Inventory's bumpy road to smooth somewhat this year

Long lead times to ease—but not go away—in the coming year.

Rob Spiegel, edited by Suzanne Deffree, Managing Editor, news -- EDN, January 6, 2011

OEMs, contract manufacturers, and franchised distributors have worked to build up inventories, but there hasn't been enough to go around. With shortages in such basic parts as tantalum capacitors, aluminum capacitors, relays, nichrome film resistors, and some inductors, manufacturers can't solve the problem at the design level. Last year (2010) was a boom one for independent distributors as cheap parts suddenly skyrocketed in price.

Many in the industry believe that inventory will come closer to balance in 2011 when leadtimes should decrease as component manufacturers ramp up production. Uncertainties about the global economy, however, are prompting caution, so inventory levels will likely stay low. One wild card in the mix is raw materials. Shortages in tantalite, nickel, copper aluminum, zinc, palladium, and silver are sending prices up.

Leadtimes coming down slightly

Recent changes in both demand and production are beginning to take some of the edge off shortages in the market. "[In October], we saw demand soften a bit, yet decreases in demand are coming off record months, and demand is still above historical averages," says Dustin Ford, vice president of South Asia at Smith & Associates, an independent distributor. "Some leadtimes have come down, and push-outs on scheduled orders have occurred with some customers."

Early in 2010, demand shot up at an expected rate. "Throughout the channel, a lot of product inventory has been pretty scarce," says Michael Knight, vice president of supplier management  and product management at TTI Inc. "It's been tough for anyone to accumulate inventory. We're starting to catch up. We're seeing inventory begin to recover. You'll see some shortages continue in tantalum capacitors, aluminum capacitors, and some inductors. Relays are a disaster now. They can't make parts fast enough."

As 2010 wore on, demand continued to increase beyond the overall economy, and leadtimes quickly became longer.


You can attribute many of the shortages in 2010 to component manufacturers' quick moves to reduce capacity. Rather than getting caught with a mountain of inventory, as in 2000, manufacturers cut capacity. According to Todd Ballew, executive vice president and general manager at World Micro Inc, a components distributor, "2008 and 2009 were the years when supply was greater than demand, so component manufacturers were really backing off their facilities. In 2010, we started to see demand, and [component manufacturers] responded by producing the most valued products first. That [step] caused downstream shortages."

Caution still rules

Component manufacturers sliced capacity beginning in 2008 when the economy began to slip. They are not likely to rush into capacity investment before they're sure of sustained demand. "Semiconductor manufacturers put limits on orders throughout 2010 to help contain the dreaded bullwhip effect from double booking during demand upswings," says Ford. "This [situation] has helped fuel demand in our market as frustrated customers turn to [independent distributors] to keep their lines moving."

Another reason for the shortages of 2010 was a surprisingly sharp increase in demand. New products, such as tablets and smartphones, drove consumer purchasing even in a weak economy. "The capacity cuts that happened were pretty dramatic," says TTI's Knight. "Then, demand came back very quickly. It took through the first half of 2010 before anyone was willing to add capacity. The demand is still surprising."

Some OEMs have responded to shortages by stockpiling critical components. "Apple started buying two years of supply on certain memory products about a year ago," says Gil Aouizerat, chief executive officer of Pacific Component Xchange, an independent distributor. "We're seeing instances where OEMs will step up to the plate and buy components in cash in advance, saying ‘We're going to pay a billion to keep the line going.'"

Aouizerat points to GPS (global-positioning-system) and flash as items that are high in demand. "GPS and anything that has a camera in it is growing radically," says Aouizerat. "GPS and flash are growing in the high double teens."

Raw materials have become a new problem

One unusual twist in both supply and pricing comes from shortages in raw materials. "Raw-material shortages are kinds of new events," says TTI's Knight. "In the past, we've hit manufacturing-capacity shortages. A lot of what we're seeing now is raw-materials shortages."

Although capacity will expand naturally to accommodate demand, short supplies of raw materials could keep prices high even as supply grows. "High raw-materials prices will also add to the worries, as well as increased commoditization of components," says Ford. "Our customers will continue feeding their lines hand to mouth."

Some improvements in balance to come

One of the big unknowns comes from global economic forces. The current electronics boom meets with a sluggish macroeconomy. "The macroeconomical uncertainties should keep semiconductor manufacturers cautious about their capacities. Any increase in inventory levels should lean out, keeping leadtimes long and prices high," says Ford. "Uncertainties are looming across the globe. Uncertainties mean poor forecasting and inefficiencies throughout the supply chain. We see that well into 2011."

Even amid the uncertainties, many expect the electronics industry to reach a reasonable balance between demand and supply in 2011. "Capacity is catching up, but we're still seeing some pockets of problems. It's vendor-specific," says Newark's Campbell. "I think we're seeing a balance for 2011. There will be pockets of imbalance; there always are. But, generally, we see things coming more and more in balance."