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From Shortage to Overstock : Why OEMs Should be Prepared for Looming Overstock Issues in Electronics Supply Chain

In our previous articles, we covered the global chip crisis, and how it has led to the shortage of electronic components and supply chain disruptions in the sector. Even as the chip shortage problems continue to bite the electronics industry, OEMs now stare at yet another problem – overstock.

Double booking stretching lead times

As the end of the year approaches, many OEMs will be receiving the components they ordered last year – the lead times are longer due to the semiconductor crisis and the Covid pandemic. But that’s not a big problem until you realize that many companies ordered more components that they need to avoid stockouts. That double-booking or even triple-booking distorts demand signals. This, therefore, increases the risk of excess continuing to build through the supply chain. Inevitably when the demand falls, it will generate considerable stocks that will take OEMs and EMS providers several months or even several years to liquidate.

Overstock

Double-booking is indeed a persistent problem in the electronics industry. During the dotcom boom of the late 1990s demand for electronic components went through the roof. When that market bottomed out, the electronics supply chain was left with $13 billion of excess inventory in 2001.

In times of crisis, large EMS companies and OEMs tend to fill in extra orders to head off a repeat of shortages. Some manufacturers are turning away companies who are stockpiling chips and even longtime partners are somewhat constrained. While it is a prudent move to stockpile chips in the event that the shortage worsens over time, it is not always the case. Long lead times are required to build capacity and significantly increase output, and in a pandemic-stricken world, this may take even longer – as recent data suggests. By the time companies reach peak capacity, demand may have stabilized at lower levels, leaving OEMs scrambling with excess inventory.

In addition, it is difficult to flag double booking due to limited visibility in the electronic components supply chain. OEMs rarely share order information with one another and suppliers do not have processes in place to flag double ordering. This makes it hard to figure out just how much double ordering is taking place.

Still excess inventory presents a significant risk for manufacturers. Holding large amounts of inventory requires a huge investment to buy the stock in the first place. This often leaves too much capital tied up in excess stock. Furthermore, this additional volume of inventory places additional pressure on transportation, handling and storage costs. Consequently, if the components are not sold in time, they may become a waste quickly, putting even more pressure on companies to find buyers.

A looming problem for OEMs and EMS providers, surplus stock in a post-pandemic world is a situation companies must prepare for. At the same time, OEMs may not be able to cancel orders easily or bully suppliers into lowering costs without facing threat of legal action. Companies are also under immense pressure from shareholders to remove as much inventory as possible from their plants and warehouses. To minimize the impact, OEMs and EMS companies have two main options to get rid of surplus inventory.

  • Scrap it: The obvious approach among OEMs is to hold excess electronic components for months or even years in the hope that there will be another surge in demand. But if that doesn’t happen, companies usually cut their losses and discard the components – estimated to be worth $5 billion every year. Offloading excess inventory as scrap or waste however poses a huge threat to the environment - only 40% of e-waste is formally collected and recycled. Besides, the rare earths used in electronics means that recycling is the better if not the only option.
  • Sell to brokers: Independent distributors or brokers usually provide a ready market for excess inventory but brokerage comes at a cost. To start with, brokers purchase unused inventories at a very low price, so you likely won’t see any profits with this method. Furthermore, OEMs have no visibility into the broker’s supply chain which increases the risk of your components being counterfeited and sold in the secondary market.

Sell Your Excess Inventory on AIRENC

Most OEMs will have to have to combat the challenge of components overstock at some point later this year. AIRENC is a community-based transaction platform that enables OEMs and EMS companies to sell their excess inventory directly to buyers (partners interested in excess stock). As a result, we help companies to liquidate excess inventory quickly and efficiently. The platform brings together OEMs and EMS to collaborate and work towards a circular economy by identifying excess components inventory and creating a market for that stock.

Unlike brokers, the AIRENC platform makes it easier to sell surplus inventory to potential buyers at competitive prices since we eliminate costly intermediaries. We also ensure standardized procurement processes and offer comprehensive audit trails for components to enable community members to build trustworthy relationships and transact with confidence. In addition, the liquidation sales are exclusive to registered sellers and approved buyers so you can be sure about where your components are going.

Here's a summary of the benefits AIRENC community-based transaction platform offer to OEMs and EMS companies:

  • It is the members of the community who set the prices at which they want to sell and buy components. The prices are therefore decorrelated from the market, completely cutting out intermediaries who tend to take advantage of an emergency (and oversupply) to manipulate prices.
  • Members are carefully vetted, which guarantees the integrity of the products (components) that are sold on the platform and prevents counterfeiting.
  • The members of the community platform are known, which improves transparency and allows buyers to shop with confidence and sellers to capitalize on their brand image.
  • Members can also choose who they sell to and prevent their components from ending up with their competitors.
  • Each transaction is carefully evaluated, from both the buyer and the seller’s end. Not only does this enhance transparency, but it also encourages each member to play the game.

With AIRENC, OEMs and EMS providers can stabilize their supply chain by limiting emergency situations and better anticipating market changes. In addition, the platform helps companies improve their brand image by reducing component waste and being recognized by peers as a trusted partner.



Published: Jan 12, 2021

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