Michael Kennedy, vice president of global accounts at TTI, Inc. in his article published by TTI Market Eye explains role of distributors to support EMS in managing components across the board.
The primary challenges that electronics manufacturing service (EMS) providers faced in 2021 were many and included a myriad of component shortages, inflationary pricing, logistics challenges and COVID-19 restrictions and closures across multiple geographies.
With average lead times for many electronic components extending rapidly from a standard 12-16 weeks to more than 40 weeks, EMS providers and their end customers have been challenged to stay ahead of the increasing trend and source all of the components needed to complete end product builds.
A Focus on Inventory and Cash Flows
As we started the year, we were dealing with extending lead times and constraints in areas like connectors (with significant issues in automotive interconnect), relays, pressure/temperature sensors, tantalum capacitors and high-CV/auto-grade MLCCs. With the focus on the higher-dollar ICs and availability issues, these components may not be top-of-mind. The reality is that any one of these devices can equally stop a production line and prevent revenue recognition.
In this turbulent market, the challenge for EMS providers will be managing the full range of components across the board or harness assembly – maintaining a focus on inventory and cash flows, as well as assuring supply of the many low-cost, commodity parts.
This is where a distributor partner can be very helpful. For instance, at TTI, Inc. we have a great deal of experience working strategically with EMS providers to find more efficient ways of doing business, particularly with interconnect, passive, electromechanical and discrete products that normally represent 20 percent of the spend, but 80 percent of the part count/product placements on a board.
Our most successful EMS partners find value in multiple distributor-provided solutions, such as digital engagement with API or EDI; forecast management with buffer stock; on-site supply chain programs; proximity warehousing; flexibility related to rescheduling/cancellation and lower MOQs; influential component manufacturer relationships; and extensive available-to-sell inventory positions.
Connecting with Component Suppliers
Distributors are also closely connected with the component manufacturers and are able to provide market updates and help EMS customers keep lead times as up to date as possible – oftentimes providing early identification of forthcoming challenges and buffering against gaps in the supply chain.
Combining various supply chain solutions can help EMS customers minimize inventory holding costs and drive better inventory turns models. We saw EMS inventories continue to rise throughout 2021 as product flowed in, only to sit idle because certain critical components had been delayed, preventing builds from being completed. This situation ultimately results in potential cash flow challenges, although end customers have been much more amenable to fund at least some portion of these inventories and accept higher pricing to source critical components to better meet build schedules.
Partnering with a distributor ultimately offers the advantage of lower total cost of ownership. EMS providers can reduce inventory holding costs, improve flexibility, mitigate a certain degree of increasing prices and leverage distributor relationships and supply chain solutions.
While we all look forward to moving beyond the long lead times and uncertainty of the past year, it is likely that there will continue to be supply-chain disruptions and a variety of constraints and challenges that occur. There is an undeniable advantage in having proactive distribution strategies and working with the right partners to manage risk and provide better assurance of supply.