There will always be certain risks that a business can expect: a management turnover; a market correction; or taking on too much debt. In the electronics supply chain, the industry has become better at spotting risks, such as those that come with manufacturing and sourcing products offshore. But the more subtle risks, said Tom Galligani, worldwide vice president for supply chain, Future Electronics Inc., come not from without but from within a company’s supplier and customer ecosystem.
Galligani addressed a crowd of nearly 100 at the ERA/ECIA New England Regional Series event this week. Galligani has been in the electronics industry for more than 30 years and has done his own research on the trends that have impacted the industry. It’s not news that risk is increasing: outsourcing and offshoring have exacerbated the impact that time zones and weather events have on the supply chain. The earthquake and tsunami that Japan experienced in 2011 and the flooding in Thailand in 2012 refocused the electronics industry’s attention on supply chain practices such as lean, which minimize inventory throughout the channel. Following the disasters, customers were tempted to take possession of all the inventory they had on order in the supply chain, Galligani said, but distributors and suppliers advised against it. There was not enough evidence at the time that electronics would suffer a widespread period of shortages. Most customers heeded those warnings: those that didn’t, Galligani said, sat on a lot of inventory for a couple of years.
Widespread shortages didn’t materialize in part because component makers have spread their factories out over various geographies and have built redundancies into their raw-materials supplies. But new risks always materialize and one that has raised its profile in the last few months has come from component suppliers.
Three major semiconductor mergers: NXP/Freescale; Avago/Broadcom and Intel/Altera have been announced this year. When in the past chip makers such as Motorola, Texas Instruments and Fairchild Semiconductor manufactured a broad line of semiconductor products, M&A among chip companies was actually beneficial in terms of vendor reduction. As chip companies have split into multiple specialty businesses, though, M&A stands to take products out of the marketplace rather than just reduce vendors. “What does [M&A] mean for the product lifecycle of semiconductors?” Galligari said. “What does that mean for EOL?” OEMs with long design and product lifecycles could spec in a chip that is discontinued even before the OEM device hits production. (see: What Happens to Purchasing When Suppliers Merge?)
The upshot of all this, Galligani said, is a reversal of some of the trends the industry has experienced. Two decades ago, offshoring was automatically assumed to be more cost-effective than remaining onshore. OEMs, he said, have been doing more cost analysis and have found offshore savings to be negligible. “For one thing more data is available,” he said: costs to ship products across the ocean can easily be compared with domestic transit costs. “Automation saves on labor costs,” he added—wages are less of an issue. Component prices—which used to vary widely depending on where components were sold—have stabilized and become more global. Companies are now doing their diligence and measuring total acquisition – and not just labor-- costs. The end result, he said, is companies such as General Electric, Honeywell and Eaton are bringing some of their manufacturing back onshore.
A 2010 Boston-based start-up, Lumenpulse, supports Galligani’s findings. Greg Campbell, SVP/ CTO of Lumenpulse told attendees the LED-fixtures developer compared a number of onshore and offshore component suppliers. Offshore suppliers were actually more costly when transit time was factored into the equation: Lumenpulse, which sources and manufactures 100 percent onshore, turns its systems around in two to six weeks from order-to-shipment. The 2010 start-up registered sales of $100 million in 2014.
In addition to the usual suspects – the weather, the market and financial – M&A should be added to an OEM’s risk-management strategy, Galligani concludes. Distributors and manufacturers’ reps are in a good position to assist customers, he said, because they know suppliers’ product roadmaps; are familiar with a wide range of suppliers; and know what their customers historically buy. “We can also do a deeper dive and help them understand where products are built, what the usual transit times are, and where raw materials are sourced.” Supply chain managers are getting smarter, he added, and are making decisions based on hard data and facts. That, in turn, has contributed to a resurgence in onshoring.
The ECIA Regional series continues on August 4 in Dallas/Ft. Worth.