Empowering EU Electronics Growth Through Global Supply Chains

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euThe challenges to economic growth are not insignificant and have raised stability questions for the EU region. Among the challenges is the growing complexity of global supply chains. While new markets in emerging and developing economies hold opportunities for older components, there are significant challenges for companies branching into these new markets where they do not have existing local networks.

 

The European Union (EU) has faced numerous challenges since the 2009 global economic recession. EU electronics manufacturers, like other industries, have felt the impact of these challenges while facing new market developments that demand attention. Among the challenges is the growing complexity of global supply chains. To seize the opportunities of an increasingly open and affluent world, European manufacturers need to master new, global supply networks that demand local connections and agility far from EU shores. EU manufacturers need supply chain partners who can support them with dynamic market opportunities at the right time and place, and at the right price.

EU prospects growing

The challenges to economic growth are not insignificant and have raised stability questions for the EU region. Despite these challenges, from the viewpoint of financial analysts (see Credit Suisse's summary of Germany, for example) and of the semiconductor and electronics industry, the EU is experiencing a steady, sustainable growth that has supported some of the better market sales data in a while: 14.9% sales growth year-over-year, according to WSTS data. Economic growth forecasts are especially positive for the semiconductor and electronics industry, and include modest growth for 2014, as well as a positive view for the EU to experience a 1.6% GDP growth for 2015. This does not mean to say it will be an easy return to more stable and sustainable growth, but the underpinnings and prospects are there and will come to light in due time.

Noting the EU's economic underpinnings is important, not only as a measure of consumer confidence, but also to gauge the strength of potential municipal, industrial, and manufacturing rebounds. Each of these major market sectors together will ensure the stability of the EU's sustainable rebound, and, to date, each is showing continued improvements. This year, we have seen particular growth in automotive semi, automation, and embedded ICs. These markets tie together at industrial sector levels and trickle down to consumer markets, particularly for automotive and the important Smart City and Smart Home growth, long spearheaded in the EU and continuing to see adoption at municipal and individual consumer levels.

Complexity of chips and chains demands new models

On the global front, market momentum has renewed attention on emerging and developing economies. Of course, the quest for success in developing markets puts manufacturers under significant pricing pressures. Pricing pressure in the face of already tight margins requires supply chain creativity to take advantage of windows of sales opportunities. Distribution creativity and agility is the other side of the new set of global supply chain challenges. There is an increased complexity arising along the distribution channels that support growth in the emerging and developing markets.

Traditional, distributed supply chain models are no longer working for semiconductor and electronics industry companies in either the EU or the US. The reason comes down to rapid changes in pricing, demand, supply, and market locations globally – these situations are bringing new, local competition with aggressive market strategies focused on overtaking tier-one leaders. The challenge of seemingly chaotic and rapidly-changing end-markets is made all the more complex as these short cycles and, in turn, short lead-times from the demand side are met with reduced supply capacities. This tight supply situation arises because of short-cycled components that are made by fewer and fewer chip manufacturers.

In light of the many moving parts that make up global inventory models, the leaders in global sourcing and distribution that can provide strategic and competitive solutions are coming from long-standing component distributors with deep knowledge, experience, local relationships, and global reach. Focused distribution and global services partners with core strengths rooted in component sourcing and distribution markets not only have purchasing models, inventory hubbing capabilities, and visibility into best-in-class supply chains, but these well-established partners also afford a new level of agility and risk mitigation to their customers. As Kirk Wehby, COO, Smith & Associates, recently noted in Electronics Purchasing Strategies:

Electronics manufacturers have been going through a period of focused outsourcing; simplifying supply chains to make them leaner, more transparent, and more fluid. Component distributors have been responding by increasing their integration strategies in different ways, and with varying successes, depending on the history of the breadth of their core competencies. […]Vertically integrated distributors are leveraging existing capabilities and aligning what is in-place across their global offices to offer more elegant and seamless value added services to customers.

Visibility and agility gains

Global distribution leaders, like Smith & Associates, provide expertise and services to companies whose core business is not rooted in sourcing and distribution channels. Among the most challenging problems that Smith provides solutions for are near-daily price variances, necessitating the ability to act rapidly and globally when inventory market conditions change. Rapid inventory shifts can necessitate product hubbing or the sudden need for assuring disposition of excess inventory. These safeguards not only work to ensure strategic cost models, but also help to mitigate risks from disruptions that are increasingly rising. These challenges are rooted in the rising competition among chip manufacturers and dedicated lines for major OEMs demanding large orders (thereby affecting pricing for other OEMs and EMS companies).

Consolidation of suppliers is on the rise now, as well. The global supply chain is consolidating into a few strategic partners able to not only provide sourcing and distribution services, but also to oversee complex inventory management solutions for leading EMS providers and OEMs. Cutting-edge global supply chain expertise is no longer found in-house because that degree of specialization and complexity is beyond what one company can solve alone. Instead, turnkey, global services partners ensure that visibility and transparency are part-and-parcel of service solutions (inventory management, sourcing, distribution, reverse logistics, EOL and component lifecycle management, pricing, testing, etc.). The service solutions offered by leading distributors provide the necessary agility to companies seeking to meet global supply chain challenges and move their market reach to gain from new opportunities, despite potentially unfamiliar locations and markets. Leading distributors provide expert solutions that mitigate the unfamiliarity which companies are encountering today. The value-add provided comes from the deep expertise, thorough familiarity, and existing networks resulting from the global distributors' long-standing positions in those markets and regions, such as Smith's strategic global offices with deep local networks and established logistics.

Price variance mitigation

Companies always seek maximum control over pricing. Pricing volatility arises from the combination of shorter demand and production cycles, increased competition among fewer chip manufacturers, and challenges relating to the complexities of chip fabrication today. Not only do we see highly-volatile pricing events, but supply disruptions seem to be occurring along new patterns, likely related to new manufacturing challenges, as well as to shorter device (and component) cycles. All of this means that time-to-market and purchase windows are shortening, also. To control costs requires controlling the price of components. In highly-dynamic markets, ensuring the most strategic pricing for components can be a make-or-break moment for a company.

To meet these complex pricing challenges, EMS companies, in particular, have increasingly turned to cost-saving opportunities from Purchase Price Variance (PPV) programs. PPV programs address two critical needs: cost savings and just-in-time (JIT) inventory to meet shorter cycle demands. Since PPV purchases follow demand schedules, inventory holding costs are reduced. The PPV model is based on purchasing components at a target threshold price that is a percentage variance below standard or expected cost and further reduces costs on a line-by-line basis. PPV programs, at their core, are quite simple. The process generally involves providing a component demand list in the form of either a Bill of Materials (BOM) or a Materials Requirement Planning (MRP) report. The BOM or MRP report contains those components needed for upcoming builds. At Smith, the dedicated PPV commodity expert for that customer then cross-references the part numbers and generates a cost savings report for any components that meet the threshold percent savings, based on the agreed levels. Upon approval from the electronics manufacturer, the required components are then purchased and scheduled for delivery at the lower cost that triggered the PPV purchase.

Supporting EU's global growth

Previously, with longer component and device cycles, there was more time to evaluate and choose purchase points for manufacturing events. Similarly, the best time at which to sell excess inventory was longer and there were more opportunities for realizing a decent Return on Investment (ROI) on those held parts. While new markets in emerging and developing economies mean that older components have the chance for a second opportunity, it is, again, a significant challenge for companies to branch into these new markets in new regions where they do not have existing local networks.

The economic climate is stabilizing, but these are still quite turbulent and challenging times on the macro-horizon. For the EU semiconductor and electronics industry to flourish, diversification and growth into new global markets is essential. However, these markets are not open landscapes; rather, they are already focused targets of highly-competitive, new or diversifying OEMs with very aggressive supply chains. To succeed in the tight and volatile global marketplace today necessitates forging new supply chain strategies that safely and expertly connect the EU with quality partners in these new, global markets. As a result, we are seeing significant demand for expert, secure, and turnkey global services from leading distributors who can provide the needed competitive edge through sourcing, pricing, quality, and inventory management solutions catered to individuated strategies for market success. Simultaneously, continuing to build out core, local EU markets and support the growth in major enterprise, industrial, automotive, and municipal sectors is also critical. Here again, pricing and quality are essential, and having agile inventory solutions and sourcing programs such as PPV is helping the EU's leading companies to continue to set the standards for innovative electronics solutions.

Copyright 2012 N.F. Smith & Associates LP.  All Rights Reserved.  View our Privacy Policy.

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