtain a degree of accuracy in your forecasts.
With more budget marketers can engage in predictive analytics. For markets with high uncertainty, like the one now, the traditional go-to analytical tool is Monte Carlo Analysis, named after the famous casinos in that region. This tool (a plug-in to Excel) incorporates uncertainty in its modelling and allows for different types of market scenarios and factors such as widely varying component costs. The output of the Monte Carlo Analysis is the probability of a particular business strategy working.
Build your manufacturing relationships
Aim to develop a long-term trusted relationship with a contract manufacturer. A strong relationship leads to faster issue resolution. Issues are always going to arise, either from external pressures or variability in the manufacturing process.
The key to issue resolution is collaboration - to work through the problems and develop the trust needed to rely on each other. Some companies deliberately have two or three suppliers, to keep them “honest”, but this is a lot of work, is very costly to manage and can lead to an adversarial relationship.
By contrast, a trusted relationship emerges from success in solving problems rather than abandoning a supplier at the first hint of trouble.
The key to trust is for the manufacturing contractor to understand the product developer’s (original equipment manufacturer) business intimately and being vested in the success of the product. Both parties need to take the time to explain each other’s business, it’s strategy, product road map, business processes, goals and performance metrics.
A mental switch is required from lowest-cost to best-value sourcing. It needs to be understood that the lowest price is not always the least cost. A collaborative relationship identifies hidden expenses the product developer is incurring and the total cost of ownership, as well as opportunities for improvement and outsourcing of non-core functions.
If you want your contract manufacturer to go the extra mile for you, build your relationship. See our blog post for more on relationships.
Adjust your purchasing practices
The current shortage market has exposed the vulnerabilities of just-in-time purchasing policies. To stay ahead of shortages, rolling orders are needed well in advance of the actual due date. We are recommending ordering a year in advance at a minimum.
Similarly, companies need to budget in the likelihood of higher component prices, particularly if they need to place urgent orders which in this market is anything under 52 weeks.
While some suppliers are saying conditions will start to ease in late 2021, our sources are not predicting a return to normality till mid to late 2022. These predictions are assuming no further adverse market disruptions and continually improving the global supply chain, which recent events have taught us not to rely on.
The key strategy is to address market uncertainties to implement a supply agreement. A supply agreement involves delegating authority to your contract manufacturer to purchase products on your behalf – also called vendor managed inventory. A key benefit of having a supply agreement with your contract manufacturer is they can in turn put in place supply agreements with multiple component suppliers, leveraging its purchasing power for many different clients/products.
Under this arrangement, the contract manufacturer has written authorization to purchase long-lead-time components as far in advance as they deem necessary, depending on changing market conditions. The product developer is still financially liable for these purchases and cannot opt-out if, down the track, component prices drop as the market returns to surplus. On the flip side, the developer benefits if the supply conditions worsen.
With the better planning and collaborative relationship developed in points one and two above, the best middle ground balances all risks that can be identified.
Manage customer expectations
Customers don’t like surprises. If they have been buying your product for a long time at a certain price, and it suddenly jumps, they will not be happy. Similarly, if they are accustomed to short lead times and products are not available, they will be similarly shocked.
The key is to communicate frequently, right now, about the possibility of price or delivery fluctuations so that they can adjust their expectations well in advance of placing their orders.
Start by ensuring your customers are well informed about the origins of the current difficult market conductions. Following are some good articles:
The end of just-in-time for electronics manufacturing by our own Circuitwise CEO Serena Ross
Make personal contact with your customers to ensure they are taking the component shortages crisis seriously. It is natural for end-users to take supply guarantee for granted. As such they may not take early warning signals seriously until it is too late. As part of your better planning goals, work with your customers to predict their individual demand.
Be more flexible in design
When components are simply not available there may be no choice but to rapidly redesign the product. Regardless of current availability, it is prudent to build in increased flexibility to redesigns or new designs to minimize the impact of future component shortages.
The basic principles of increased design flexibility are to design PCB layouts in such a way as to increase the options available to easily fit different components. This principle applies mainly to critical components with long lead times, such as microprocessors, and not the more common, easily interchanged components for which direct equivalent replacements are available from different manufacturers.
The main variables involved are the number of pins on a component, the functionality of those pins and the physical dimensions (the packaging) of the component. With clever layouts, it is possible to design circuit board layouts to drop in alternative components to the same location on PCB, even if the pins or packaging are different. As an example, see this post on designing for component flexibility from a design partner of ours Genesys Electronics Design.
The clever layouts usually come at a cost of increased board complexity and are most practical when the alternatives come from the same family of components from a particular manufacturer.
Another approach is to have several design variants, each optimized to an alternative critical component, which makes it easier to accommodate components from completely different manufacturers. Apart from significantly increasing the hardware costs, this approach also has implications for firmware development that usually makes it uneconomical. However, if there are preferred components available it may be the only viable option.
The above steps are the best you can take now to mitigate against component shortages moving forward. Unfortunately, if you are desperate for components right now, the only path forward is to work with distributors and contract manufacturers who have established relationships and hope they can find a solution for you. Contact us if you need help and we will do our best to chart a path forward for you through these difficult times.