FOCUS ON BUSINESS
Coping with Supply Chain Disruptions: An EMS Owner’s View
Extended lead times, fake parts, 300% price hikes: What could be next?
It’s commonplace among electronics manufacturing services companies to develop workarounds for problems that crop up quickly, or to think on our feet to find ways to deal with seemingly insurmountable obstacles. Worldwide supply chain disruptions are not unusual to the electronics design and assembly and design industry. The current situation is exceptional, however, and its causes wide-ranging, but of course we still must get the product built and shipped to the customer. That doesn’t change.

The current shortage of parts came as no surprise: We saw the writing on the wall some four or five months ago. Anticipating problems is critical in this business. We secured large quantities of components that, for example, we knew were becoming very hard to find but also required for current and future customer builds. Indeed, some parts now have lead times of up to two years, such as certain types of FPGAs, microcontrollers, and other types of ICs. Unfortunately, this means larger-than-normal inventory on hand and at our partners’ locations, which is contrary to our “just in time” operational model.

Parts scarcity leads to perhaps two of the most significant challenges for managing an EMS: the artificial inflation of parts cost and the rise of counterfeits, even at authorized resellers. Some suppliers are selling these parts for more than five times their normal price. It affects BoM costs and pricing back to the customers, which eventually proves disruptive for everyone’s business model. We have leveraged our long-term relationships with specialized authorized component resellers/distributors, many of whom are able to find parts and also have methods to determine the legitimacy of those parts, which is critical in times like these. In some cases, we’ve found and rejected counterfeits, and the specialized resellers/distributors must procure a new batch. In the end, the customer gets good parts, but all the back-and-forth in some instances causes delays. There have been drastic changes over the past few months, and some projects we quoted end up with shortages by the time we receive the customer PO. I have never seen anything like it in all the years we’ve been in business. In summary, backlogs remain elevated, inventories short and lead times historically long.

It’s fallout from the worldwide semiconductor shortage, as a lot of what we’re missing are ICs. FPGAs are the biggest problem, followed by small microcontrollers, then specialized ICs such as power regulators, level translators and RF components. What’s also interesting, in some cases, is the shortage of connectors, and specific types of wires for cables. Why this is so, we don’t know, but the most critical issue is, again, the shortage of ICs.

Luckily, we have avoided delayed delivery penalties for missing contracted ship dates, and the key to that is instant communication with our customers. They know what’s going on in the industry, and we inform customers immediately when we learn of delays due to supply-chain issues. We always let customers know early, so all are fully aware of the conditions and can inform their customers to plan accordingly.

It’s a similar issue when quoting builds. Normally, a quote could be issued in a day, but now it may take five days because we must locate hard-to-find components and receive guarantees of availability. Also, returning and replacing counterfeit parts causes another time delay, and in many cases these delays are significant. Price fluctuations are a significant problem as well. In many cases, we do not pass them onto the customer, and sometimes we’ve already gone ahead and committed to a certain cost or price in flight, and it changes in the process; this is very impactful to our business, especially with large orders. As such, we’re monitoring price fluctuations in real time and informing customers about price changes as best we can, but we are still at risk.

As an example, our defense business sometimes has a much longer quote-to-PO-issuance timeline. This can be a real problem, because we’ve issued quotes as early as the beginning of this year, for example, that don’t get awarded for 90 to 120 days. In one case, we bid a project at the end of the first quarter, and it was awarded just under 90 days later. In addition, we’re dealing with parts that are aged; some of these components were from the 1970s and ’80s. Not only are they difficult to find, but in some cases we’re experiencing an overnight 300% markup.

So, when we looked at the quotes back in March, for example, they were priced at X, and now they cost 300% more. This is an example of where we went back to the customer and asked for a price increase, knowing we risk the contract getting canceled. It’s not a penalty per se, but it is lost revenue if they’re not willing to accept the new price. In these extraordinary times, it all hinges on being dynamic, dealing with extreme ambiguity, while fostering a great network of partners to help navigate and resolve the challenges of supply and erratic component price fluctuations. Ultimately, if you don’t secure the parts, and you can’t ship the job, you don’t make revenue. It’s very challenging for EMS business operations right now, sometimes even daunting!

Ahmad Chamseddine
Ahmad Chamseddine
is president of BSU Inc. (bsuinc.com); ahmad@bsuinc.com.