This article is the first installment of the 2021 Automation supply chain update.
View the rest of the series here.
Beyond all its other impacts, one of COVID-19's most damaging effects on manufacturing and process control supply chains is that it's imposing huge lead times on raw materials, intermediate, parts and finished products, most notably microprocessors for automotive and consumer electronics.
"Over the past two or three months, the overall supply chain has become totally bizarre. For instance, the semiconductor market was OK during the peak of the pandemic in 2020, but now some components are being quoted at 99-week lead times," says Vikram Kumar, president and CEO of AVG Group. "This hasn't been a problem for our EZAutomation and Uticor products because we maintain a large raw material inventory by buying two to three years of components in advance. However, we're hoping these long lead times don't continue for more than another three to six months, even though it doesn't seem like the shortage has reached its peak yet. Fortunately, for EZAutomation, we're getting some new customers since some of our competitors are quoting 16-week lead times and customers can’t wait that long. Because we have excess raw components and manufacture in the U.S., we're able to deliver right away."
Kumar reports that China and its semiconductor manufacturers are hoarding chips for themselves, which is why lead times from U.S. suppliers, such as Arrow, Avnet and Mouser, are quoting 52 weeks to more than 90 weeks. He adds another major reason for the U.S. semiconductor shortage is that the U.S. also recently imposed sanctions on Chinese manufacturers. such as SMIC and Huawei, regulating sales of semiconductors. Fortunately, Kumar also reports that U.S. and European officials have implored Taiwan officials for help in resolving these shortages, and are also pushing for more onshore semiconductor fabrication.
“Some large automotive plants that never previously shut down recently even had to stop production due to shortages of chips. That's why it's so difficult to get cars these days,” says Kumar. “However, if we source directly from Chinese suppliers, we can get chips faster. But, if they find out it’s for the U.S., then a 75-cent microprocessor gets quoted at $11. Again, our biggest advantage is that we buy in mass bulk and overstock components. As a result, our production will be OK for the next year or so, even as our sales jump high. However, if this shortage continues for longer than another six months and sales demand continues to increase, it may bite everyone.”
Stronger ties and blanket orders
Beyond stockpiling raw materials and parts to strengthen its supply chain, Kumar adds that AVG maintains a global presence and networks, so it's better able to source components, ship them to international AVG divisions, and transfer them internally. “However, even though we buy in bulk and are in a good stock situation currently, we advise our customers to place blanket orders, so we can consign final goods or parts they need for current machine demand to be safe. This lets us aggregate finished goods or inventory for them," explains Kumar. "If they can't do a blanket order, they can maybe commit to a consignment, which lets us hold extra pieces for them. For example, we routinely stock two months of products for large distributors like Digi-Key, so they can easily order more of a particular product if they see it's being used and moving more quickly."
Of course, the key to buying raw materials and parts in larger volumes and further in the future is coordination, organization, planning and tracking. "We subscribe to the five Ps, which are 'prior preparation prevents poor performance,' " says Kumar. "We're also starting to see demand from traditional semiconductor distributors such as Digi-Key as they're expanding their product portfolios to include industrial automation parts. They're well-known for providing smaller components and semiconductors and have a definite presence among engineers, but they haven't usually handled larger products like PLCs that need expert technical support, and that's where we can team up with them."
