The electronics industry urgently needs an energetic components exchange program to help address an inventory imbalance that is distorting the supply chain and resulting in the wastage of parts valued in excess of $20 billion annually, says a top industry executive. While some companies are implementing programs for helping customers individually address the problem it would be better resolved at an industry level, according to an executive with a leading electronics components distributor.
A large chunk of components that aren’t used annually by OEMs and contract manufacturers are proprietary parts that cannot be swapped into other devices but the majority are standard or commodity products that could be easily used but that are wasted simply because of inefficiencies in the supply chain, said Lindsley Ruth, senior VP at Future Electronics Inc. Oftentimes, component suppliers keep churning out new products unaware their inventories are piling up elsewhere unused. This development is contributing to the devastating impact of electronic components and equipment on the global environment, he said.
“Semiconductors have a significant impact on the environment,” Ruth said in an interview with Bolaji Ojo, editor-in-chief of Electronics Purchasing Strategies. “We’ve got to be careful that we only produce what’s needed and when there’s excess inventory that exists around the world, we move it to the right place where there is demand and not build more product and create environmental waste and landfills.”
Ruth said the industry as a body needs to develop a comprehensive strategy for raising the level of visibility managers have into the supply chain, especially with regard to the availability of components in certain areas where they might not be needed so as to facilitate the transfer of such parts to where they might be required. Future Electronics is implementing an internal program for its customers to facilitate this, Ruth said.
“We estimate there’s $20 billion in components that go to waste every year,” added Ruth. “$12 billion of that is probably standard product that could be used elsewhere. Other people have their estimates, but it’s a huge number. We collectively as an industry are doing nothing but at Future electronics we are doing our best by creating a program to address this issue.”
In addition to the subject of components wastage, Ruth also addressed other significant industry topics, including the issue of counterfeiting and how distributors are serving engineering and purchasing professionals with varied products and services. Concerns about counterfeiting appears to have cooled down in the industry recently due to current market condition where companies have sufficient supplies of components, Ruth said. Nevertheless, companies like Future Electronics continue to implement programs that focus on traceability of parts entering the supply chain to make sure fake parts do not contaminate their stocks.
“The key to anti-counterfeiting is traceability; knowing the mother and the father of the components,” Ruth said. “We make sure there’s a birth certificate for our components and that we know exactly where the products came from. We take back product from customers but you’ve got to make sure it’s the product you sold to the customer by making sure you’ve got the right processes in place not only in the distribution centers but also in the back office behind the scene involving purchasing, asset management and IT.”
Excerpts from the interview follows:
EPS: How has the industry changed in how distributors serve the engineering and purchasing markets?
Ruth: From an engineering standpoint the market is becoming much more focused around specific applications. We are becoming experts in certain industries where our customers are well positioned, whether it is street lights, wearables or any product relating to the internet. There are certain segments that are emerging where we’ve got to have a higher or greater level of expertise and we’ve identified those opportunities and we’re investing there. This approach has been critical to our success over the years. We narrow down and simplify the business to a few key priorities, and then focus on those areas.
EPS: Are there market segments that Future won’t venture into?
Ruth: We’re not going to get into computer products; we’re not going to get into data centers and; we’re not going to get into selling large server systems and products unlike some of our competitors. We’re staying focused on the components business in semiconductors, interconnects, passives, electromechanical products, as well as in lighting. These are our core competencies and we’re going to continue to focus in these areas. There are tons of opportunities out there and we don’t see an end in sight in those categories for us to continue to grow a market share.
EPS: How is Future Electronics dealing with the problem of counterfeiting?
Ruth: The key to anti-counterfeiting is traceability; knowing the mother and the father of the components. We make sure there’s a birth certificate for our components and that we know exactly where the products came from. We take back product from customers but you’ve got to make sure it’s the product you sold to the customer by making sure you’ve got the right processes in place not only in the distribution centers but also in the back office behind the scene involving purchasing, asset management and IT.
EPS: How should companies deal internally with the problem of counterfeits?
Ruth: All these areas are critical; there’s not one particular department that’s responsible for directing a counterfeit initiative. It’s a team effort, multiple departments, cross-functional around the globe and across every geography. Being privately held and having a single IT system make it easy for us to manage the issue of counterfeiting. We have a counterfeit policy in place. At the end of the day it’s about stopping products from coming into your supply chain and into the distribution center. Whether it’s from the supplier or returns from customers, you’ve got to be very diligent and you can’t be cheap in terms of your investment in that area.
That’s an area where I think we’ve done a really good job. We worry less today about counterfeiting than probably five years ago. We just don’t see as much in this current market condition and probably it’s a less opportunistic condition for counterfeiters around the world and especially Asia where a lot of the counterfeiting originates. It still exists and you have to stay one step ahead of the counterfeiters because the second you think you’re ahead of them they start counterfeiting everything. You’ve got to stay very diligent in making sure you have a foolproof process to go through the right steps and ensure that products are fully traceable back to the original supplier.
EPS: What do you see ahead for the electronics industry?
Ruth: The global economy is still fragile. If conditions worsen or if manufacturing in China further decelerates, or the US has a hiccup, there will be a global impact on the electronics business. Today, we’re looking at probably a mid to upper single-digit sales growth for the industry and I think Future will grow at a faster rate. Further to that, what we can’t take for granted are circumstances beyond our control such as national disasters. We’ve seen a few of those over the last couple of years and they have gotten a bit more common. So, you’ve got to be prepared for these type of developments.
However, the longer we go from experiencing supply/demand imbalance, the more comfortable people feel and the more they begin to forget the steps to take to be prepared for those events. We’re kind of in that stage again where companies are not prepared. If anything happens they’ll need to go back and look at the plans and make sure they have the right readiness programs. We never forget this. It’s constantly on the mind of Future’s employees. Our whole system is set up so customers are supported to the best of our abilities when you have those imbalances and that’s a big service offering that Future offers. I don’t think the market or the supply base in Asia is prepared for another event such as the earthquake and tsunami in Japan or the floods in Thailand in years past.
EPS: Aside from these concerns what’s the expectation at Future Electronics regarding the future?
Ruth: We’re optimistic about the future. Our products are not going away. We see a greater proliferation of electronics with everything we touch in our lives and I think that’s going to continue. Semiconductor parts have a significant impact on the environment. We’ve got to be careful that we only produce what’s needed and when there’s excess inventory that exists around the world, we help move it to the right place where there is demand and not build more product and create environmental waste and landfills. I think that’s the biggest concern going forward. With the proliferation of electronics we create a lot of environmental waste and we’ve got to be careful to manage them and make sure we all do our part to help the world be a better place.
EPS: Do you see electronics waste as a major problem for the industry and, if yes, can distributors play a role in restoring balance and in reducing the wastage?
Ruth: A large amount of waste is created every year. This includes standard products that could be used but that aren’t being used because one customer may have excess inventory while the other customer might need the same components. For example, a customer might have excess inventory in Vietnam while a customer has demand in Indiana. Meanwhile, component manufacturers are making more products for the customer in Indiana, when there’s product that might exist for it in Vietnam. Future Electronics wants to play a role in putting these types of customers together and creating an inventory exchange program that helps reduce and eliminate waste.
We estimate there’s $20 billion in components that go to waste every year, probably $12 billion of that is standard product that could be used elsewhere. Other people have their estimates, but it’s a huge number! We collectively as an industry are doing nothing but at Future electronics we are doing our best by creating a program to address this issue.