Supply chain pile-up

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It’s been described as a “supply chain pile-up”. We are talking about the electronic components sector where supply imbalances have been causing problems across industry.

Now work by electronics industry research group iSuppli has highlighted the difficulties faced by electronics contract manufacturers. Analyst Thomas Dinges says major contract manufacturers face a challenging supply imbalance characterised by tight inventories of parts and ?nished products and a glut of raw materials.

“Judging from various earnings calls as well as numerous conversations taking place in the industry, semiconductor companies are citing extended lead times and parts shortages as a major problem.”

iSuppli found that a snapshot of inventory at five of the larger electronic manufacturing service providers showed that components and raw materials accounted for nearly 70 per cent of total inventories during the first quarter of 2010, the latest date for which quarterly data is available.

In comparison, work-in-process goods made up about 17 per cent of inventories, while finished goods comprised less than 15 per cent… Overall, finished goods were at their lowest level since the fourth quarter of 2008.

At the heart of the problem, says Dinges, is the slow pace in bringing on increased production capacity. And it is unlikely that the situation will improve until later in the year – even if demand softens in the near term.

Some work  just published by Gartner also touches on this issue – it says worldwide semiconductor capital equipment spending is projected to approach $36.9 billion in 2010, a 122.1 percent increase from 2009.

“The strong semiconductor growth in 2010 has driven semiconductor capital growth to all-time highs,” says Klaus Rinnen, managing vice president at Gartner. However, Gartner is already warning that companies should prepare their manufacturing plan for a softer 2011.

 “Companies should also prepare business plans for the next equipment down cycle, starting in late 2012, because memory companies will have over-invested, thus generating excess equipment,” says Rinnen.

Clearly, it is going to take time to align production to demand. In the meantime, the challenge will be to minimise the impact of the shortages.

Of course, the issue has its roots in the decisions taken to deal with the sudden and dramatic downturn that heralded the global recession. Companies can hardly be blamed for responding quickly to protect their businesses.

However, we can now look back and learn the lessons. Surely, closer collaboration could have pre-empted some of the problems we see now and enabled a smoother recovery.

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