Outsourcing Semiconductor Operations? 4 Questions to Ask Your 3PL
by 
Dennis Menefee, president and CEO, Partstat
In some industries, most notably healthcare and aerospace, the need for secure, climate-controlled, long-term inventory storage facilities needs no explanation. A typical Boeing 747, for example, will endure approximately 35,000 depressurization cycles — roughly 30 years’ worth of flights — before decommission, while an MRI machine can be continually upgraded and repaired to last as long as 22 years. In both cases, the OEM must bear the responsibility of not just maintaining extensive product lifecycles, but maintaining the long-term service agreements associated with each. To do so, these manufacturers must ensure that the critical electronic components necessary are readily on hand when needed.
With such extreme outliers, it unfortunately has skewed what the term “long-term storage” means for manufacturers. Many consumer electronics manufacturers introduce new product iterations on an annual basis, while other products with three, five, or even 20-year production runs have relied on a traditional “pay as you go” model, with manufacturers placing orders through distributors based on present need with little regard for obsolescence management or volatile market fluctuations that can have drastic effects on lead times.
In some respects, this supply chain model is understandable; especially in a competitive market where manufacturers are expected to keep pace with the latest innovation, it makes sense to prioritize the use of finite facility space to prepare for the next product. For these OEMs, the idea of having a long-term storage strategy might seem to be overkill for their needs. Why focus on long-term storage when their business model is predicated on completing product lifecycles in the short term?
“Long term” as it pertains to the electronics market, however, does not mean what it used to.
In the last two or three years we have borne witness to the most significant electronic component shortage since the turn of the century, with demand far outpacing the inventory levels suppliers would willingly carry. The result has seen component manufacturers achieve record profits and increased overall sales, but manufacturers have also been forced to make a choice between supporting the current market, or continually moving forward with newer product iterations in an effort to be first, stay ahead of competition, and maximize profit margins. In most situations, the choice is difficult but clear — component manufacturers will opt to move forward, even if it means inadvertently increasing strain on current OEM customers.
How significant this strain would be, unfortunately, has been significantly underestimated. In some cases, we have seen many once commoditized components such as MLCCs and similar passives placed on allocation before even being formally released; in others, these same components have been obsoleted entirely in this same short time frame. For OEMs who decided to remain noncommittal in regard to their inventory and not immediately place sufficient bulk orders in this window, options moving forward were extremely limited.
Such market realities speak to a moving of the long-term “Overton Window,” to borrow a term from politics. What was once short term has become long term, and what was once long term has moved far out of the realm of feasibility as far as inventory sourcing is concerned. In today’s market, the limited climate-controlled warehousing space that was appropriate in the past is simply not equipped to ensure a seamless, disruption-free supply chain. A change in how OEMs view their storage strategy is needed, and the sooner the better.
The concept of long-term storage must move beyond just the aerospace and healthcare industry. Every company in every industry must build long-term storage capabilities, if for no other reason than “short term” in the classic sense no longer exists. While this may sound somewhat daunting, especially for OEMs who have limited capital on hand to initiate such an infrastructure overhaul, it really comes down to one simple solution: expanding the supply chain to include specialized long-term storage partners who handle, store, and fulfill the inventory off-site on the customer’s behalf.
I use the term “specialized” deliberately, because today’s designs often require components that need complex storage processes to maintain optimal functionality. Semiconductors in all forms are very sensitive to environmental factors, and must be stored in an environment that is suitable to protect against risks such as fire, flood, humidity, electrostatic discharge, mishandling, and even, depending on the location, political instability. Should the component in question be one that has been already obsoleted, then this process becomes even more critical; in some cases, the loss of such irreplaceable inventory can result in drastic measures that might even include the premature discontinuation of the OEM product.
Despite these risks, however, even some of the most high-tech companies in existence still store critical inventory in warehouses within their footprint, fully exposed. This has been the traditional business continuity strategy because until now, there has been no storage option for electronic component or semiconductor inventory capable of shielding companies against these types of supply chain disruptions.
Specialized long-term storage through highly specialized supply chain partners changes this dynamic. Not only does this all but circumvent the current state of the market prone to obsolescence-based disruption, but, in fact, results in significant net savings. Long-term warehousing onsite without proper knowledge or training not only increases risk related to the integrity of the inventory, but such practices have also been known to incur annual inventory carrying costs as high as 25-30 percent of the value of the electronic component. Partners who specialize in long-term storage, by contrast, have dedicated their entire business model to providing such a service, and offering maximum value for minimal cost. At my own company, for example, we have been proven to save OEM customers 42 percent in annual carrying costs.
The only way forward in today’s marketplace is a renewed focus on what each individual company does best. OEMs reach success by continually pushing innovation, by continually outdoing themselves and their competition. Supply chain partners are no different — storage is their innovation. By working together and making such relationships the new status quo of the electronics industry, long-term, specialized storage capabilities will not just be omnipresent, the need to be concerned about such issues will be virtually eliminated.
A future where OEMs can procure inventory without limitations and guarantee downstream revenues — that’s a future worth considering.
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