Rising component prices, the recent earthquake in Taiwan, and strong demand could cause several ripples through the supply chain, according to a report from Merrill Lynch & Co. Inc.
In a survey of 52 OEMs in the industrial, computer, automotive, communications, defense, and medical industries, about 37% of the respondents indicated that a tightening demand for certain components and the effects of the Sept. 21 temblor could modestly reduce near-term output, said analyst Jerry Labowitz of New York-based Merrill Lynch. The participants represented manufacturing, purchasing and materials sourcing, operations and logistics, finance and investor relations, business management, and supply-chain management.
The average participant said a shortfall of 7% to 8% could occur in the fourth quarter of this year or in the first quarter of 2000. Also, 30% of those surveyed have been warned by their contract electronics manufacturers that a component shortage could adversely affect unit production by 5% to 6% in the next several months, the report said.
Y2K uncertainty further complicates the situation. Although only 8% of those polled said they are concerned about meeting production demands after the calendar flips, approximately half said they were building safety stocks, and some revealed that they are compiling more than three weeks' worth of inventory in preparation.
As in previous cycles, distributor relationships become a key factor during shortages, with 79% of the respondents noting that a distributor will help them acquire components to meet production demand. Of those questioned, 89% already use the distribution channel for their procurement needs.
"A shortage environment reinforces the value-add provided by distributors to OEMs, which we believe could result in improved demand trends for distributors in the future," Labowitz said.
Besides using distributors to soften the blow, OEMs said they will turn to CEM partners for procurement needs, provide suppliers with longer-range forecasts, pay expedite charges, use bonded-inventory programs, develop new supplier relationships, sign written capacity agreements, and increase spot-market purchases.