How to Solve Electronics Procurement Issues in a Post-Pandemic World

The global semiconductor shortage is a case study for what happens when supply disruptions meet nearly unconstrained demand. The pandemic accelerated the digital transformation fueled by 5G expansion, cloud computing, and Industry 4.0. These trends, combined with the race to develop smarter electric vehicles (EVs), higher PC sales, enhanced healthcare, and smart manufacturing, increased demand even more for a $556 billion global market.

Given the increasing reliance of nearly every industry on intelligent technology, the electronics supply chain must adapt to avoid perpetual disruption and meet demand in the new-normal world. Two primary supply chain approaches, vertical integration and diversified supply, can adapt to meet challenges with raw material availability, strained subcomponent supply, and ballooning costs and lead times. As evidenced by the recent wild demand swings, the change should prioritize supply resiliency in addition to capability, speed, and cost minimization.

Vertical Integration

Tesla enjoyed the benefits of vertical integration when competitors’ suppliers couldn’t deliver. This strategy enabled deeper innovation, improved control over quality and production processes, and the ability to control lead times without the need for rapid secondary-supplier qualification.

This approach requires capital investment and is difficult to reverse if cash becomes scarce. A risk is excessive capital outlay balanced against shortfalls in production – there is one customer, so low orders have a compound effect. In addition, while this model increases control and the ability to customize, it also requires specialized expertise and training. That requirement increases sensitivity to turnover and onboarding time.

Still, vertical integration helps in times of supply disruption. Considering the final assembly's design best determines when to employ vertical integration. For specialized components or ones carrying IP, it is worth vertically integrating. This approach ensures you can deliver your unique features without relying on the market.

Finally, effective vertical integration still requires strong relationships, contracts with raw material suppliers, and effective onboarding and cross-training. These steps mitigate two of vertical integration’s biggest challenges. The earlier view of upcoming order quantity changes provides a competitive advantage.

Supplier-Diversified

A horizontal or supplier-diversified approach is practical when many components and market expertise already exist. While this approach reduces control and customization, it allows you to add expertise from industry leaders instead of investing to develop the capability in-house.

Defining primary and secondary suppliers, building availability, delivery timing, and periodic cost optimizations into contracts is essential. Each of these steps motivates suppliers to own the supply resiliency of their components.

Another best practice is to develop a supplier qualification process that uses round-robin testing. The objective is for the supplier to provide in-spec and validated parts, but several comparative rounds of testing at each location can dramatically improve quality. Suppliers can also impart expertise to your team, making it helpful to obtain standards, training guides, or tips on how to use the components.

Electronics supply will continue to be a challenge in the remainder of 2022. Depending on the component, vertical integration or supplier-diversified supply can alleviate procurement challenges. In addition to the solutions above, ensuring a tight connection between the Procurement and Supply Chain groups can catch supply disruptions early and help mitigate potential production delays.