Do you think that we should have foreseen the challenges experienced in the pandemic?
Senior commentators have been talking about the potential for there to be a global pandemic for many years and never before have such big-budget movies such as Contagion seemed so on point. The last 12 months have been unlike any other and the electronic components market, in particular, has struggled with a series of upheavals that couldn’t possibly have been foreseen 24 months ago. From this experience, there is much that buyers in the semiconductor industry might wish they’d have known before, which can help everyone prepare for future global issues, or strengthen their supply chain in a market that continues to change rapidly.
How did COVID-19 change the distribution market?
We saw Original Equipment Manufacturers (OEMs) and Contract Electronic Manufacturers (CEMs) pausing or reducing production at the start of the pandemic, uncertain of what lay ahead. The industry moved focus to the immediate challenge centred around medical equipment including ventilators along with booming demand for consumer-related electronic items supporting work-from-home initiatives. But it wasn’t as simple as changes in demand, as moving products around the globe was equally challenging. Air freight capacity, which traditionally utilises space within passenger flights, was restricted as passenger air travel all but stopped. The cost of transporting containers by sea rose by up to 10 times. It was even difficult to transport components within countries as lockdowns imposed regional borders that had never previously had to be navigated. As the pandemic swept across the globe, the general consensus at the time was of a slowdown in the semiconductor market – but as events have since shown, this opposite was actually happening as “new demands” sucked up already stretched component production capacity.
18 months on, we are experiencing a shortage in semiconductors. Why is this?
It was impossible to predict the long-term changes that would be created by the pandemic as there was no roadmap or playbook to follow. The impact of the universal instruction to “stay at home” led to rapid digitisation driven by the need for high-end products relating to remote working and home entertainment. This in turn, led to an increase in demand for reliable connectivity, adding greater pressure on the need for delivering 5G and its associated infrastructure.
The initial uncertainties that had hit markets, caused in part by the assumption that the pandemic would present relatively short-term difficulties, gave way to the realisation that what began to be called “the new normal” was in fact a long-term situation. With hundreds of thousands of businesses able to liaise with a home-based workforce, activity within the market increased and newfound confidence returned. The surplus component stock was swept up by manufacturers of high-end products and uncertainty was replaced by buoyancy and expansion in demand.
Has the semiconductor market changed forever?
The world’s semiconductor market has always mirrored the global behaviour of GDP but this changed during the pandemic. We saw a massive global dip in GDP – whilst the worldwide market for semiconductors grew by 5.4 per cent. Growth is looking healthier than it has in many years and as traditional semiconductor customers – most noticeable the automotive industry – has turned production back on they have found that supplies of key components are not there waiting for them. Industry experts believe that there will be no going back to what was the status quo.
The global shortage of electronic components has been a wake-up call for many in the industry and the focus is moving to how these challenges can be avoided in the future. Although it’s unlikely that there will be a move away from mass sourcing from China and Taiwan, some countries such as the USA are looking to increase their indigenous manufacturing capabilities with the aim of supplementing current resources and offering protection should another crisis hit external supply chains.
How should buyers change their approach to manage their supply chains in the new world?
The first lesson is to diversify your sources of components with multiple vendors and in multiple regions, but there are other key practices that can be adopted to help avoid similar crises in the future. Key tips include:
- Always have purchase orders in place for essential components and where possible, dual sourcing options.
- Source your entire bill of materials to eliminate the risk of holding costly stock that cannot be used due to the unavailability of one component.
- Use distributors effectively: Fulfil c80% of components required with your broadline distributor, and stay close to these suppliers to check on the status of deliveries from up to three months in advance. Use High-service distribution to top-up quantities where needed and provide flexibility, in the knowledge that critical components can be delivered from stock as quickly as the next day.
- Survey all points of a supply chain to ensure they are being managed effectively
- Review contracts with manufacturers and distributors to ensure they offer maximum protection
How can element14 help its customers?
element14’s policy of investing heavily in stock availability has enabled its customers to mitigate many of these unforeseen issues of the pandemic. element14 has more stock available in its warehouses than ever before, enabling customers to have better access to products during the pandemic. As element14is a fully authorised and fully franchised distributor, customers can be confident that only genuine manufacturer products are supplied.