Who Will Be at Risk of Allocation in the Next Shortage?

The electronics industry is said to be experiencing a ‘major crisis’, and for good reason. Shortages of critical components, such as the reduced supply of capacitors in 2018 and now the difficulties acquiring semiconductor chips and electrical connectors, lead buyers down various routes—if any—to procure as many of the necessary components as they can.

The ability to manage risks is one of the primary factors in a sustainable parts supply chain, and is one of the main disruptions coming from the upstream supply chain. As the world succumbs to inevitable global pressures, businesses are forced to navigate delays and uncertainties that bare ripple effects on their operations, and their customers. 

This need to allocate products to certain customers is generally a result of supply shortages, and businesses downstream will be forced to adapt to these changes and put their efforts into procurement of parts in a pinch. They must ensure that while primary orders are fulfilled, resources are allocated effectively to the most lucrative buyers, but those that come up short are fair warned. 

What is Allocation of Electronic Components?

Allocation effectively means managing two things during times of supply shortage: a reduction in component quantities and the hunger for growth among electronics buyers. This could mean navigating a 50% reduction in available parts, which has a significant impact on the number of clients, and the fulfillment of their orders. 

This can be a rather ambiguous process as once buyers are placed ‘on allocation’ by their suppliers, they become uncertain as to whether they will be able to complete their own orders—a challenge that echoes down the supply chain as seen during major disruptions like the blockage of the Suez canal and the reduction in consumer products throughout the coronavirus pandemic. 

From these previous events, it has become clear that allocation is not exclusive to a reduced supply, and can also be a result of staff shortages and other organizational changes—putting suppliers at reduced production or distribution capacity. In these scenarios, there are a few key things to consider: optimization of purchase volumes, prioritization of key accounts, and communication with buyers for full transparency. 

With so many industries reliant on printed circuit board (PCB) components for products, business growth, and even sustainability in some cases, effective supplier management is crucial to wading through industry changes and adapting to the fluctuations in supply. To do this, in a seemingly more variable market, requires a systemized approach and better visibility of the supply chain to predict the impacts of global events much faster. 

Factors That Influence Purchase Volumes

There are a number of reasons why a supplier would reduce purchase volumes. This could be a response to a change in the global market, risk aversion in the end of disruptive global events, streamlining operations, or changes in relationships between suppliers and their customers. 

Rarity of Components: Changes in Supply

Innovation in smart technologies increases the demand for semiconductors, which is a result of a trend in technology and less a result of reduction in components. Supply chain disruption is at the other end of the spectrum, but rarity is generally a known shortage, for example, the largest chip manufacturers are based in China alongside the highest output electronics makers in the world. In this scenario, by nature, chips are naturally allocated to manufacturers in the country. This can be due to a number of factors, including local sourcing, cost reduction, and order consistency. 

Demand for PCB Parts is Growing

Looking at this from the opposite angle, all industries have become reliant on components indirectly as they adopt smarter technologies, electrify infrastructure, and build operations systems around software-driven solutions. The demand for PCB parts shows no sign of decline as the industry is expected to reach US$76.12 billion in 2024, with a projected increase to US$93.87 billion in 2029. 

Supply Chain Disruption

Aside from the physical production of components, global and industry events can cause havoc with supply chain operations, particularly when prolonged over years with few indicators of recovery. Various issues can affect purchase volumes of PCB parts:

• Delivery delays and reduced availability of freight
• Changes to suppliers’ inventory management
• Adjustments to production
• Suppliers’ product diversification
• Long-term strategic changes by suppliers 

We can bracket this as operational changes from suppliers, which reduces their ability to meet current purchase volumes demanded by their customers. 

Changes in Long-term Supplier Relationships or Trade Patterns

Building strong supplier relationships is the key for businesses to secure what they need. Long-term relationships with PCB suppliers put a buyer in good stead for the future in the face of any further or major supply chain disruption. This hinges on the actual supply available in the industry as mentioned above, but also creates a fallback when quantities are at their lowest. 

Optimize Purchase Volumes for the Right Customers

Optimizing purchase volumes means allocating parts to the right customers in order in the most lucrative way for this business. Parts manufacturers have notoriously struggled with long lead times on various components in the past few years, which result in them cutting back, firstly the number of components they can supply over a period of time, secondly, the buyers that will get their components first. 

In 2022, the market saw immense shortages that lead to varying delays of component supply. Semiconductors had to be ordered within 40 to 52 weeks of customers’ actual required delivery time, and sometime if earlier than this. Capacitors fluctuated much more from 16 to 52+ weeks, and even electrical connectors took up to 20 weeks for delivery. 

Navigating this level of uncertainty proves troublesome for the entirety of electrical sectors, and the responsibility often falls with parts makers to manage availability and allocate components. In the most difficult circumstances, manufacturers will often reduce the number of orders they take or decline new purchase orders altogether, leaving customers wondering where to go for the parts they need. 

This is where Octopart.com prides itself on being the number one PCB search engine, allowing companies to find millions of parts of selected sources, leveraging a database of suppliers and product listings. Octopart not only shares the potential options with users, but also drops them straight into a bill of materials (BOM), simplifying the procurement process and allowing easy repeat transactions with previously used suppliers.

Reducing Purchase Volumes can Impact Customers

Whether reducing purchase volumes or cutting off customers altogether, clear transparency is important to allow them time to pivot to a new supplier or, in the case of reduction, determine whether they can make up that volume with parts from another manufacturer.

Alternatively—in the event that no supplier can meet their requirements, they will most likely allocate resources at their end as the disruption echoes down the supply chain. In this instance, communications between businesses will better-inform them of the situation. 

How do Manufacturers Prioritize Customers?

Manufacturers will look for the most lucrative options for allocating a reduced parts supply. Understanding this is key from the buyers’ perspective as price will be a key factor in allocating their suppliers’ finite resources. Buyers should understand the value they bring the manufacturer, but also the cost implications of working with them in a period where suppliers hold much of the bargaining power. 

What is a First-Come, First-Served Approach?

In a sense, the least ambiguous option for a supplier is to allocate their resources on a first-come, first-served basis. This solution seems the most logical for retaining customers’ support, but also taking supplier choices out of the equation.

Operating at a reduced capacity puts manufacturers in a tricky position and therefore results in customers deciding who acquires their products. The only question with this approach is whether suppliers allow for negotiations, which could potentially give customers more bargaining power and impact the bottom line of an already low output period. 

Who is Paying for Delivery?

This may seem like a dire scenario to consider, however the cost of delivering components may contribute to how parts are allocated. For example, a customer may provide the best prices, but the logistical cost of supplying them could bring down the margin. The geographical locations often play a major role in allocating components. 

This is perhaps why China holds the highest stake of the electronics market—the reduced cost of supplying to local buyers as opposed to overseas customers. Operating in this way also alleviates a number of chargers, such as the overseas freight costs and other fees to transport parts between jurisdictions. If the cost of delivery is in the supplier’s court, these are also things to consider. 

PCB Parts Buyer Have More Options

There are two sides to consider when disruption sets in. The business needs to remain profitable while customers also rely on their suppliers to keep them going. 

Firstly, consider the needs of the business and the cost implications of certain actions. Relationship management is one of the key factors in maintaining engagements with customers in the long term. Once the requirements of suppliers are met, various customer needs are considered to operate ethically and to achieve a lucrative outcome.

The important thing to note, despite all of the factors and strategies mentioned is that customers do have other purchasing options. Even for a short period or one-off purchase volume, Octopart’s search engine bolsters demand from electronics customers as they navigate the same supply shortage.