A chance to give forecasting a little help

The supply chain has absorbed significant disruptions over the past few years, primarily due to a global semiconductor and component shortage. And while the pandemic, natural disasters and freight issues, to name a few, have captured headlines, they cannot be assigned all the blame.

One of the most glaring issues that the electronic supply chain needs to reconcile is forecasting demand horizontally and vertically. Mixed signals in the semiconductor and component market create confusion and a lack of transparency concerning the demand for products, and wreak havoc for organizations that rely on these products. Inaccurate demand signals and data reverberate throughout the entire supply chain ecosystem and make it difficult for companies to forecast growth and predict what type of associated support investments they need to make.

A multi-faceted problem

Current supply chains were built around low costs and efficiencies, with OEMs operating with significant flexibility by all parties in the ecosystem. Components and semiconductor manufacturers offer competitive pricing and aggressive lead times and extend considerable flexibility to the OEMs. This system works well in stable, near-ideal scenarios. Unfortunately, we have not had near-ideal scenarios over the past few years.

Many companies that consume electronics have limited visibility on their end-market needs. As a result, most industries have made it possible to forecast 12 months at the component level. Meanwhile, semiconductor manufacturers and partners need to invest in a much longer 3- to 4-year cycle because of fixed costs and minor capacity adjustments. Semiconductor factories need to secure high utilization of their capacity because stop-and-go isn’t an option, especially in front-end activities. While much of the discussion today centers on semiconductor shortages, the effort to enhance forecasting should cover all types of components.

A scarcity mindset incites surplus ordering among OEMs as businesses acquire safety stock in a business version of hoarding toilet paper. For over a year, industry reports touting component and semiconductor shortages have inundated supply chain professionals. CEOs and boards of directors were also pressuring procurement and supply chain professionals to ensure availability by over-ordering to protect their organizations from shortages.

Here’s a hypothetical scenario that demonstrates the consequences of inaccurate demand forecasts.

Let’s say that an analyst firm for the major industries and markets that drive economies worldwide says demand for a specific industry will grow 20% over the next year. Five industry leaders within that sector see this report and alter their forecasts to accommodate 40% growth with the expectation that they will gain market share and increase sales. They all use similar technology, and those increased growth targets are sent to their manufacturing partners, who then send the targets to their distributors and suppliers.

This market movement alone would significantly increase the demand for a similar set of semiconductors and components that would not be rationalized in the current supply chain environment. Multiply this event by dozens of markets and hundreds of OEMs, and it’s possible to see how these false demand signals could double or even triple component and semiconductor orders beyond what is needed.

A single source of the truth

While there are some examples of bad actors in the market, the cause of many of the issues plaguing the global supply chain is a flawed system. There is no incentive for companies to collaborate or be transparent within the global supply chain. To avoid future market disruptions, supply chain professionals must work together towards a solution that improves the overall system without diminishing their organization’s competitiveness.

One possible solution Flex is exploring with some leading OEMs, suppliers and distributors is to establish an independent third-party (ITP) organization that can receive and analyze data from various stakeholders and make recommendations about future demand, down to the OEM part number level. Any recommendations by the ITP would be based on the industry growth targets provided by reputable market intelligence companies.

OEMs, EMS, distributors, and suppliers are all interested in receiving accurate demand information, based on which they can plan, and success requires the leading players in the ecosystem to participate. To be valuable, this approach would require a high level of representation in critical segments, perhaps a higher percentage of the market makers and a lower percentage of the industry followers.

During early conversations with my team about this concept, a critical question arose, “Does true demand information diminish competitive advantage?” The answer is no. Each participant would only gain access to a view of their data and global trends the ITP deemed appropriate to share among competitors. Collaboration around actual market demand among global supply chain organizations can be incentivized. While the ITP would analyze demand focusing on specific markets, the information can be consolidated and benefit participants.

Working towards true market demand isn’t a silver bullet for all the industry’s woes, but it’s an important step. As professionals navigating unprecedented supply chain and logistics constraints today, we are responsible for developing new protocols to increase collaboration and visibility to prevent these from ever reoccurring. Solving major supply chain problems requires an upfront investment in time and resources but has long-lasting benefits.

About the author: Lynn Torrel is Chief Procurement and Supply Chain Officer at Flex. Ms. Torrel is an innovative and solutions-oriented leader with proven experience in managing complex customer and supplier relationships.

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