For Tier One electronic manufacturing services (EMS) companies, one of the “advantages” of their size has traditionally been the opportunity to purchase materials directly from component makers — often at a substantially lower price than smaller competitors could get through a distributor or broker. But in the postrecession electronics supply chain, these megabillion-dollar EMS companies are discovering that what they gain in piece-part savings may not be enough to counter what they're missing in terms of supply chain support.
“Most proprietary semiconductor companies do not provide the support that a distributor like Avnet can,” says Gerry Fay, senior vice president, global and strategic accounts, Avnet Inc., Phoenix. “So despite their economics of scale, EMS companies are finding that through distribution, they are getting a total-cost-of-ownership model that is cheaper than what they have in place with their direct partners.”
Access to distributors’ supply chain prowess could be a true differentiator late this year as the EMS sector contends with a potential inventory surplus. According to a recent report from market research group iSuppli Corp., the rate of inventory increase outpaced the rate of revenue growth by 8.6 percentage points during the quarter, and inventories were up 20 percent or more at a number of leading EMS firms, including Flextronics, Jabil and Solectron. Any time a company’s inventory levels grow at a faster rate than its revenue, it’s a sign that trouble could be brewing, says iSuppli senior analyst Adam Pick, El Segundo, Calif.
Though the second-quarter inventory numbers are not cause for immediate alarm, they do warrant further investigation, Pick says. “We did notice some unique inventory increases in the EMS channel, and they are significant, but there’s certainly no reason to sound a code red just yet.” With third-quarter earnings results still pending, it’s too soon to determine whether the inventory situation is opportunistic or cautionary with regard to some form of bottleneck in demand.
The spike in inventory could also have some positive causes, Pick says. “All of the top players in the segment are growing, and everyone is talking about new program ramps, so it’s possible that what we’re seeing is an investment in inventory to capitalize on increasing demand in the second half of the year.”
If, however, end-market demand does not follow through in the second half of the year, the EMS sector could be facing some substantial inventory liabilities. “The problem with any inventory is simply having it,” says Avnet’s Greg Frazier, vice president, supply chain services. “The easiest way to combat any inventory problem is to never have the inventory until you are ready to build.” This is not always an option for companies that buy directly from component makers, however. “The terms and conditions of many component suppliers’ contracts stipulate that the customer must take ownership of inventory at specified intervals, regardless of where they may be in their production cycle.”
In contrast, distributors like Avnet are keenly aware of their customer’s need to minimize idle inventory and offer a plethora of services to help ensure that customers don’t ever have inventory until they need it. Among Avnet’s most widely deployed inventory management offerings are its vendor-managed inventory, in-plant stores, Bonded Inventory Planning Program (BIPP) and point-of-use replenishment system (POURS). With the aid of automated planning tools, Avnet’s supply chain analysts can employ the BIPP model to bond inventory in Avnet’s corporate distribution centers, monitor inventory levels and pipeline MRP requirements according to a manufacturer’s lead time.
Avnet’s point-of-use replenishment (POURS) program is a family of solutions that integrates data from multiple points-of-use sources to provide customers with a multisite view of their manufacturing facilities or distribution centers. Using POURS software, customers are able to replenish their components pipeline to ensure the continued flow of parts to the manufacturing floor, explains Frazier.
It is these kinds of services that make distribution an attractive option to the small and mid-tier EMS companies. “For EMS companies, one of the largest expenses is components,” Frazier says. “The ability to avoid unnecessary component inventory has a direct impact on their bottom line. We provide our customers with ways to fulfill their production requirements without having to have the raw materials inventory on their books.”
