Supply chain shortages have become a global issue in recent years, adding a stubborn wrinkle to the fabric that keeps the economy humming. One shortage that has plagued the automotive industry since 2018 is the shortage of electronic chips. Vehicles are laden with chips to control many of their features, from heated seating to Wi-Fi hotspots, so without them, manufacturing cannot continue at the level consumers expect.
Supply chain disruptions are nothing new; they have become something electronic parts distributors have come to expect. With low-cost components in chronic shortage and extended lead times for delivery, manufacturers are considering the use of independent distributors to get parts on-time at the lowest possible cost without assuming additional risk.
For many companies, sourcing parts from the independent channel requires a significant shift in mindset.
“Some companies make the decision to place orders with independent distributors the very first day they are in operation because they understand our market and how we operate in it,” explains Mike Thomas, vice president and general manager at Classic Components, an independent stocking distributor of electronic components based in Torrance, California. “But there is an equal number of companies that are hesitant because the chipmakers and franchise distributors have invested millions over the years to de-incentivise their customers from going to the open channel – and I understand that.”
Classic Components has been in business for over 40 years and remains one of the only premier independent distributors that is family-owned. The company’s maturity and resources allow it to deliver high-quality products with shorter lead times than many of its competitors. In fact, the company can usually deliver parts in 2-3 weeks that the OEM or authorised distributors may not have access to for 52 weeks or longer.
Keeping automotive running
At the beginning of the pandemic, automotive suppliers estimated a decline in consumer interest in purchasing a new vehicle and adjusted their projections accordingly. Chip manufacturers then followed suit, prioritising other sectors such as consumer electronics as they anticipated a reduced automotive manufacturing capacity. However, demand for new vehicles exceeded expectations, leaving the industry with a demand it could not fill.
The accelerated demand for chips in the automotive sector is going to remain steady for some time, according to Thomas, due to the current backlog. This means the long-term prognosis for those manufacturing chips for automotives is positive. And while things are beginning to slowly return to normal, at present the price of hard-to-get components like chips has skyrocketed.
The shortage has led to major car manufacturers eliminating certain features in newly-made vehicles because they are unable to obtain enough chips to ensure full functionality. This is where having an independent distribution plan comes into play.
“If you are a manufacturer, you need to have as part of your supply chain strategy an independent distribution plan,” says Thomas. “How are we going to engage? We don’t want to give a broker business and take it away from the franchisor/authorised distributors. But right now, we are the guys that can be strategic and can get parts that work when you need them at a competitive price.”
Classic Components’s sourcing expertise includes knowing where to find alternative sources of component parts through surplus inventory, strategic relationships with other franchise/authorised distributors and relying on local as well as overseas markets.
Investigating sources
One mistake that some companies make during the chip shortage is being duped by counterfeit products. It is an easy trap to fall into because the counterfeit items available today are impeccably made and almost impossible to distinguish from the real thing. Classic Components retains its competitive edge by taking a thorough look into any company it wishes to purchase from to ensure both the company and its offerings are legitimate.
Thomas describes the situation like this: your company needs a part, but none of the major, trusted sources have it in stock for at least 52 weeks. What do you do? Most turn to the Internet and search for a distributor who might have the needed chips in stock. However, it is easy to set up a website and pretend to have stock that doesn’t exist. There is also serious financial motivation with chip prices skyrocketing to produce counterfeits.
“What happens when the online search produces a list of company names you have never heard of, how do you know which are legitimate and which are not?” asks Thomas. “We know all the players overseas. We have conducted rigorous audits and met many of the owners. We know which companies are legit and which should not be called. That is what we do.”
While it might be tempting to purchase a chip from a company you have never heard of that says it has them in stock, Thomas advises caution.
“If [a reputable independent channel source] says, ‘Sorry, there just aren’t any of these chips available’ and you have an unknown entity telling you they have the parts, it would be wise to listen,” he says.
An independent distributor can also offer supply chain management along with a rigorous quality inspection process to ensure the authenticity and quality of each component received. Classic Components, for example, uses a quality management system and holds certifications such as AS9120B, a requirement for distributors serving the aviation, space and defence industry.
The due diligence process includes conducting a detailed risk profile and reputation of the vendor, the part and its end use. In addition, the customer is surveyed as to the requirements for age of the components (date codes), traceability back to the factory, and more. In the case of Classic Components, the company has developed a scoring system to establish the risk involved in each transaction.
“The process of authentication is much more extensive for higher risk profile items to ensure the chips are legitimate and high quality,” says Thomas. “There are a lot of steps, and it is very expensive and time-consuming, but is critical when the product is a pacemaker, for example.”
Unfortunately, for the foreseeable future, the automotive industry is expected to continue to experience significant supply chain disruptions. New technology for cars will also continue to increase the demand for chips, particularly in electric vehicles and interconnected cars.
“Just as it did in 2018, the current chip shortage really reinforces the legitimacy of the independent channel,” says Thomas. “We are literally helping to keep automotive manufacturers’ production lines running in some cases.”
Classic Components isn’t thinking simply in terms of the immediate future, either. Given the environment, some independent distributors have stopped stocking inventory and are demanding prepayment for components with rigid “no cancellation and no return” policies.
“We are not just here to sell a box of parts and take the money and run. We still stock components and maintain flexibility in our [financial] terms. We are here for the long haul and so we want to maintain our relationship with our customers well beyond the current shortage,” says Thomas. “When things start to return to normal and companies need to make decisions to reduce their independent distribution supply base, they are going to remember the ones who brought consistent quality and flexibility and helped them weather the storm.”
Sourcing components post-pandemic
Independent distributors are stepping in to assist manufacturers after several years of market volatility by finding buyers for surplus inventory, offering creative financial solutions to preserve cash outlay, and identifying ways to reduce electronic component costs.
Luckily, the market is finally beginning to stabilise. But, although the dust is settling, the work has only begun. With hard-earned lessons from the pandemic, many manufacturers are looking to secure their supply chain and prepare for what will be inevitable disruptions in the future. At the same time, they want to do so at reduced cost and capital outlay after paying a premium for electronic parts over the past several years.
“We just went through one of the biggest supply chain disruptions in history outside of a world war,” says Thomas. “We are now seeing interest rates rising sharply, which is slowing the economy and so demand is dropping. However, the supply chain is still highly vulnerable to present and future disruptions.”
In fact, change may be the only constant in the industry. Even though it was an unparalleled event, Covid related supply chain shortages are not the only disruption to affect global manufacturers in recent years. In 2018, there was a worldwide shortage of multi-layer ceramic capacitors (MLCC) when demand outpaced supply. At the time, 60% of the world’s production of MLCCs was controlled by three suppliers. Even now, there are components in short supply due to the limited number of suppliers, geopolitical trade tensions and ever-changing technology. As a result, manufacturers are taking steps to secure the supply chain over the long run. One of the key strategies is to be less dependent on China and more diversified in sourcing the electronic components they will need to manufacture their products, says Thomas.
According to Thomas, many manufacturers are sitting on excess inventory due to stockpiling parts and ordering from multiple sources to ensure delivery. After having to pay exorbitant prices over the past three years to secure parts, many manufacturers are also looking for ways to reduce costs further, even as prices drop. Some are looking to take advantage of financial services that some independent distributors provide to minimise cash outlay while ensuring access to inventory.
Reducing excess inventory
When manufacturers faced tremendous lead times on parts, many double, triple, or quadruple ordered since they did not know who was going to deliver first, according to Thomas. “Now that all these parts were delivered, some manufacturers have excess inventory and aren’t sure what to do with it,” he says.
If it is true dead stock, an independent distributor like Classic Components can help liquidate the electronic components and get them off the books through various types of arrangements. The company has provided this type of service since 1985, and it can be initiated with a simple email list of surplus items with the original price paid. Classic Components searches its extensive database to see if any other customers use those parts and can broker a deal between the parties.
“We have a global customer base and lots of information about the materials they use,” says Thomas. “So, if a manufacturer has excess inventory, we hopefully can find an opportunity to sell it to one of our other customers.”
Classic Components can also list and sell surplus inventory on consignment with, or without, taking physical possession of the inventory.
“Essentially, after coming to a consignment agreement, the list of items is uploaded to our website. We offer complete transparency throughout the consignment process. As we receive inquiries, we share the information so you can decide whether to sell [your surplus] at the offered rate,” says Thomas.
Classic Components may even opt to purchase the inventory outright to resell it later.
Protecting against future disruptions
Thomas states that the cyclical nature of the market means manufacturers need to prepare today, for whatever will come next.
“What happens in a year when the Federal Reserve decides to lower interest rates?” says Thomas. “There is still an incredible amount of pent-up demand. When the economy begins to return to normal it may not be like it was during covid, but a spike in demand will cause [electronic component] shortages again.”
Another factor that could affect the supply chain in the reshoring effort spurred by the passing of the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act). “They may not be saying it, but parts built in the United States are going to cost more than the parts from Taiwan. It will start to affect pricing structures at some point.”
To combat this and any other future market volatility, Thomas advises partnering with a flexible independent distributor that can provide services authorised distributors can’t.
“You want to have that relationship with a partner that is flexible enough to shift gears in a moment’s notice,” explains Thomas. “You may be in shortage mode on Monday, and then Tuesday, you have excess and want help selling it. Then on Wednesday, you decide you don’t want to sell any more and prefer we loan you money against it.”
Flexibility also involves a level of customisation because no two deals are the same. “An independent distributor has to be flexible enough to adjust to whatever the manufacturer’s specific requirements are,” says Thomas.
With the market seemingly in continual flux, the only constant may be change. When manufacturers seek to successfully adapt to whatever comes their way in the market, partnering with a flexible independent distributor that can cater to their specific needs may be the best bet to survive the next supply chain disruption.
By Del Williams, technical writer based in the US
