Smart Strategies for Managing Rising Component Prices

The electronics industry is currently facing a significant challenge: rising component prices. This trend is driven by a variety of factors and requires strategic management to maintain competitiveness.

In the article, we will present an analysis of the challenges faced by the electronics industry due to rising component prices. There are the key drivers of this trend, including supply chain disruptions, increased demand for electronic components due to digital transformation, and geopolitical factors. The importance of strategic management in mitigating these challenges and maintaining competitiveness is clear.

What to watch for to manage these challenges is multifaceted, encompassing market trend monitoring, supplier performance evaluation, and inventory level management. Short, medium, and long-term actions are possible for each watchpoint, providing a roadmap for businesses to navigate the current market dynamics.

Also highlighted are differentiated strategies to gain a competitive edge. These include diversifying suppliers, investing in technology, negotiating long-term contracts, and conducting value engineering. Each strategy has suggestions on how to differentiate, emphasizing the importance of customization and innovation in maintaining a competitive edge.

There is a holistic approach to managing rising component prices. It is underscored by the need for proactive and strategic management, tailored to the specific needs and circumstances of each organisation.

Drivers of Rising Component Prices

Three major factors are contributing to the rise in component prices:

Supply Chain Disruptions: The COVID-19 pandemic has caused significant disruptions in global supply chains, leading to shortages of key components and subsequent price increases. For instance, the pandemic led to unscheduled closures of manufacturing and distribution facilities, bottlenecks at borders, and sick workers, all of which squeezed supply. Other examples are the six-day blockage of the Suez Canal due to the grounded ship Ever Given in March 2021 (https://www.bloomberg.com/news/features/2021-06-24/how-the-billion-dollar-ever-given-cargo-ship-got-stuck-in-the-suez-canal) , and the six-day closure of the Colonial gasoline pipeline in the United States after a cyberattack in May 2021 (https://edition.cnn.com/2021/05/12/business/colonial-pipeline-restart/index.html)

Increased Demand: The ongoing digital transformation across industries has led to increased demand for electronic components, further driving up prices. The increasing demand for emerging tech like AI, 5G, and IoT has triggered a spike in demand for electronic components. The proliferation of smart devices is driving the need for advanced processors, sensors, memory devices, and power management components. Another example is the shift towards high-speed connectivity, energy efficiency, artificial intelligence (AI), the Internet of Things (IoT), and autonomous technology, which is creating a demand for advanced parts. This is leading to a valuation of the semi-conductor market alone at USD 1,307.7 Billion by 2032 (https://www.globenewswire.com/en/news-release/2024/01/08/2805163/0/en/Semiconductor-Market-Valuation-to-Reach-USD-1-307-7-Billion-by-2032-amid-Increasing-Demand-for-Advanced-Electronics-and-Technological-Innovations.html )

Geopolitical Factors: Trade restrictions and geopolitical tensions can also impact the availability and cost of components. Geopolitical risks posed by elections, polarization, and conflicts within and between states have inevitable knock-on effects on the economy, both globally and for individual countries. This year more than ever, managing these risks and shoring up institutions that promote stability are essential. Another example is the war in Ukraine and the conflict between Israel and Hamas in the Middle East, which highlight the extent to which geopolitical developments are a key determinant of global economic performance (How are geopolitical risks affecting the world economy? - Economics Observatory)

What to Watch For

When managing rising component costs, it is important to monitor four factors, and there is short-, medium-, and long-term actions one can take to stay abreast of the dynamics at play:

Market Trends: Keep an eye on global market trends and forecasts to anticipate future price movements.

Short Term Actions

Subscribe to industry newsletters and reports: These often provide timely updates on market trends and forecasts.

Attend industry webinars and conferences: These events can provide insights into current trends and future predictions.

Medium Term Actions

Invest in market research: Hire a team or outsource to a market research firm to get detailed reports and analysis on market trends.

Develop relationships with industry experts: Their insights can be invaluable in understanding and predicting market trends.

Long Term Actions

Establish a dedicated market trends team: This team can continuously monitor, analyse, and report on market trends and forecasts.

Invest in predictive analytics tools: These tools can help anticipate future price movements and market trends.

Supplier Performance: Regularly evaluate your suppliers' performance and reliability.

Short Term Actions

Regular performance reviews: Evaluate your suppliers’ performance and reliability on a regular basis.

Feedback and communication: Communicate your expectations clearly and provide constructive feedback.

Medium Term Actions

Supplier development programs: Invest in programs that help your suppliers improve their performance and reliability.

Diversify your supplier base: This can reduce the risk associated with relying on a single supplier.

Long Term Actions

Long-term supplier partnerships: Develop long-term relationships with high-performing suppliers.

Invest in supplier performance monitoring tools: These tools can provide real-time data on supplier performance.

Inventory Levels: Monitor your inventory levels closely to avoid overstocking or understocking

Short Term Actions

Regular inventory audits: Regularly check your inventory levels to avoid overstocking or understocking.

Safety stock: Maintain a safety stock to manage unexpected demand.

Medium Term Actions

Invest in inventory management software: This can help monitor inventory levels and provide alerts when levels are low or high.

Implement an inventory optimization model: This can help determine the optimal amount of inventory to hold.

Long Term Actions

Just-In-Time (JIT) inventory management:  Increase efficiency by receiving goods only as they are needed in the production process.

Invest in predictive analytics for inventory management: Help anticipate future inventory needs based on numerous factors like past sales data, seasonal trends, and supplier lead times

These actions can help organisations effectively manage rising component prices. It is important to remember that these strategies should be tailored to fit the specific needs and circumstances of each organisation.

Differentiated Strategies

To gain a competitive edge, consider these four strategies and associated differentiation initiatives (figure 1):

Strategy 1: Diversify Suppliers

Diversifying your supplier base involves sourcing components from multiple suppliers rather than relying solely on one.

By diversifying, you reduce the impact of supply chain disruptions caused by factors like natural disasters, geopolitical tensions, or production delays.

Having backup suppliers ensures continuity even if one supplier faces issues.

Different suppliers may have varying quality standards, so diversification allows you to choose the best components.

How to differentiate:

Customized Relationships: Build strong relationships with each supplier, understanding their strengths and weaknesses. Tailor your approach to each one.

Collaborative Innovation: Work closely with suppliers to co-create solutions, such as joint R&D efforts or customized components.

Strategy 2: Invest in Technology

Leveraging technology can significantly impact component procurement:

AI and Machine Learning: Implement predictive algorithms to forecast demand accurately. This helps optimize inventory levels and prevents overstocking or shortages. As part of this strategy, look to implement and use automation tools to streamline the procurement process, reducing manual effort and errors. Collaborate through digital platforms to allow suppliers share real-time data on availability, lead times, and pricing.

How to differentiate:

Advanced Analytics: Go beyond basic forecasting. Use AI to analyse historical data, market trends, and external factors for precise predictions.

Blockchain for Transparency: Explore blockchain solutions to enhance transparency in the supply chain, ensuring authenticity and traceability.

Strategy 3: Long-term Contracts

Negotiating long-term contracts with suppliers offers advantages: This allows you to lock in favourable pricing over an extended period, shielding your business from market fluctuations. Suppliers are also more likely to invest in your success if they have a long-term partnership. Aligning supplier contract terms with your own business goals and growth plans locks in these opportunities.

How to differentiate:

Performance Metrics: Set clear performance metrics in contracts, particularly ones that will distinguish you in the market. Reward suppliers for exceeding expectations.

Risk Sharing: Explore risk-sharing models where both parties benefit from success and mitigate losses together.

Strategy 4: Value Engineering

Value engineering involves optimizing product designs for cost savings without compromising quality. Evaluating existing designs to identify areas where cost reduction is possible through proactive design analysis. With design analysis and value engineering, companies can explore alternative materials or components that maintain performance but are more cost-effective. It is also an opportunity to examine eco-friendly designs that reduce waste and energy consumption.

How to differentiate:

Innovative Designs: Stand out by creating unique, efficient designs that resonate with customers.

User-Centric Approach: Prioritize features that matter most to your target audience while minimizing unnecessary complexity.

Differentiation lies not only in the strategies themselves but also in how you execute them. Tailoring these approaches to your specific context and staying agile in adapting to changing market dynamics should be the key mantra to adopt for any strategy execution.

Conclusion

While providing a thorough examination of the current challenges in the electronics industry we have also offered potential strategic solutions to address them. It is crucial to emphasise the importance of understanding the drivers of rising component prices and implementing strategic management practices to maintain competitiveness.

The industry watchpoints of monitoring market trends, evaluating supplier performance, and managing inventory levels, provide a comprehensive approach to being proactive towards rising component costs. Additionally, the differentiated strategies such as diversifying suppliers, investing in technology, negotiating long-term contracts, and conducting value engineering, can provide businesses with a competitive edge.

These insights and practical strategies are for any business navigating the complex landscape of the electronics industry. By implementing these strategies, businesses can effectively manage component costs, maintain their competitive edge, and ensure their long-term success in the face of rising component prices.