Allocation anxiety
Smaller OEMs especially hard hit by shortages
By Laurie Sullivan
Electronic Buyers' News
(08/18/00, 05:41:26 PM EST)
It's tough to make headway with a stiff wind in your face. The same is true for OEMs struggling to keep production lines operating in a period of extreme component shortages.
Crystal oscillators, tantalum capacitors, and other parts are so hard to come by that some smaller systems makers have even taken to calling on customers' purchasing departments in the hope of finding key components to complete their projects.
These should be the best of times for OEMs like Glenayre Technologies Inc., a Charlotte, N.C., manufacturer of paging systems, paging devices, and service platforms. Global demand for electronics is soaring, bringing the promise of robust revenue and healthy profits. Instead, the electronics industry is facing one of the worst instances of across-the-board materials allocation in its history, according to Ken Hedgepeph, senior procurement specialist at Glenayre.
“We're not always able to get capacitors, d-sub connectors, DRAM, and most [other] memory through the usual distribution channels,” Hedgepeph said. “We do material-resource planning for the distributors to let them know what's coming down the pike, and they still don't have the products we need. It may not be true, but it seems the manufacturers are selling to their top 10 customers and nobody else.”
Unable to find components through regular channels, Hedgepeph goes to brokers for the majority of the products Glenayre needs to keep its production lines up. Many OEMs have no choice but to source their parts through the aftermarket, eating into their profit margins by paying multiples of typical contract prices. Glenayre knows that better than most, Hedgepeph said, because the company absorbs the hit instead of passing its cost on to the customer.
But the pain that comes with paying $72 for a $6 capacitor is better than being forced to shut down production, which Hedgepeph said could cost the company hundreds of thousands of dollars.
“Lead times also are pushed way out. We quote a product to our customer, but they don't understand a 90-day lead time,” he said. In response, Glenayre created a standard quote package for customers and is reporting a 90% success rate in keeping lead times to between four and six weeks.
Living with the 'A' word
Allocation has become a fact of life for OEMs. Take once-abundant DRAM, until recently the poster child for the semiconductor industry's capacity glut. Companies have done little to prepare for a DRAM shortage that is expected to worsen this quarter and linger to some degree through the second quarter of 2002, according to Dataquest Inc., San Jose.
Indications of inventory stockpiling are beginning to surface, but it is unclear whether this involves buyers hedging against price increases or manufacturers reluctant to release product into the market when it could fetch a 50% premium in the next six months, Dataquest said.
DRAM isn't the only part on allocation. In a conference call earlier this month, Steve Church, president of Avnet Inc.'s Electronic Marketing Division in the Americas, recited a laundry list of products that included SRAM, flash, SAW filters, and analog components (see table). Other parts, such as discrete logic, that used to take days to procure now require up to 36 weeks.
“One of our main activities today is chasing parts for our customers,” Church said, “and we haven't seen lead times soften or price deterioration in the marketplace.” Church hasn't noticed many new products going on allocation, but then few are coming off either.
“Many of the semiconductor and passive-component manufacturers will add capacity, and the beginning of this additional capacity should be coming on line in early 2001,” said Robert Damron, an analyst at Tucker Anthony Cleary Gull Inc., Milwaukee. “More supply is the only thing that could alleviate this situation. Or if the economy would go into recession and demand slowed dramatically, which we don't expect. The only realistic remedy is additional capacity.”
Market drivers gain strength, and even in the midst of shortages the electronics industry continues to develop applications that require more parts. A 486 motherboard required 124 passive components, compared with the Pentium III's 440 passives and the 600 required by the 1-GHz AMD Athlon.
“Apply the same principle to the automotive industry and the cell-phone industry and it gives you an idea why we see this sort of demand,” said Glyndwr Smith, senior vice president at Vishay Intertechnology Inc., Malvern, Pa.
Vishay this year will not meet demand for commodity surface-mounted components, either passive or active. To ramp up production, Smith said, Vishay will spend $250 million in capital investments in 2000, up from $120 million in 1999.
The supplier pushes 50% of its product through distribution and tries to provide its strategic accounts with all their needs. But in the last several months, customers everywhere have begun turning to brokers to match them with much needed components.
Betting on brokers
“To someone who only buys through an authorized distributor, a broker is almost like a bad word, but in the same sense he's like a savior,” said one OEM industry executive.
“We realize they're not legally franchised to sell parts from manufacturers like Motorola and TI. But at least these guys had the insight, fortitude, and cash to go out there and buy a lot of parts and put them on the shelf. These guys advertise on the Internet and charge two to three times the cost because they know everyone's so desperate.”
OEMs like Aquadyne Corp. are intimately familiar with the vagaries of the aftermarket. With annual net revenue of less than $10 million, the manufacturer of embedded control systems for water-quality management isn't big enough to buy direct from suppliers, nor can it find products through the larger distributors.
“Some materials are so hard to get that the distributors are basically becoming channels for semiconductor manufacturers,” said Dean Daniel, president and chief executive of Aquadyne in San Diego.
“The classic model of being able to call up a distributor and know they have the component in stock is becoming a thing of the past,” he said.
Smaller distributors can help
The capacity crunch may be a hiccup for chip makers, but Aquadyne is plotting its survival strategy. The manufacturer is doing well, Daniel said, but is increasingly turning toward smaller distributors such as Las Vegas-based Competitive Components Inc. to locate hard-to-find parts.
“The best and the most successful distributor out there today for customers like me is Competitive Components,” Daniel said. “Another is Digi-Key, which really isn't a distributor; they're more of a catalog house. Because of materials allocation, having access to inventory just doesn't happen in a lot of cases, and unless you're placing long lead-time orders, the parts just aren't available.”
Ed Shifino, account executive at L-Mar Associates, Rochester, N.Y., admits that many of the suppliers on the manufacturers' rep's line card are either on allocation or have very tight delivery with long lead times. Linear analog components from Analog Devices Inc., Norwood, Mass.; DRAM and SRAM made by Integrated Silicon Solution Inc. (ISSI), Santa Clara, Calif.; and tantalum and ceramic capacitors from Kemet Electronics Corp., Greenville, S.C., are just a few of the most sought-after components, according to Shifino.
“We can only rely on what our suppliers tell us when we try to quote price and delivery,” he said. “There doesn't seem to be any letup at least through the end of the year and into the early part of next year. We aren't turning customers away directly, but they may in fact draw their own conclusion and look at other avenues after we quote them lead times.”
L-Mar's net revenue from commission-based sales of combined lines exceeded $25 million last year, even with quoted lead times of between 26 and 52 weeks.
George Asmus, vice president of operations at the Broadband Access Group, a division of the WireLine Group at ADC Inc., Irvine, Calif., is one OEM executive who doesn't think company size is necessarily an issue when it comes to allocation.
ADC's WireLine Division, formerly PairGain Technologies Inc., bought $100 million through distribution in 1999. With the help of Arrow Electronics Inc., Melville, N.Y.; TTI Inc., Forth Worth, Texas; and Insight Electronics LLC, San Diego, Asmus' purchasing group can usually find anything ADC's new division needs.
“Lead times have increased substantially, but in most cases distribution has done a reasonable job helping ADC procure materials,” Asmus said. “But there have been isolated cases where we've had to use our distributors to procure material through a broker.”
Never mind the brokers-some distributors are using the current environment to secure longer-term contracts, better long-term pricing, and payment for extra services provided to their customers, according to Tucker Anthony's Damron.
“Just don't forget your small guys,” Glenayre's Hedgepeph urged. “Granted, Glenayre is dealing with the Arrows, Avnets, and Futures of the world, which are these multibillion-dollar companies. I spend about $3 million a year with one or the other, but it's still hard for me to push buttons and get a whole lot of response.”
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