No one wants to get stuck holding the bag for too long on components, but the current environment is making that increasingly hard to avoid. Here’s how to navigate the problem while keeping treasury and sales teams happy, and customers supplied.
The Big Picture:
- Long lead times are turning component buying into a months-ahead commitment.
- No one wants millions tied up in parts that may sit for months (or even years), but that’s exactly what’s happening.
- A supply chain partner can take the inventory burden off your plate.
Electronics OEMs can’t afford to wait until the last minute to procure components for production, especially in the current environment. With certain chips and components difficult to source and lead times stretching for months, having inventory on hand when production starts can determine whether a build stays on schedule or gets pushed out.
When the stakes are high, even one delayed build can mean missed delivery commitments and frustrated customers who may never come back. Companies can’t afford to have that happen, yet electronics manufacturing services (EMS) and contract manufacturing partners may be reluctant to finance and hold large amounts of reserve inventory for months at a time.
The reality is that in high-demand sectors, manufacturing partners have little incentive to tie up their own cash in components that may sit for months before production starts. This puts OEMs and equipment makers in a bind. Consider these scenarios:
- An electronics OEM has a production run that’s scheduled six months out, but the orders for several long-lead components have to be placed now to ensure availability once assembly starts.
- A data center equipment supplier may have customer deployments scheduled months out, but still has to procure and store memory, power components and networking hardware well before the build ever starts.
- Large technology companies and hyperscalers face similar challenges with product launches, server rollouts or infrastructure expansions that require components long before the contract manufacturer is ready to use them.
Someone winds up holding the bag in every one of these situations, and unless there’s some type of special arrangement between the OEM and its manufacturing partner, somebody has to fund that reserve inventory and carry the financial risk until production catches up. The global pandemic drove some of this when customers raised forecasts and EMS companies bought inventory against those forecasts.
Then the bullwhip effect took over. Demand softened and inventory levels at the largest EMS companies climbed 65% above pre-COVID levels, according to Kearney. Now, those companies are taking a more conservative stance right at a time when so many components are getting harder to find. TrendForce estimates lead times for some server components are stretching to nearly a year, while Avnet’s August lead-time guide pegs general-purpose relays at 35 weeks under allocation, some power supplies at up to 48 weeks and select sensors at up to 48 weeks.
These are some seriously long lead times in a fast-moving industry, with AI and data center demand putting added strain on some server-related components. It has also forced companies to “buy ahead” simply to ensure parts are there when production starts.
Securing Parts Without Carrying Inventory
Current market conditions aside, OEMs, data center operators and large tech companies still have to secure parts for both current and future projects, but may not want the cost sitting on their balance sheets or the inventory crowding up their warehouses. An outsourced supply chain partner can take on the inventory commitment, hold title to the goods and release components as production schedules call for them.
That helps companies secure supply early without having to shoulder the full financial and physical burden themselves. Treasury teams avoid tying up millions in inventory months ahead of need, and sales teams can keep promising customers the parts will be there when production starts.
“Companies can’t afford to wait six months to secure the parts they know they’re going to need, but they also don’t want millions of dollars tied up in inventory that won’t be consumed until a later date,“ said David Jeng, CEO of Wintec Industries. “Somebody has to own that gap, fund it and take the risk if the production schedule changes.”
Owning and Funding the Gap
With little relief in sight for component shortages and extended lead times, companies are looking for new ways to keep inventory available without carrying all of it themselves. They’re also offloading the physical storage and management of those goods so their own facilities and teams can stay focused on core business needs.
“Depending on the arrangement, we either fund the purchase ourselves or use client or third-party capital, then hold title to the goods while they wait for production,” said Jeng. This setup takes the sting out of committing to parts months ahead of need. It also reduces inventory holding costs and limits the balance-sheet impact of expensive goods, including buffer stock needed for future builds.
Companies considering a strategic inventory and supply chain management arrangement should ask these questions when screening potential partners:
- Who buys the inventory and provides the capital?
- Who holds the title while the components are waiting to be used?
- Where will the inventory be stored and who manages it?
- What production schedule or other trigger releases the components to the EMS provider?
- What happens if production gets delayed, quantities change or some of the inventory is no longer needed?
- How will inventory levels, cash use, accounts payable and accounts receivable be tracked and reported?
The answers to these questions will help you pick a partner that can handle the bumps that come with long lead times, shifting production schedules and changing demand. Ultimately, you’ll want one with the financial capacity, warehouse network, reporting capabilities and flexibility to carry inventory from purchase through final delivery.
Need help securing critical components months before production without carrying the inventory yourself? Wintec can fund, hold and manage the stock, then release it as your production schedule calls for it. Learn more: wintecind.com