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A Return to Allocation?

With lead times expanding and major OEMs struggling to secure stock, industry sources are suggesting that the electronics industry is about to see a widespread return of allocation. Cyclops Electronics examines the issue.

Is Apple going to release a brand-new smartphone for its tenth anniversary later this year? That is what many industry analysts are debating at the moment. Although there has been plenty of column inches dedicated to the topic of Apple’s latest phone, it is probably safe to say that nobody - except Tim Cook and a couple of other high-ranking officials (perhaps) – would be able to provide a definitive answer.

However, despite there being no concrete evidence, either way, many within the media have been speculating that any imminent product launch from Apple could be delayed due to a global shortage of electronic components. If Apple is struggling, how are other OEMs going to secure the parts that they need for production runs?

And then there is talk that leading semiconductor manufacturers could be allocating stock on a widespread basis in the coming months and then add the usual fears associated with consolidation. It all comes together to paint a potentially worrying picture.

What do we know?

Well, for a start, lead times for certain types of components have risen.

During the past couple of months, the availability of ceramic capacitors through certain distribution channels has increased from sixteen to thirty weeks. The reason for this is that there has been a spike in demand from Asian manufacturers that has left little stock on the global markets.

People searching for memory from franchised sources are finding it harder and harder to secure stock. Due to strong growth in the smartphone sector and the release of a new line of premium Samsung handsets, many memory manufacturers have put their products on allocation. According to our latest information, all Toshiba memory products are now on allocation, as are Micron’s popular DDR3 lines.

Finally, we have heard reports that lead times for many ON Semiconductor and Analog Devices lines are increasing, to the point where allocation is a real possibility.

Why is this happening?

To put it simply: In many cases, supply is outstripping demand.

In a report released at the beginning of this month, an analyst for Deutsche Bank wrote: “Several supply chain reports have suggested that key component shortages…could delay the release of a high-end iPhone 8 device this [autumn].” This report supports a previous claim by KGI Securities analyst Ming-Chi Kuo who reported that the new device will face “severe supply shortages”. Bloomberg has also published a story earlier this year predicting that “supply constraints” will delay any release.

Of course, many component and semiconductor manufacturers will be prioritising their tier 1 OEMs. But even with global technological juggernauts such as Apple finding it hard to procure the quantities of stock needed, there is a massive knock-on effect across the entire supply chain.

Apple’s supposed woes, whilst making a lot of headlines in recent months, are part of a wider trend.

There has been a noticeable shortage of NAND flash products for over six months now. Worldwide production capabilities of NAND flash is somewhat limited, due to many manufacturers (a list that includes Samsung, Micron and Toshiba) switching from 2D to 3D NAND. This sluggish transition has inadvertently led manufacturers to concentrate their efforts on supplying their most prominent and profitable customers and market sectors.

For the majority of OEMs, this has resulted in an increase in price.

According to the industry research firm IC Insights, the average selling price of NAND flash is 40% higher today than it was at this point last year.

It is a similar story when it comes to DRAM memory products, which cost around 45% more than they did twelve months ago.

This inability to meet OEM demand is not just consigned to those manufacturers who produce NAND flash and other forms of memory.

Many semiconductor manufacturers plan their production runs on historical trends and future projections, building a percentage in to cope with fluctuations. However, there is a trend for customers to place high-volume orders through different sources when market prices start to rise in a bid to get the best deal. This impacts production plans, forcing lead times up and increasing the threat of allocated shipments and back orders.

Finally, the raft of mergers and acquisitions has played havoc with market trends. Consolidation is rarely positive for the OEM purchaser as the possibility of obsolescence increases whilst the number of potential suppliers diminishes.

As Adam Fletcher, chair of the Electronic Component Supply Network wrote on the issue recently: “legitimate concerns about the medium and long-term product availability, pricing, possible product rationalisation etc., causes considerable anxiety”.

In high-profile markets and industry sectors, it is natural for companies to move quickly and secure stock early to protect themselves against any change in production patterns. However, this leaves those who don’t act immediately wrong-footed and battling with inflated costs, amongst other headaches.

Another consequence of consolidation is that similar product lines are merged. This can cause a bottleneck in supply chains as demand is spread across a small number of franchised sources. A result of this is that semiconductor manufacturers can implement allocations until production levels can be increased and buffer stock successfully built up.

Whilst we are not at the point of widespread allocation due, we have seen that lead times for ON Semiconductor/Fairchild and NXP/Freescale lines have followed an upward trend throughout this calendar year.

How can Cyclops Electronics secure your supply chain?

With the prospect of allocation likely, although not officially confirmed, many OEMs will be looking at contingency plans to secure the parts that they need for upcoming production runs.

Thanks to our global procurement network, we are able to lock down large quantities of available stock – no matter where those components are located.

We offer a dedicated stockholding service for all our customers who opt to schedule their orders and deliveries. Based on your forecasts, our purchasing team will locate and buy the stock you’ll need on an annual basis. This not only secures your supply chain but because we buy the entire quantity, we can also offer you cost savings and other efficiencies that will greatly improve the bottom line of your business.

Then, when you need the stock, we ship it out to you. No more worrying about lead times and fluctuations in price: We give you the stock you need, when you need it at a fixed price. It’s that simple.

With many of the world’s largest OEMs operating on a near year-round production cycle, it can be difficult to be reactive when problems arise. If, for example, you need a small quantity to complete an additional manufacturing run, then your one-off request through franchised channels could see you left with a lead time of three months or above.

Again, this is where we come into our own. By pouring through our list of trusted suppliers from around the world, we can find you the parts you need – no matter if they’re on a three, thirteen or thirty-week lead time.

Don’t play the waiting game. Come to Cyclops Electronics and see how one of the world’s leading independent stocking distributors can keep your production lines running in a cost-effective manner, even with the threat of allocation and inflated prices looming large.

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