Smart Made Simple Discuss Supply Chain Intelligence Allocation is Back on the Table

By Matt Carefoot, Purchasing Manager, Smart Made Simple

There will be people reading this article that won’t have experienced allocation in their time within an electronics manufacturing service provider’s (EMS) purchasing departments, therefore I’ll start of by explaining exactly what allocation is.

Definition of Allocation

Allocation is the word often associated with electronic component supply.  It comes back to the simple economic principles that we learnt in school about supply and demand.  Currently, we are in a position where demand for certain and key electronics components outstrips the manufacturing capacity for these critical components, required in the bill of materials (BoM) to complete the production build.

So, what happens when supply can’t meet demand?  Well in the electronics manufacturing industry, we have our Original Component Manufacturers (OCMs) and their distributors.  When supply outstrips demand these parties will allocate the components parts to try to keep folks like SMS, the EMS companies manufacturing, but typically not to the same output volume.  The OCM and the distributors have their own criteria for determining who gets what. Order date, volume, associated industry the components/products are supplying into e.g., automotive, consumer, infrastructure, industrial, medical etc, urgency of requirement and line stop status, being some of the parameters they will use.

What Impact Does Allocation Have on the EMS Provider?

When the OCM or distributor informs us that a component part has gone into allocation, the first thing we will do is consult with our engineers and our Original Equipment Maker (OEM) customers to research if there are any component alternatives that could be used.  If they advise us that there are, then we will work with the OCM and distributors to try to secure the alternative.  The reality is that others will do the same, and these will also become challenging to source.  If the component part is unique to the build with no alternatives suitable, this is when you will see lead times extending and production forecasts lengthening.

What is the Current Climate within Electronics Manufacturing?

The electronic component supply chain is currently experiencing considerable strain with some major disruption.

Silicon wafer fabrication being the main driver for these shortages. Global demand out stripping supply, in some manufacturer cases by 5:1

Driving factors:

  • Covid-19 hit the globe.  Many locations that were severely impacted were the main component manufacturing localities.  Facilities have faced closures, lock downs, and staff shortages.  These factors naturally created a backlog that hasn’t been able to be cleared.
  • Covid-19 spurred innovation with the demand for Automotive, Automation, MedTech, and Robotics on the rise.  Whilst people witnessed for themselves and were more exposed to messaging in relation to the environment, and the protection of unsurprisingly the demand for more eco-friendly automotive rose.  Our family and friends were all talking about how nice it was to hear the bird song, and how clean and clear the rivers looked.  This had a ripple effect to spike the automotive and clean tech industries.  If you didn’t attend a Zoom call, or buy some exercise equipment, of invest in some home and lifestyle products, were you even in lockdown?
  • Covid-19 economic masters predicted the largest recession since the 1920’s, when we’ve actually seen world economies stabilities in in some geographies rise.  Developing economies and landscapes have continued to emerge and the electronics industry invests to protect their geographical footprint, landscape, and supply chain networks.

 

The sheer volume of activity and material passing through the main ports and hubs used across the globe also created a challenge with a massive imbalance in the capacity in air and sea freight transportation/transportation.  Whilst many of us sat in the garden enjoying the blue skies above, which seemed odd as they were missing the passing of aeroplanes, little did you know that this would compound the supply chain problem.  Many freight forwarding companies utilise space for additional capacity on passenger flights and of course, we were not jetting off for our two-weeks in the sun.

And, of course, we all read about the Suez Canal, but this just became an illustration of how some freighters were literally stuck in the ocean for weeks, which had a knock-on effect on port capacity and processing. So, if your pizza oven or hot tub was weeks late, the likelihood is this is why.

How Do You Communicate Allocation and Extended Lead-Times to Customers?
Nobody wants to be the bearer of bad news.

Every EMS will handle things differently, but from our Smart Made Simple (SMS) perspective we are leveraging relationships that we’ve forged over decades.

Many EMS companies are in a panic, spending a ridiculous number of resources and effort with no progress.  Movement is slow we must accept that and focus our energies in investigating solutions and information accuracy.

In a market that speed matters, what can be done?

It is all about getting our OEM’s orders in place in relation to long time demand.  Unfortunately, anything short term will be in jeopardy unless inventory exists in catalogue distribution or the grey market. Our customers should strategically position themselves to be able to approve alternatives at short notice to speed up the validation process.

From a SMS outlook, we will continue to push for delivery commitments and improvements.  We will escalate where we can and bring our OEM customers into shared discussions with the OCM to reinforce the importance of supply.

It is imperative that we all work together, in the supply chain, from OCM, to distributor, to EMS to our OEM customers.  Transparency, traceability, and the sharing of information to support the supply chain network is crucial.  These are tough unprecedented times where supply chain intelligence is a must to simplify the situation.  By keeping it simple, sharing data, and working together we will make it through.  It’s Smart Made Simple.

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