The Health of the Current Supply Chain: Lessons, Predictions, and Solutions

A complex system in the midst of a global pandemic, the electronics supply chain is still struggling. At its base, suppliers perform mining operations of raw materials like tantalum and silver. At the top, manufacturers assemble mission-critical electronics like missile guidance systems and electric vehicles. In the middle are numerous stakeholders negotiating a nearly limitless number of jumps around the globe, subject to various local laws, restrictions and logistics. It’s safe to say no supply chain is more complex than the electronics industry.

When the COVID-19 pandemic hit, this network of trading partners was forced to cease normal operations. Some businesses closed for a period of time, while others closed their doors entirely. Many suppliers have managed to maintain operations, but at reduced staff. As demand for parts initially decreased, the dramatic reduction in supply was not immediately apparent. The damage was done, yet unrealized. Restarting this complex machine has resulted in imbalances that will take time to correct.

Existing Strains in the Supply Chain 

In 2018, Jabil was already identifying shortages in the supply chain, reporting “We haven’t seen anything like this since 1999, when lead times for tantalum capacitors hit a high of more than 52 weeks and created widespread supplier allocation due to unexpectedly high OEM demand.”

Industries like all-electric vehicles (EVs), the Internet of things (IOT), and 5G radio towers were commonly identified as contributing to increased demand, resulting in a decline of electronic component availability. It’s fair to say demand has increased and that the supply chain has not reacted particularly well satisfying this demand.

Capacity Expansion: A Cautionary Tale

From 1999 through 2001, we witnessed both an increase in tantalum capacitor demand and a (perceived) simultaneous reduction in supply. The result was a painful increase in costs and lead time, both of which reached uncomfortable levels, noted in a 2003 retrospective produced by KEMET. The tantalum capacitor crisis resolved itself quickly as a result of capacity expansion, new technology, and recognition of the unwelcome behavior of “double ordering.”

In one quarter in 2001, revenue for tantalum capacitors was cut in half – an event long remembered by those suppliers who had invested in expensive new capacity, now going unused. Double ordering results when a buyer of electronic components places an order to satisfy their demand, and then places an additional order with a competing supplier in hopes that one of them has the inside track of getting the inventory. Often obfuscated to buyers at the time were pinch points in the supply chain where double orders were merged and presented to a common supplier. As a result, forecasts, market opportunity, capacity requirements, and revenue projections were all doubled … but not legitimately so. When the orders were reconciled and half were canceled, the supply chain was left holding the inventory, having invested in capacity not required.

This was a lesson the supply chain will long remember. Today, the industry has adopted a wait-and-see attitude to determine if the increased demand for electronic components is real, or just an aberration of imbalances resulting from the pandemic disruption.

One Grain of Sand

Electronic assemblies are typically complex pieces of equipment. Open any electronic device and you will see thousands of components, all of which are vital for the build. The current shortage of electronic components is commonly called  a “chip shortage,” referring to the integrated circuits built on one flat piece of silicon. These “chips” are interpreted as meaning the CPU on your computer or the variety of microprocessors within an electronic assembly.

The unfortunate reality is that all electronic components are experiencing some level of disruption. Bare board fiberglass, copper sheets, oscillators, crystals, and connectors are just a few of the components experiencing historical increases in lead time and instability. One grain of sand can cause a mechanical watch to cease operating. There are thousands and thousands of opportunities for failure in the electronics supply chain.

One Drop of Water

As noted above, current supply chain inefficiencies began with a strained network of trading partners even pre-pandemic. The lack of robustness due to lean manufacturing made the supply chain susceptible to any disruption. Just-in-time delivery has added another layer of fragility in the supply chain, grossly exacerbating current issues and disruptions. Lest we forget, supply chain operations actually ceased for various trading partners at different times during the pandemic. Now coming back online, suppliers are reluctant to rush into investing in capacity expansion for fear demand will suddenly evaporate again.

Furthermore, additional complications such as trucker shortages, international laws regarding vaccine requirements, shipping logistics, and the Abracon facility fire in Q4 2020 all add to the complexity. Additionally, objective evidence shows that electronic component demand has increased, and is forecast to continue through 2027.

When asked the root cause of the current supply chain inefficiency, it is useful to remember a flood begins with one drop of water. Where that drop of water originates is not critical. The rising water is of supreme importance.

How Long Will This Last?

Unfortunately, supply chain disruption will last longer than is comfortable because it’s a math problem at its core. If demand continues to increase and supply stays the same, the current inefficiencies will never balance. With the assumption that current demand levels are here to stay, supply will meet demand at the lead time needed to build production capacity–years.

Visibility of Supply Data Is Critical

Orbweaver digitally integrates the supply chain, connecting buyers, sellers and manufacturers of electronic components. Amid market uncertainties, stakeholders can benefit directly from the speed and efficiency of digital communication in the quoting and purchasing cycle as opposed to emailing spreadsheets and PDFs. Regarding supply chain improvements, we’re seeing the greatest impact with supply visibility – allowing our customers to instantly view their supplier’s variable inventory and place orders in real time. The ability to move quickly, taking into account real-time accuracy and transparency of data through supplier data integration, is the industry’s best shot to overcoming market supply chain disruptions.