Electronics contract manufacturers risk supply chain bottleneck

Component shortages have led to a traffic pileup in the global electronics supply chain, according to a report by iSuppli.

The analyst outfit has said this has led to major contract manufacturers facing a challenging supply imbalance, which has been characterised by “tight inventories of parts and finished products and a glut of raw materials.”  

In its research, iSuppli looked at the inventory of five of the larger Electronic Manufacturing Service (EMS) providers. It found that components and raw materials accounted for nearly 70 percent of total inventories during the first quarter of 2010. It said that in comparison, work-in-process goods totalled about 17 percent of inventories, while finished goods made up less than 15 percent.

Thomas Dinges, iSuppli EMS and ODM analyst said that finished goods were at their lowest level since the fourth quarter of 2008. He warned that the imbalance was “likely to persist.”

“iSuppli believes that the current trend—in which electronics inventories are being weighed down by an overwhelmingly large percentage of raw materials—will continue for some time to come, given that more product in kits are waiting to be finished,” he said.

He added that judging from various earnings calls as well as numerous conversations taking place in the industry, semiconductor companies are citing extended lead times and parts shortages as a major problem.

A look at many component samples showed lead times had worsened for a wide range of semiconductor discrete devices, with lead times running as much as 100 percent longer than for the same period last year.

The shortest lead times – at 10 weeks as of July – are for connectors, up from 5 weeks in July 2009. The longest lead times are for rectifiers and small signal discretes, now running at 20 weeks – a full five months compared to 10 weeks last year at this time.

It said that supply chain industry contacts, which it has spoken to do not believe the situation is likely to improve until later in the year, even if demand softens in the short term.

Dinges added that the difficulties arise from a “combination of seasonality factors and the slow pace in bringing about increased production capacity.

“Given that many suppliers were shuttered during the last years because of financial distress, the shortages have resulted in supply bottlenecks in industries.

“Such shortages—in both parts and raw materials—will only add to the strain of EMS and ODM providers, even if they were to train their efforts at simply maintaining current levels of inventory velocity,” he added.