Knowing how to handle and effectively mitigate electronic component shortages is crucial for any supply chain business. 

The fact is, another component shortage like the 2018 passives shortage will happen again. Understanding the causes and best practices for preparation will significantly help your supply chain to run smoothly during any market condition. Let’s look at why electronic component shortages happen and what you can do to best prepare. 

A prominent cycle in the electronic components industry, shortages can severely disrupt the supply chain. In fact, the past two decades brought several waves of global component shortages, which significantly challenged OEMs and EMSs to keep their production lines running.  

You may ask — what causes shortages and how I can plan for them? Here’s some insight based on our decades of experience mitigating electronic component shortages.

3 reasons electronic component shortages happen 

1. Natural disasters

The massive globalization of the electronic industry renders it vulnerable to any major natural disasters throughout the world. Take the 2011 flood in Thailand as an example. 

Thailand is known as the global manufacturing center for hard drives. But flooding from months of unusually heavy rainfall seriously impacted factories, causing a 30% drop in hard drive supply in the last 3 months of 2011 and into 2012. The price for hard drives increased from $80 per unit to $140 per unit, and supply was very limited.  As a result, major electronics companies — such as Acer, Lenovo and Apply — struggled to find enough hard drives for their planned production and had to pay far above the market to secure inventory. 

2. New technology

Ever-changing technology is shaping the electronic industry faster than ever before. Since 2015 alone, the significant jump in demand for MLCCs in the mobile handsets and automotive sectors is putting severe pressure on the supply chain. 

The number of MLCCs increased from around 500+ pieces to over 1,000 pieces from iPhone 6s to iPhone X. 

Data Source: KEMET Financial Presentation Feb 2018- page 18

Furthermore, electric vehicles require 4 times more MLCCs than the traditional internal combustion engine (I.C.E.) automobile. See the comparison below: 

Data Source: KEMET Financial Presentation Feb 2018- page 18

Hideki Maruyama, president of Murata (China) Investment Co. Ltd, also confirmed that alternative fuel automobiles and ADAS autopilot supporting systems are developing much faster than they originally anticipated, and are thus consuming a large portion of MLCC supply in the market. This is one of the main reasons behind the 2018 MLCC shortage

3. OCMs shifting production to high-margin products 

After years of development, manufacturers of electronic components — especially passive components — have created somewhat of a monopoly in which a small number of large factories control the market. Instead of expanding market share with broad product lines, these manufacturers are seeking higher margins and sustainable development. They are switching their focus from low- and medium-priced products to auto-rated and industry-rated products with higher margins.

Let’s look at an example: Kyocera discontinued 104 and 105 specifications for 0402 and 0603 sizes of MLCCs at the end of February 2018. These specifications are widely used in almost all products and are the most demanded MLCC in the market. 0402 is popular among high-end smartphones and LCD TVs, while 0603 is found in motherboards and notebook computers. This is a clear example of how the 2018 MLCC shortage impacted almost all sectors in the electronics industry. 

How can you prepare for the next shortage? 

For the electronics industry, it’s all or nothing. An end-product can’t ship if one single component is missing, whether it’s the CPU or a tiny MLCC capacitor. This makes electronic component shortages a critical issue for supply chain professionals. 

In today’s complex and globalized electronic supply chain, how can you prepare for the next shortage? Here are three strategies you should consider to protect your business down the road.

  • Closely follow technology trends and market updates

For supply chain professionals, staying up-to-date on new technology trends will give you an idea of potential future shortages. With this information, you can be more strategic when souring components. 

Additionally, some manufacturers have started including supply chain experts’ recommendations in new-product designs to help engineers spec in a product into a BOM. This way, they can avoid potential supply chain nightmares by not using products that may face obsolescence or a shortage in the coming years. 

  • Diversify your component sources

There are second- and third-tier suppliers for components that are widely used in many products. We recommend working with them directly or through a supply chain partner, such as a distributor, to help keep your supply base diversified. That way, when the next electronic component shortage happens, you already have plans B and C set up. 

  • Create a bonded inventory plan for essential components

Taking advantage of bonded inventory plans can allow you to work closely with a supply chain partner to find a best-fit, long-term purchasing plan. They can help you buy components, store them in an ESD-approved warehouse, and ship them to your manufacturing site per your production schedule. With having a preplanned bonded inventory program in place, you can have peace of mind, especially during the shortage market. 

More electronic component shortages will happen — the question is not if, but when and how. Understanding the options available to your supply chain can help your business be fully prepared to mitigate the next component shortage cycle.

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