The global electronics supply chain is riddled with risk, a phenomenon that won’t go away anytime soon and which companies must respond to by proactively identifying challenges within their operations and then collaborating with partners and suppliers to reduce their exposure, according to Pascal Fernandez, VP of business development at Avnet Velocity, a unit of component distributor Avnet Inc.
Contrary to recent thoughts within the electronics industry, inventory stocking can be a critical part of the risk management process at electronics manufacturers because having unfettered access to component stocks can help reduce the whiplash effects of demand and supply uncertainties, Fernandez said in a paper presented earlier this month at the 9th Annual Advancing S&OP to Integrated Business Planning conference in Amsterdam, the Netherlands.
“Inventory holding is not an accident or a compensation for inefficient processes,” Fernandez said. “It’s a forward-thinking conscious investment to support better flexibility and responsiveness and overall improve customer experience.”
That is a position increasingly prevalent only among the leading electronics component distributors. Most other players in the electronics market, especially OEMs, continue to see inventory as either a sign of inability to sell products at the right time and price or a burden on the balance sheet, a belief encouraged by some analysts who rate companies positively or negatively on their ability to reduce stocks. As a result, equipment manufacturers and component suppliers have in the last decade worked hard to reduce their inventory stocks to maintain “days-of-inventory” – a favorite metric of many analysts – at the lowest possible level. Failure to do this can result in a downgrade of stock ratings.
Companies like Avnet and rivals like Arrow Electronics, Future Electronics, Digi-Key, Mouser and Asia-based WPG Holdings operate with a different mindset. These companies often market themselves on their ability to deliver components to customers swiftly and at competitive prices, sometime within a 24-hour window of order placement. Distributors pride themselves on their inventory management expertise and leverage this in support of customers. That strategy should not be confused with inability to efficiently manage inventories, Fernandez said.
There are other more important risks plaguing the supply chain. One is related to the limited visibility most companies have into market demand and conditions at suppliers and other supply chain partners. Fernandez noted that 27 percent of high-tech companies have reduced visibility into events at their tier-1 suppliers while “only 21 percent of high-tech companies have visibility beyond tier-2.” With this record, it’s not surprising that the level of risks in the supply chain continues to rise each year as companies engage with more partners and as manufacturers increase their specialization.
One way to mitigate risks in response to the limited visibility is to intensify partnership and collaboration activities and ensure all participants are open in their communication efforts. The Avnet executive said risk reduction “should be the No. 1 ambition of all companies,” adding that in other to achieve this companies must include all players in their supply chain, including component manufacturers and customers.
“Collaboration, like in all human enterprise, requires passion and faith,” Fernandez said. “This is based on trust and mutual understanding. Only high-level strategic collaboration will provide efficient supply chain risk mitigation.”
As part of the presentation Fernandez identified what he called the “Real 7 Stages of Collaboration Maturity.” In these stages companies go through several evolutions before finally settling at the optimal phase where they are better positioned to take advantage of integrated business planning (IBP) actions to reduce risks in the supply chain, he said, with each level offering a certain amount of rewards for efforts invested.
“The forced stage represents the lowest return with the highest effort, whereas the accidental stage represents relatively high return for a low effort and the strategic stage represents equally high return compared to effort,” Fernandez said.
The seven stages identified by Fernandez follow:
- Accidental: The business version of love-at-first-sight. This may be a historical milestone for your business so pay attention to EVERY opportunity – don’t take established business relationships for granted! This stage requires: A company culture that enables people to ‘think’ the extra mile. T shape people who understand the big picture (Inventors, Explorers, Eccentrics and Mavericks are hard to find these days but they are the ones making the difference!)
- Erratic: The long-term value can’t be seen beyond the short-term issues that exist. This stage is marked by: Missed opportunities; The risk of losing track of the other party’s strategic interests and not realizing they may have changed before it’s too late and; The overall outcome of the collaboration directly relates to the quality of your contribution
- Reactive: This stage involves reacting to information requests, secure feeling of performing to expectations. This feeling generally precedes losing the customer to the competition. At this stage companies: Over-perform vs. expectations; Answer the questions that were not asked and;Walk the extra mile to better cover a potential shortage risk.
- Forced: At this stage collaboration is not a unilateral declaration; it’s rather the acceptance that both sides’ interests are deemed equally important. Forced cooperation can be an imposed and inefficient process for the other party, B2B nonstandard protocol or a cost-transparency requirement. There needs to be a frequent validation of what’s in it for everyone involved.
- Complacent: At this stage companies are no longer looking for incremental improvements in the working relationship. The stage is marked by the following: Missing opportunities and not identifying risks; Customer retention is imperative at this point so let paranoia be your best friend. If you think everything is running smoothly, you are most likely mistaken.
- Tactical: Sharing tactical information on a regular basis and acting upon it. At this level it’s important to validate mutual expectations regularly and adapt accordingly.
- Strategic: Companies at this stage share long-term visions and plans and collaborate on new systems, products, etc. The stage is marked by: Being smart enough to recognize that in the “give-and-take” relationship, “giving” is what matters most; Understanding and respecting the other party’s limits and constraints as being your own. The real stress test for strategic collaboration is not sharing profit but sharing losses when things go wrong.