From 2015 onwards, the original component manufacturers (OCM) of component parts have continued to grow via aggressive mergers and acquisitions (M&A), especially the semiconductor manufacturers.  The semiconductor industry consolidation, and changes in their distribution sales model have left end-customers with fewer supplier options and fewer qualified design resources. We believe that semiconductor suppliers will continue to win share and will likely have pricing/margin power over the industry for a number of years to come, and in the chip industry, mergers have created mega-suppliers with considerable power.

When two OCM suppliers with a common product portfolios merge, the vendor base for those devices is reduced by a factor of one. Mature lines are phased out in favor of newer and more profitable ones and we’ve seen end-of-life notices from OCMs accelerate within the past year.  At the end of the day, OCMs want to satisfy all demand, but they don’t want to get into a situation where they expand and then the market contracts.

Therefore, the reality is that we now operate in a market with fewer OCMs.  Where once we had several choices, we now have one or two, or sometimes a sole supply only, resulting in the thinning or damming of the sourcing stream.

The current component shortage is now expected to last through 2018. Passives lead-times are stretching to 30-plus weeks, with some orders quoted for delivery into mid‐2019. That’s a long time for buyers to live hand-to-mouth.  This leads to a bunker mentality within the procurement department that double, and even triple, orders to stock up on supply.

For the first time in a number of years, the term allocation is back on the table.  Of course, in any scenario when demand exceeds supply, there is an impact on cost, with prices rising at an extraordinary rate.  For the first time in years, we are beginning to see price increases in chips, making buyers anxious.  Naturally, business is booked well in advance to avoid absorbing an increase, especially in a margin-sensitive business such as EMS.

Being involved in the design stage allows your EMS partner to design the product for manufacture, taking into consideration components that may create a challenge for the Original Equipment Maker (OEM) to secure.   Products can be designed with an alternative component, one that could be easier to source, or one that isn’t approaching its end of life, (EOF) or obsolescence.

Component demand is up thanks to IoT growth and the rise in automotive, mobile and industrial markets.

Technology migration, particularly within the already-volatile memory market, has a ripple effect on availability.

There is currently a transition in the flash market from 2D to 3D technology.  Flash is, of course, the key component in SSDs.  This movement is naturally driving a shortage in both flash memory, with a knock-on effect on SSDs.  Demand gradually puts pressure on established technology, such as DRAM, with DIMM modules for servers in short supply at a time where cloud technologies drive demand up for server production.

This shouldn’t be a  show-stopper.  Take a sustainable approach by forging open book and transparent relationships with your OCM partners.

We’re now seeing shortages across a wide range of products.  In passives, MLCCs and tantalum; and some resistors and diodes.  The industry’s largest DRAM supplier, Samsung, is considering increasing its DRAM output, even as it adds capacity for newer technologies.

But how should they do this?  Does the OCM add capacity, which is expensive and takes considerable time to ramp-up, to a point where the return on investment is visible?  However, if they don’t add the required capacity, could they run the risk of losing the sale?

And it’s not just the OCMs who face challenging decisions, the EMS buyers do too, as the suppliers and distributors are allocating products, using customers’ buying history as a baseline.

The solution, to reduce or eliminate risk, is to take control of the parts of the supply chain that can be controlled.  Work with like-minded OCM partners only, and form a two-way relationship.  Develop your supply chain for cost-effective solutions to reduce waste (component waste, e-waste, packaging, process inefficiencies etc).

Work with your OEM partners to design products with the circular economy in mind, which we at Dynamic EMS see as becoming more important to our EMS business model, and our OEM customers, who now request our company mission statement in regard to environmental issues and/or policies, for example, Just-in-Time (JIT).

Having operated within the supply chain for EMS companies for over 35 years, we recognise that what we are experiencing currently, is part of a continuous cycle.  As this cycle develops, we will see new, smaller component manufacturers emerge and grow.  These companies are born as developmental spin-offs from the larger existing companies, with the talent, experience, and resources in place to transform and disrupt the market once more.

So it’s a cycle, do what you can to sail through it with the minimum amount of disruption.  As many management books state on the subject, change is a business objective, belt up and hold on tight, as it could be a bumpy ride.

John Dignan is managing director of Dynamic EMS.