A perfect storm is brewing in the automotive electronics supply chain. Industry professionals are seeing lead times on "passives" — electronic components such as resistors, capacitors, inductors and transformers — stretch out to one year or more in some cases.
Why does this matter? When lead times get longer, schedule surprises can result. That could mean delays and loss of revenue on new vehicle programs or existing programs that require volume increases.
Meanwhile, as companies scour the globe for components, counterfeits could enter the supply chain with out-of-date parts relabeled as new, increasing warranty calls for parts that cost pennies.
As a contract manufacturer producing electronic modules for automakers and Tier 1 suppliers, Firstronic sees this impacting virtually all electronics products to some extent.
To grasp the challenge, it is important to understand the supply chain for electronic components. Typically, a contract manufacturer orders most passive components through distributors rather than directly from the component manufacturer. A demand forecast is set up, and a bond representing the number of parts the distributor guarantees will be available for the project is agreed upon.
Just as the automotive industry has moved to electronic data interchange and online portal processes to tighten communication, contract manufacturers have adopted similar methods to streamline the supply chain process. A pull signal is sent when a production work order is scheduled, the parts are shipped to the contract manufacturer, and the distributor replenishes its inventory. Properly done, there is very little need for human interaction. Inventory liability is minimized, and material arrives as scheduled.
But the longer lead times could mean trouble. Over the last year, these lead times have become unusually long because demand for these parts has grown faster than component manufacturer capacity.
For example, a quick snapshot of the availability of 1,064 passive components in my company's supply chain indicates that 255 have lead times of at least 26 weeks, 190 have lead times of at least 32 weeks and 96, or almost 10 percent, have lead times of at least a year.
Additionally, more parts are going on "allocation" — when a component supplier tells a customer it can only have a certain percentage of its order. When demand outstrips supply for a component, the component manufacturer determines what percentage of an order it will supply to each customer.
What causes this situation? Partly the normal cycle of capacity constraints that follows an electronics industry slowdown. Capacity was cut following the 2008 recession, and mixed economic signals in 2011 and 2012 triggered additional component industry consolidation and cuts in capacity.
However, there are additional dynamics that make risk of supply chain disruption higher than in previous cycles. First, there has been a generational changing of the guard in supply chain management. Older supply chain managers and engineers who had built face-to-face relationships with their suppliers have retired. The new generation at both electronics suppliers and automotive companies works at a distance — electronically. When demand exceeds supply, suppliers and customers aren't talking. Instead, customers double- and triple-book orders to increase their allocation. Suppliers then try to guess at how much of an order is really needed. Worse, this lack of visibility into actual demand discourages manufacturers from increasing their capacity.
Industry consolidation has also exacerbated the problem. When component suppliers merge, a bill of materials that had multiple sources for each part may suddenly have one source for many of the parts. Fewer suppliers also drives slower capacity increases since there is less competitive pressure to increase capacity.
So what must supply chain professionals at automotive manufacturers do to decrease the risk of disruption?
First, talk with your engineering team. At Firstronic, we are regularly seeing bills of materials with obsolete parts or parts near end of life. Follow the advice contract manufacturers, distributors and component suppliers give on best availability when it comes to parts selection. Pick parts that are easy to cross-reference among multiple manufacturers.
Second, go back to building relationships with your component suppliers and provide information on new programs as early as possible.
Third, stop single-sourcing passive components. We often see only one supplier selected for most of the parts on most designs. There is more than one good automotive supplier on most every passive application. Specify multiple suppliers for each part.
Finally, recognize that this is an industrywide problem until capacity increases. Good forecasts and an approved vendor list focused on sourcing flexibility are keys to navigating this storm.