Forecasting alleviates negative business impacts of materials shortage

Electronics component manufacturers were among these, and they have been reluctant to reinvest in growth until the economic turnaround is certain.

As a result, many components are now in critical short supply across the globe – from key commodity materials to specialized electronics components.

The good news is that the industry is on the upturn. The Institute for Supply Management reported in July 2010 that economic activity in the manufacturing sector saw its 10th consecutive month of growth – that news is encouraging component manufacturers to ramp-up production once again.

The bad news is that the supply-chain backlog is severe, and pundits anticipate that the shortages will continue through the end of 2010, with some estimates pushing out recovery as far as the first quarter of 2011. Recent reports even blame the popularity of iPad, iPhone 4 and other new devices for further draining the Asian market of electronic components.

A global supply shortage poses significant business and operational risk for OEMs and ODMs. Lead times on some components are currently exceeding 20 weeks, preventing manufacturers from filling customer orders as quickly as the orders may be required. Increases in the cost of components as demand exceeds supply also places manufacturers at risk of margin corrosion. In the worst cases, they must boost the cost of their products.

Another very real risk today is that component vendors are pushing out the dates for confirmed orders and their suppliers give them eleventh-hour warning of shortages. End-customers are the worst affected, as they have little to no advance warning that their orders cannot be filled despite guarantees.

While working closely with one’s electronics manufacturing service (EMS) provider to forecast production volumes is always important, in times of shortage it is absolutely critical. Not doing so almost certainly guarantees that a company will suffer from all of these risks.

Forecasting the need for components 6 to 12 months in advance enables manufacturers to bond inventory with suppliers. Bonded inventory is a certain percentage of inventory that is set aside for you and to which you have immediate access.

In cases where the OEM outsources its manufacturing to an EMS provider, forecasting requires close partnerships between the two parties. The most important aspect of such a partnership is to provide visibility into customer activities and sales forecasts. A best practice is to meet with your EMS provider on a quarterly basis to discuss potential new business and probabilities of new orders. Based on estimates and plans they can work with you to put bonds and letters of intent in place with suppliers, thereby alleviating many part obsolescence and/or supply shortage issues. This is also the best means of securing competitive pricing.

It is also wise to involve your EMS provider in new-product design and planning. In doing so, you will incorporate design-for-manufacturing (DFM) into your development process. Through DFM, contract manufacturers are able to help to avoid single-sourced parts as well as other costly pitfalls, such as unnecessary labor, over-design, single-source parts, and problems with manufacturability.