Electronics manufacturing services (EMS) companies, like most manufacturers, are trying to manage though a severe component shortage that’s expected to last well into next year. One European EMS provider, KATEK Group, has implemented several strategies – including a shortage task force – to maintain production levels.
Components are just one part of the supply chain under stress. There are issues with other custom parts like PCBs (printed circuit boards), not to mention the exponentially rising costs of freight due to increased demand and reduced capacity.
“We have a mixed task force of procurement, sales and logistics dealing with the situation daily,” explains Rainer Koppitz, CEO of EMS KATEK. “And we try to be as flexible and agile as possible, sometimes this means that in one location our employees do not know whether next week they will have short time work or they have to work overtime, and this is very difficult. But maybe most important is the continuous communication and 100 percent transparency between our customers, suppliers and us. No hidden agenda, no overstating of demand, no finger pointing.”
KATEK, headquartered in Munich, specializes in the automotive, connectivity, industrial, energy and healthcare markets.
Christoph Antener, group director, strategic sourcing for KATEK Group added, “In each of our facilities we have created a material shortage task force with group oversight. We are trying to select the escalations as early as possible to react quickly with solutions like second sources, availability checks in global markets, re-design proposals, all to deliver to our customers on time. And of course we step in at group level in those escalations with manufacturers and our suppliers to get at least some allocated minimum quantities for our sites.”
“Sometimes with some creativity we get access to missing parts from ‘less known sources,’” he continued. “We then discuss this openly with the customer to ask whether they are supporting this solution. If not, we don't do it. Because we are aware of additional risks like counterfeits, out of spec devices, etc., we have secure supply chains and incoming quality control, keeping the customer into the loop to manage the risk as low as possible. Until now we have had no issues, but vigilance and open collaboration continue to be our watchwords.”
Manufacturing challenges are not limited to short supply. The global supply chain has suffered multiple disruptions in 2021 which has increased shipping costs and delayed deliveries. This has a three-fold impact on EMS providers:
- Higher component prices and exceptional freight costs cannot all be billed to the customers, said Koppitz. “This is a hard battle we need to fight everyday to protect our company. And this speaks to the importance of a close, open and honest relationship between brands and their electronics partners. We are mutually dependent, so we should support each other as much as we can.”
- KATEK’s also shipping lower volumes at lower margins than expected. “And these volumes are far below the customer demand, all because we have unexpected missing parts almost every week. The lack of predictability is hurting as much as the lack of components,” said Koppitz.
- “We are also seeing exploding working capital demand with negative cash flow as we often have to order and pay 100 percent of the parts for a module, only to find that one part is not delivered, so we can’t produce the module and 99 percent of the parts become stock or work in progress,” he added.
Design for disruption is also a solution, executives said. Knowing there are alternatives for critical parts in advance can certainly mitigate risk. Second sources approved by customers increases availability options in the market.
Also, long-term demand commitment horizons by customers (as a standard, not only in crisis) can improve the situation. Long-term means 12-48 months and even beyond.
Chip fabs need to be more in line with the global demand which has increased as a result of mega-trends. Digitalization will help for early warnings and will create additional visibility in managing supply chain disruptions.
“Honestly, all of this doesn’t help so much in a situation like this,” Koppitz concludes. “If there are no chips, there are no chips. Full stop.”
The European EMS market, which declined in 2020, is set to rebound in 2021, according to EMS consultancy In4ma. Production values for 2020 came out to 41.3 billion Euro ($47.5 billion), a reduction of 5.4 percent.
In the first half of 2021, the EMS industry recovered considerably. The dramatic effect of the coronavirus only started in the Q2 2020 and during the next three quarters improvements were only marginal. The real pick up of business happened during Q2 of 2021.
“When looking now at the results for the Q2 2021 and comparing these with the Q2 2020, it becomes obvious that only the big EMS are now doing better,” reported In4ma. “For the medium EMS companies there is still a chance to get to 2019 revenues by the end of the year. For the small companies it will take them until 2022 results to get back to 2019 revenues.”