Systems OEMs are facing stretched-out lead times, higher prices and shortages of certain key parts from their components distributors. The problems stem from unusually strong demand from markets such as cellular telephones, swamping component manufacturers' ability to keep supply flowing in the interconnect, passive and electromechanical (IPE) distribution channel. Distributors say they don't expect the crunch to ease until the fourth quarter at the soonest.
The hardest-hit sectors include tantalum and ceramic capacitors, ferrite beads and frequency-control products including crystals, oscillators and SAW devices. Indeed, major suppliers of passive components recently began putting distributors and other customers on allocation.
There's no question that newer wireless technologies are consuming all the supply, said Dennis Donovan, vice president of supply chain management for Sager Electronics (Hingham, Mass.). Distributors first saw signs of tightening supply during the second half of 1999, concurrent with an explosion in the cellular phone market, combined with an increase in passive-component content for beefed-up functionality.
It's difficult for suppliers to keep up with demand, and indications are that things will continue this way through the end of the year, said Ken Lamneck, president of Arrow/Richey (Denver).
"Most of our suppliers say they expect to have some extra capacity coming on later in the fall," said Wally York, vice president of marketing for Pioneer Standard Electronics (Cleveland). "Supply will become less of an issue toward the fall and next winter."
Yet the crunch has a major upside for distributors: The resellers can move virtually every component on the shelf, and rising prices mean slightly higher margins. Prices are rising across the board for passives, said Thomas J. McCartney, senior vice president of the IPE-product business group for Avnet Inc. (Phoenix).
"They're going up from our suppliers, so we have to pass those along," he said. "We are trying to minimize the effect but there will be some impact on pricing."
Tight supply also has an impact on the engineering and design community. "If you can't get the final product out the door, then you get zero revenue," said York. "In some cases, engineers are under some pretty serious constraints, so it's better to expend the cost to redesign the board and get the product out than to wait maybe another six months or so before the situation turns around."
The good news is that distributors don't report any shipment delays for electromechanical devices such as switches and relays. In the interconnect world, once-tight supplies for CompactPCI products for telecommunications and data communications markets appear to have eased now that connector makers have increased production capacity, distributors say. However, lead times continue to stretch for smaller, surface-mount connectors.
Though capacity is under control for interconnects, switches and relays, "we have to monitor it to make sure that we get our fair share of supply," said Sager's Donovan. "Like others, we anticipated this coming and pipelined product accordingly," starting in the fourth quarter of 1999.
Average selling prices were driven so low that some capacitor makers were reluctant to add production capacity, which significantly contributed to current supply conditions. Tantalum capacitors are on allocation and ceramic caps are bordering on it right now, Donovan said. In general, the supply of all surface-mount products is being stretched, mostly due to strong demand from new technology areas.
For the most part, large OEMs or key customers are supported first. In times of allocation and tight supply, distributors and component makers typically put customers that have historically done business with them at the head of the receiving line.
"We've relegated supply to our core strategic accounts, including distributors," said Willie King, director of product marketing for passives maker AVX Corp. (Myrtle Beach, S.C.). "Each one is getting a certain amount of tantalum capacitors based on their forecast demand and what we are able to supply to them."
It's a different scenario for new customers. "We recommend that they go through our distributors that may have a bit more inventory available," King said.
Because of severe price declines in the IPE arena in recent years, distributors are looking forward to the firmer or higher prices they expect the supply crunch to bring. Distributors report that pricing has increased about 8 to 10 percent for tantalum and ceramic capacitors over the past year.
There are also rumblings from customers about spot-market prices from brokers. "We're getting calls and complaints from various customers about outrageous prices," AVX's King said. He also added that neither AVX nor its distributors are supporting the broker channel. Major distributors like Arrow, Avnet, Pioneer Standard and Sager will not sell to brokers, although it is nearly impossible to keep supply from getting into the broker channel.
Distributors expect sales to remain strong for interconnect, passive and electromechanical components throughout 2000. Case in point: Avnet's IPE business grew by more than 20 percent during the second half of 1999 and is expected to remain on the same growth path this year. Passive component sales account for about 30 percent of its IPE business, the company said.
A tight market means more active management by purchasers for quantity buys, and a close watch on trends by distributors, said Mark Larson, president at Digi-Key Corp. (Thief River Falls, Minn.). Digi-Key's sales in the fourth quarter of 1999 were up 32 percent over the same quarter the previous year, he said, and sales in January rose 50 percent over the totals for January 1999.
The supply crunch has caused distributors to act with very aggressive ordering plans in an attempt to mitigate lead time problems. Product commitments out 30 days is a business model that may have worked a year ago, but it's not applicable to the current market conditions, Larson said.
Most distributors have already restructured their product business groups and have people who work daily on anticipating market trends and potential trouble spots in the supply chain. As a result, distributors like Avnet have been able to anticipate tight supply in the channel, and get a leg up on meeting demand volumes. "Although we have to place orders earlier and need to manage inventory on a tighter bandwidth, we are keeping on top of supply," McCartney said.
To better manage the process, Sager, for example, has segmented its purchasing organization: asset management to monitor suppliers, product planning to analyze industry trends, product mix to foresee changes in supply conditions, and sales development for supply chain management.
Communications is key to a steady supply. "We work extremely closely with our suppliers and try to obtain as much upside product as possible to support our customers' needs, and to ensure that the suppliers are meeting their commitments," said Arrow/Richey's Lamneck.
In addition to visiting key suppliers on a regular basis, distributors like Pioneer Standard submit specific part-number requests for strategic customer requirements to their supplier partners. That company has also set up an automatic-replenishment program for top-moving products with one of its suppliers, and claims to have commitments from its partners to receive a fair share of allocation across the board.
For sample or prototype volumes, design engineers and purchasing professionals can try catalog distributors. Catalog houses like Digi-Key typically have plenty of inventory in the pipeline.
"We've stayed with more traditional models of stocking and heavy inventory," Larson said. "We typically have adequate product to serve the engineering community. It's very rare that we run into extreme problems."
However, Digi-Key's in-stock percentages have dropped by 1 or 2 percent. "We have some situations where we are not able to satisfy the needs of customers, specifically for those coming in for spot orders," said Larson. "If they have schedules, there's no impact on orders."
The distribution channel is also taking on direct customers that component manufacturers can't currently support.
"Under special circumstances, suppliers are trying to take care of some direct accounts by moving them to us, which wouldn't happen under normal circumstances," Donovan said.
"Our business with distribution is quite tremendous right now," said John Denslinger, vice president at Murata Electronics North America Inc. (Smyrna, Ga.). "Our problem is that we can't deliver enough to our total network, so we've had to make some reservation or allocation to distribution. They are not receiving as much as they would like to."
"There are suppliers that don't even know who to service right now. We're seeing opportunities that we've never seen before, because component manufacturers need to focus on building components, not on order management," Donovan said.
Many switch makers agree that distribution is key to future growth, which may be the reason for more product in the pipeline. Going against the industry trend of cutting back the distribution roster, NKK Switches expanded its distribution channel by adding Mouser Electronics and Future Electronics last year. Also in 1999, C&K inked agreements with Kent Electronics Corp., Deltron Electronics plc in the European market and Future Electronics.
To alleviate some delivery problems in the frequency-control arena, oscillator manufacturers are also turning to distribution. Some are setting up VCXO and TCXO product lines as standard offerings in a multitude of frequency ranges in order to have product in the pipeline for prototyping and engineering samples. Lead times for VCXOs and TCXOs are in the 20-week range. In general; lead times for crystals and oscillators are moving out to 16 to 22 weeks.
One way to get around a supply crunch is to rewrite product specs to make use of components that are easy to get. OEMs are already finding alternatives to the scarce tantalum capacitors, turning to high-capacitance multilayer ceramic chip caps and aluminum electrolytic capacitors in some applications where supply is critical. In some cases, a technology shift is almost seamless; in other applications, it calls for redesign.
Pioneer Standard sees a lot of requests by the engineering community for alternative parts through suppliers such as Murata and Nichicon. The distributor is promoting the replacement of tantalum caps in its quarterly technical-solutions magazine for partners and customers.
"We're offering the engineering community an alternative using Murata's high-capacitance capacitors to replace some of the tantalum caps," York said. A helpful guide, "Alternates to Surface Mount Tantalum Electrolytic Capacitors," can be found at NIC Components Corp.'s Web site: www.niccomp.com.
The shortage problem is not as severe for ceramic caps as it is for tantalum caps because there is a greater number of competitors, said AVX's King. Plus, it's quicker to bring on more capacity for ceramic caps, he said.
Still, all partners in the supply chain need to watch the market closely as ceramic capacitor manufacturers continue to shift their production capacity from larger to smaller case sizes to keep up with demand in the cellular phone market. This could cause a potential shortfall in larger-case components, sources said.
Distributors suggest that engineers get their requirements for new designs to the distributors' sales teams as soon as possible. That way, distributors can help engineers select the most readily available device. And technical distributors can suggest viable component replacements if engineers communicate with them early in the design stage.
Engineers can also help, of course, by providing forecasts of expected demand. "That allows us the opportunity to sit down and review our forecast on a weekly basis with our suppliers to pass along what some of those opportunities are," said York of Pioneer Standard. "If an OEM has an unrealistic production time frame for a particular device, he can be informed early of the need to look at alternatives."
The good news is that constrained supply has not slowed new-product introductions in the pipeline. Moreover, a lot of research is being done in the areas of integration and high-capacitance products to address the supply issue, York said, since some industry watchers are concerned that another supply crunch could be waiting in the wings once the next hot product begins to gobble up components like there's no tomorrow.
Arrow Electronics Inc.
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Murata Electronics North America Inc.
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Pioneer Standard Electronics
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