ESCALATING LEAD TIMES FOR “PASSIVES” HAVE A CHOKEHOLD ON COMPONENT MANUFACTURERS. HOW CAN YOU AVOID LENGTHY LEAD TIMES FOR YOUR HARDWARE PRODUCTS?
Component shortages — it feels like deja vu all over again. Not long ago we were wringing our hands over the lack of NAND flash memory and before that, the hard drive crisis. And right before we could pop the cork and celebrate the memory supply stabilizing, we learn about a new component squeeze, those tiny little passive electrical components found on motherboards: capacitors, resistors, transistors, and diodes.
Actually, pundits started predicting the passives shortage in 2016 so it’s not a complete surprise, but it’s radically different from the hard drive crisis. That’s because when the tsunami took out a couple of drive factories that led to the decimation of that supply, we knew in a matter of time these global manufacturers would ramp up production elsewhere until supply stabilized and factories were restored. In the case of these passives, the lack of components is not to blame.
WHAT’S RESPONSIBLE FOR THIS SHORTAGE?
The problem is not access to the raw materials but instead, the manufacturing capacity limits in the face of surging demand, as this Industry Week article describes.
In fact, several articles point to the skyrocketing demand and consumption from automotive electronics, artificial intelligence (AI), smartphones, industrials, and cryptocurrency mining causing the tight supply. New technologies are requiring double, triple or quadruple the number of these components than in the past. As a result, manufacturers have shifted production to specialized multilayer ceramic capacitors (MLCC) products that are designed to fit the needs of these applications which reduces capacity for general-purpose MLCC products.
The slow down in general-purpose MLCC production has depleted supply including any safety stock the board manufacturers had the foresight to procure, and demand has remained consistent. This is having a snowball effect on the server industry – lower supplies of general-purpose MLCCs means a decrease in motherboard supply, and servers can’t operate without them, which is causing significant delays for hardware manufacturers to fill orders. Consequently, delivery dates are being pushed out far beyond the standard lead times we’re accustomed to. For example, some of the popular server SKUs used by our customers that typically arrived within a week are delayed as much as 14 weeks, and for some models, even more.
GUIDANCE TO REDUCE THE IMPACT ON YOUR PRODUCTS
As a hardware-agnostic OEM integrator, MBX has strong channel partnerships with hardware manufacturers, distributors, and resellers. These long-standing relationships have a positive impact on our supply chain team’s ability to source products where and when they are available, but it’s not a golden ticket.
Anytime we foresee supply constraints on a particular server component, there are two strategies we recommend to our customers to decrease the impact and expedite the allocation process:
Proactive Purchasing: Proactive purchasing involves taking a longer view of your sales forecast while keeping in mind market conditions. Armed with this data, your MBX account team works with our supply chain group to lock down materials in the channel by placing purchase orders proactively, effectively maintaining standard manufacturing lead times.
Advance Procurement Agreement (APA): Another way to protect yourself from supply shortage risks is to create an APA with your MBX account team. An APA is designed to keep material on hand to stay ahead of demand, but it’s not invoiced until it’s consumed. By setting up an open order for specific components or materials, when inventory hits a predetermined reorder level it allows MBX to systematically replenish it to the appropriate level.
THE BOTTOM LINE
Hardware vendors don’t anticipate the passive shortage to improve in the short term because many of the high-consumption market segments we mentioned are still growing at a clip. This is confirmed by what we’re reading in the news media: the current shortage is projected to last to 2020 and beyond.
The good news, if there is any, is that despite the price increases caused by high demand, the cost of MLCCs is generally only 1-4% of the system price, so any increases to date will have a minor effect on the overall cost. However, the longer the shortage continues, given the principles of supply and demand, there is a risk of more noticeable cost increases.
Are you prepared to weather the storm from the passives shortage? Talk to MBX about setting up an inventory program that minimizes the impact on your products and enables you to turnaround customer orders without delays.