Written by Marc Barnhill
Cost-cutting and margin improvement requirements echo along the semiconductor and electronics supply chain. These challenges are broad and require an increase in value chain partnered solutions and customized strategies. But today's market challenges are the new set of opportunities available to agile companies, with solutions that have matured alongside our industry.
I’ve been actively engaged in the electronics industry for more than 20 years and, during that time, I have seen many changes, both in components and in how our industry operates. What has not changed is technology’s robust ability to transform and to be transformative. Perhaps as a result of this dynamism, the electronics supply chain has not followed a typical path. With the benefit of history, and viewed from a position within the supply chain, I see exciting and important changes occurring.
While our industry has continued to mature, many of the recent changes can be understood as an adaptive response to both the 2000 inventory problems and the 2008 global recession. At Smith, we have seen these adaptive responses to internal and external challenges as a means to increase market agility. We believe this agility is realized through the creative engagement of supply chain partners who have the expertise and sophistication to leverage lessons learned by competitors, while providing the dynamism and agility necessary to compete and lead in today's challenging global marketplace.
The challenge is the reward
Perhaps the most-requested service by our clients, especially recently, has been to provide customized solutions to market challenges, whether in sourcing components, asset disposition, or strategic inventory management. The secret to our success in providing these solutions has been the pairing of a deep knowledge of the hardware (components) with the ability to dynamically and securely leverage the supply chain in order to act at the right time.
From the hardware side, we have seen that the electronics industry can arguably be understood to have "perfected" rapid product development. Interchangeable component development supports customized off the shelf (COTS) builds, and increasingly features rich functionality in smaller footprints at comparatively lower costs. As we all know, Moore's Law certainly has been an important driver for our industry, and as the challenges to "beat" Moore's Law continue to challenge all types of engineers, from mechanical and electrical to quality, the ripples from this successful motivator continue to drive positive industry changes. What wasn't considered with Moore's Law, though, was what impact the design trajectory would have on the costs of R&D and manufacturing at the complex, 1x-nanometer architectures that we are pushing. These R&D, equipment, and manufacturing costs have also pushed changes and challenges to increase margins and trim costs.
The perfection of Just-in-Time (JIT) delivery epitomizes the challenges of maximum supply chain efficiency, keen pricing strategies, and agile inventory management. These are essential business processes for our volatile markets. The industry overhangs experienced in 2000 taught us many lessons, especially the importance of cost and inventory management that can quickly adjust to positive and negative market whiplashes, which services like Purchase Price Variance (PPV) directly address. As we have seen, consolidating costs through managed inventory solutions while simultaneously leveraging interchangeable components and kitting options are just a few of the sourcing services that we have been called upon to customize for customers, whether large or small.
Breaking out of the pack
In the rapid-fire electronics market, taking the lessons learned from one supply chain challenge into new, customized solutions is the best practice. Consumers and enterprises alike expect to be continuously presented with increasingly sophisticated and multifunctional end-products at lower prices and with shorter development cycle intervals. Simultaneously, the quest to be the next market leader pushes companies to respond to these demands with ever-shorter cycles. In turn, this situation then requires more agility, more logistics and quality prowess, and more cost and pricing management of companies' supply chain partners. These pressures create their own cyclicity that promotes the transformations I talked about at the outset of this discussion. It still amazes me when I consider the impact that these developments and changes have had on not only our own industry's evolution and on consumers' expectations, but also on how today's global marketplace operates.
Time and again, we have seen that market leaders respond to these challenges by instead seeing new opportunities to break out of the pack. With these new opportunities have come market shifts, particularly among the leading independent distributors (IDs). Just as the industry has matured, so have the supply chain partners – my own company, Smith, included. Top-tier IDs are no longer focused on single orders with JIT delivery. Today's top-tier IDs are global enterprises staffed by seasoned professionals able to provide sophisticated, customized market services that directly improve margins, provide customized inventory management strategies, realize asset distribution ROI, and leverage a partner's assets for turnkey solutions. No longer is an ID solely a distributor, but more appropriately a turnkey, value chain necessity.
Market leaders challenging the norms
There is still great promise for real competitive opportunities in the semiconductor and electronics sector, not despite the challenges, but thanks to them. What experience has shown is that market leaders, whether traditional PC OEMs, leading EMS providers, or the largest companies in the rapidly-growing medical and industrial electronics sectors, all are demanding new strategic thinking. The goal is to realize new gains by moving beyond traditional supply chain relationships. Dynamic supplier services give companies the ability to leverage the experiences and knowledge from supply chain partners in new and critical ways that transform challenges into market wins.
One of the first lessons learned on a trading floor is the importance of expert inventory management and component pricing tracking. Taking decades of experiences and folding them into highly dynamic systems and processes is how we have met the challenge of intense market volatility. Leveraging this knowledge and turning it into agile services that can be customized to meet the challenges of our clients has been a cornerstone of our market success.
For example, while the seemingly-positive challenge of rapid growth and demand for product is one that most companies wish for, it also requires careful inventory management for components that can quickly obsolesce. Procurement is tricky and rife with pitfalls if not handled with experience. Outsourcing this service is just one example of how some of our clients who are leading, global manufacturers have addressed shortage needs as well as long-term inventory consolidation efforts. Having onsite purchasing experts allows in-house teams to continue their core efforts while benefiting from the experience that a mature value chain partner provides.
We all know the importance of seizing market opportunities when they come along. The trick is knowing when something is the right opportunity. What may seem like a positive change in availability or pricing might have deeper cyclical trends that herald other opportunities or forthcoming challenges. Today's supply chain services leverage the expert advice from professionals who deal with such situations on a daily basis and who have the ability to see markets from various companies' perspectives because of their consultant and advisory roles. Understanding that knowledge and insight in the semiconductor and electronics industry is just as dynamic as any technological change, our industry has experienced unparalleled growth by maintaining agility in supply chain relationships.
Cost control and hub solutions imperative for inventory management
Inventory management is a constant challenge, but as more hubbing requirements are placed on midstream clients, they have had to take a closer look at how to reduce their cost of operations and total cost of inventory ownership. In one particular case of reducing warehousing, procurement and inventory costs led a global consumer electronics (CE) manufacturer to decide it needed a fresh perspective on the situation. Working from the customer's demand reports, Smith implemented turnkey solutions to procure necessary components, including difficult EOL parts, through our global network. We see, time and again, that customizing supply chain strategies from within an existing paradigm yields successful, innovative solutions.
Reducing the total cost of ownership is a pervasive requirement along the supply chain. As hubbing continues to be moved upstream in our industry, it is creating a supply chain shift rooted in financial risk management. Faced with challenging new responsibilities, many midstream companies are expanding their relationships with supply chain partners who can customize solutions to create value.
But how you go about choosing alternative components and suppliers is not as simple as it may seem. Who you source from and who they, in turn, source from are among the most important risk management decisions you can make today. Not only is there the risk of counterfeit or substandard parts, but understanding today's complex market for electronic component sourcing is not for the faint of heart, nor the newly-initiated. To those who understand and can reliably and safely act in our dynamic and volatile commodity market, there are significant opportunities, not the least of which are short- and long-term cost savings and inventory management.
The challenges don't begin and end with inventory management, though; reducing build costs and developing a roadmap that can provide long-term cost savings is a regular engineering challenge. With the rapid rate of component obsolescence, as Moore's Law marches ever forward, companies diligently research cost-savings opportunities available through experienced suppliers who have been able to act in multiple markets, and for long-term procurement, to fulfill future warranty and service requirements.
Changes permeating relationships and services
Across the board, we see companies all along the semiconductor and electronics supply chain facing increasing pressure to improve margins and cut costs. An important byproduct of our industry's maturing that I have seen is that the relationships along the supply chain have also matured. Thinking outside the box often means bringing in someone from outside of that box, and so increased outsourcing for complex solutions has been gaining favor among today's industry leaders. For over two decades, I've been a part of the growth from Smith's early trading and JIT roots to developing customizable service solutions that leverage years of experiences. The outcome has been a new dynamism that can address the intense pressures and volatility we all face in our complex global marketplace.
Today's market challenges are the new set of opportunities available to agile companies. Market challenges can be turned into opportunities that arise from successfully navigating supply chain disruptions that curb revenue and require new types and levels of strategic supply and inventory management. Maturation along the sophisticated semiconductor value chain has brought with it a reconfiguration of partnerships that have, in turn, redefined the supply chain itself. This cyclicity is evidence of the dynamic nature of our industry, and just as the end-products afford new agility to users, the changes in our supply chain are affording an important agility to the new crop of market leaders.