Market Changes Bring Supplier Changes: 2012's strategic diversification

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servicesIn 2011's aftermath, sourcing remains a question. Utilization has room to increase, but will the right lines be available at the right time and the right price? Faced with disruptive events, increasingly conservative inventories, volatile pricing, and shrinking margins, it is essential to have strategic supplier diversification and agile, targeted inventory management.

 

 


A common refrain in financial investment advising is "diversify your portfolio." The reason for this, of course, is to minimize risk – to avoid putting all your eggs in one basket. This simple strategy, risk avoidance through diversification, has wider applicability, and currently it's playing out across the electronics manufacturing supply chain. As last year's two major natural disasters in Japan and Thailand continue to negatively impact profits, component availability, and the wider semiconductor and electronics supply chains, the lessons relearned of the risks of sole- or limited-sourcing will not soon be forgotten.

Much like diversification, alternative inventory management strategies and programmatic cost-cutting supply initiatives are being employed to address market fluctuations. For example, limited demand and lingering global economic uncertainty, on top of ever-slimmer margins, are reinforcing lean inventory management strategies. These lean strategies are being passed down the supply chain, pushing the hubbing points for components farther back and requiring new types of inventory management services to be in place, and for a more extensive set of companies (refer to Smith's recent MarketWatch Quarterly article on supply chain disruptions, "Managing Today's Risky Business" for more details). Also, the consolidation of suppliers and manufacturers, the reduction in the number of companies able to support today's fantastically expensive fabs and lines, and the bankruptcy of some major suppliers are already having a cautionary impact on supply forecasts and adding increased speculation to near- and long-term pricing. There are serious questions about the reduction in fabs, lines, and component manufacturers, especially given the problems facing Japanese firms presently. The present situation is forecasted to result in lowered component availability, whether due to conservative production or simply to the lack of capacity or lines. In turn, this situation translates directly into increased demand for agile market strategies to best respond quickly to volatility in pricing and availability.

Adding to the trend of more conservative financial spending, mergers and acquisitions (M&A) dropped significantly during 2011 and continue to remain below average in 1Q12. This continued, depressed M&A activity further underscores the data that point to the fact that the semiconductor and electronics industry is responding to market trends by turning to new supply chain strategies for maximizing assets, inventories, and new market opportunities.

Diversified Supplier Strategies

Perhaps one of the most notable shifts currently occurring in our industry is the move away from sole- or limited-sourcing supplier strategies, particularly after this traditional supply chain relationship proved unable to respond during the most critical of times. During the 2011 disruptions, many corporations found that their supplier strategies were not able to respond to their needs, and so, to keep production lines moving, they turned to qualified, global, open-market suppliers to fulfill demands. The success of these engagements was such that long-standing leaders of the open-market, such as Smith & Associates, have seen significant increases in demand for not only spot-market or shortage supplying solutions, but more complex, global inventory management and asset disposition strategies as well. Being part of the open-market and having the critical benefit of deep, historical insight in regard to vendors and hard-to-locate components, as well as experience in customized inventory and asset management solutions, Smith has seen many large players qualifying new channels in order to diversify and create strategic buffers against the market.

Among the buffers being added to supply chains is the diversification of suppliers to reduce the risk of production halts. The extent of last year's natural disasters meant that not only were suppliers unable to meet their deliveries and demands, but many suffered such significant facility destruction that they have been forced to relocate, re-equip elsewhere, or re-prioritize order fulfillment. In the most serious situations, many have simply been unable to restart business. These supplier dislocations and dissolutions dramatically affected many supply chain relationships, leaving those in sole- or limited-sourcing supplier situations in very difficult situations. The lingering effect of line stoppages and inventory problems continues to be seen in depressed or negative earnings reports still in 1Q12.

New sourcing norms, regionalized manufacturing, and general market strategies were certainly forged out of the supply chain events of 2011, and were made even more challenging by the volatile global financial/economic situations and demand-softness in mature markets (i.e., the 2011 US and EU economic problems). The central theme of the present strategies is diversified sourcing, both in terms of supplier (from whom) and geography (from where). Along with these new sourcing strategies has come increased demand for a wider array of targeted solutions to further improve market positions (while maintaining lean inventories) in the still-tentative, but stabilizing, global, macroeconomic climate.

The market conditions that have validated the practice of extremely lean inventory management and tougher margins for components and devices further add to the need for diversified supplier and services strategies. With the locus for the hottest devices and the vast majority of sales still in the mobile space, mobile phones (smart- and feature phones) and tablets (including tablet PCs and eReaders), there is also a faster lifecycle for the most in-demand components. Rapid innovation and brutal competition translate into shorter lifecycles for these components before they then, relatively quickly, move to end of life (EOL) status. Being able to quickly respond to pricing, cost savings, EOL and inventory situations, and asset disposition for improved ROI are at the core of today's in-demand market strategies that open-market leaders, like Smith, are providing to the rapidly-increasing set of global corporations.

Targeted Inventory Solutions: Sourcing and disposition

It goes without saying that, coming out of 2011, traditional inventory and asset risk management approaches have been highlighted and, therefore, revisited, along with the move to diversify supplier bases. Among the in-demand inventory solutions are the value-added benefits of having a qualified, diversified sourcing strategy that leverages the various capabilities and respective market positions afforded by these new, strategic, supplier relationships. Significant market agility and flexibility in today's volatile (and demand-fickle) marketplace is being realized in risk management strategies that provide customized and dynamic asset management.

The qualified, long-standing, open-market leaders, such as Smith & Associates, have experienced significant demand for a suite of services from OEM and EMS corporations seeking to improve their risk management strategies through diversification – particularly after having successfully turned to these same open-market suppliers during crises. Smith has responded both to clients who recognize the importance of supplier diversification and to those who require expanded services to buffer against tumultuous and fast-paced global markets. Among the expanded suite of solutions in demand from Smith's clients are the following:

  • Customized Purchase Price Variance (PPV) analytic tools to best react to market changes that translate into improved savings and profitability levels;
  • Vendor managed inventory (VMI) to improve cost management;
  • End of life (EOL) inventory management solutions;
  • Maximized returns from asset disposition and divestment of low(er) margin lines; and
  • Various other strategic inventory and asset management services.

Looking more closely at the strategic solutions needed to meet present market conditions, we provide a brief explanation and discussion of the most requested supplier services.

Cost reductions through PPV

It goes without saying that the implementations of cost reductions are at the forefront of business strategies. Smith has updated and expanded its Purchase Price Variance (PPV) toolset and service program in response to increased demands for highly customizable tools that are built on market knowledge and the advantages of a vetted, global, open-market view of specific components with historical, financial, and actionable variables. Smith's PPV Plus+ program combines the customized toolsets and well-informed market data with dedicated, professional PPV specialists, who work side-by-side with our customers through detailed demand lists and market triggers.

Smith's PPV Plus+ program provides more than traditional PPV market views because it relies on a customized analytics program, PartMatch, our in-house PPV Tool. PartMatch automatically compares the items on a demand list to our vast database of electronic components available on the global open market and captures specific data on market pricing and demand trending. To simplify the resulting scenario, when PartMatch identifies a purchase price less than your standard cost, a match is detected. Adding to this powerful PPV process are the global logistics reach, financial strength, and unwavering quality assurance of the SmithSecure quality initiative, for which Smith is known as a leader among independent distributors.

Cost planning through vendor management inventory

Ideally, manufacturers seek to hedge against price increases while still assuring the needed inventory to maintain production levels in tune with market demand. The volatility of the marketplace, from global and supply chain events to consumer confidence and pricing variance, demands extensive global reach, deep market knowledge, constantly updating component and part data, and the financial strength to act when appropriate. Adding to these business intelligence and financial requirements for success is the push to continuously prune and push back inventory holdings. The result has been tremendous demand for programs such as Smith's PartBank Vendor Managed Inventory (VMI) Program, which was specifically designed by Smith for our customers to reduce carrying costs, minimize the effect of future price increases or shortages, and achieve accuracy in cost planning. While Smith has provided these services and programs for many years, the past year has seen demand increases and requests for such solutions and services. As a longstanding, open-market, independent distributor, Smith has developed deep market intelligence as well as many global relationships that, combined, offer us an unparalleled ability to provide strategic inventory support, particularly around our key focus areas: peripherals (LCD, HDD, ODD), CPUs and chipsets, memory modules and chips, and other ICs (both active and passive).

Based on our in-house tools, product knowledge, market expertise, and network of quality vendors and suppliers, Smith provides a unique VMI program that is tailored to our customers' respective sourcing needs, inventory management plans, and logistics requirements, as well as optional efficiency-enhancing programs to best ensure that parts are available and in inventory when and where they are needed at the best possible pricing. In cost-aware and lean inventory times with volatile pricing the norm, this type of market agility and inventory management provide the most sought-after buffers in the industry today.

Managing component lifecycles and asset disposition

Today's hottest devices are also among those with the shortest lifecycles, yet consumers demand warranty and service programs that can provide the support they expect for all types of devices. Assets hold onto value, and finding the best means for evaluating, marketing, and recovering that value is an important means for improving margins as well as ensuring proper, environmentally-aware disposition for those assets that must be destroyed and recycled (refer to Smith's MarketWatch Quarterly article on reverse logistics and component lifecycle management, for more details).

 

Recovering asset value is not without challenges, though, beyond the reverse logistics processes, and, for the past few years, EMS companies especially have been reaching out across the supply chain to those partners who are best positioned to help realize maximum value recovery from existing assets. Some have even added their own asset disposition services to their suite of offerings. Critical in asset disposition, though, is ensuring that the recycling of IT hardware, which is usually end of life (EOL) IT devices that are being decommissioned, follows the latest data erasure processes to meet industry and government standards.

Aftermarket services (AMS) and asset recovery solutions will vary in accordance with the components or equipment that have reached EOL, and might include a combination of ser¬vices, including refurbishing, remarketing, recycling, or destruction. The proper evaluation of the assets is essential and is best maximized when handled by a partner with open-market expertise who can provide a comprehensive asset analysis and determine feasible market opportunities. In the case of refurbishing, remarketing, and recycling components or equipment, it is essential to have a partner, such as Smith & Associates, with the latest, technical laboratories that are fully-equipped with the data wiping tools necessary to ensure the protection of your data, provide certificates of disposition, and improve the market value of your assets through refurbishment and professional marketing resources.

At Smith, when remarketing is not an option, we ensure that our customers receive Chain-of-Custody disposition reports to help reduce the risk of fines and fees associated with improper disposal of IT assets. Additionally, any scrap material is repurposed rather than being sent to landfills. We use only certified third-party recycling partners who are EPA compliant, and we perform audits to confirm compliance to our standards for environmental protection. Our zero-landfill, zero-incineration, and zero-waste export recycling policies ensure that all materials are handled with the environment in mind. Materials are reused and recycled in a green manner.

Looking forward to growth and renewed strategic partners

2012 forecasts for stabilized growth in the US and emerging markets, with hopes for the same in the Euro zone, are seeing support in the form of higher financial market trading levels and resurging consumer confidence. As this positive momentum grows legs and the global semiconductor and electronics supply chain completes the corrections in the wake of the massive 2011 disruptions, we are seeing the changes in corporate supply chain strategies that are reshaping relationships and partner requirements. The strategies are intended to increase the ability of OEM and EMS corporations to be more proactive when faced with disruption events that threaten production lines. Faced not only with disruptive events, but with increasingly conservative inventories, volatile pricing, and shrinking margins, strategic diversification and agile, targeted inventory management are essential competitive positions.

As the pace of growth builds over 2Q12 and as we head into the expected higher growth cycle beginning 2H12, the bottom reached as we exited 2011 and cycled through 1Q12 necessitates that strategic relationships be in place to meet the new market demands. OEMs and EMS companies are poised to respond to the rapid growth forecasts for device and component lifecycles for mobile data transmission, increased mobile data traffic across verticals as device adoption rates increase (especially for the growing eHealth sector), faster device cycles for mobile handsets and tablets, and increased demand for various data storage and management services. But the critical variable is not only the strategic plan for meeting the type, volume, and timing of these demands by consumers and enterprises alike; it is also ensuring that the best pricing and secured availability of critical components is met.

In the backdrop of this exciting growth cycle for semi is the looming question of the impact of the past many cycles of reduced CAPEX, lines that were not refreshed, and the loss of lines that were not or have yet to be rebuilt after the disasters in Japan and Thailand. Utilization has some room to increase, but will the right lines be available at the right time and the right price? Diversified portfolios with increased market visibility and knowledge are essential to success, which means essential to keeping lines operating on schedule, managing costs during price volatility, and ensuring that EOL assets are reaping maximized ROI to improve margins. Sourcing is a diverse requirement, necessitating partners with expertise in the various capabilities needed to keep you at the fore of the market and ahead of competition, Because of this, today's market changes are seeing supplier changes that will improve growth and profitability along the semiconductor and electronics supply chain.

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

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