Libya

Analyst Penn says electronics should double inventories

Industry reacted well to March's upheaval but inherent supply chain weaknesses have been exposed.

Electronics companies need to stock much deeper inventories after last month’s earthquake in Japan exposed inherent weaknesses in the supply chain, according to the latest monthly semiconductor report from UK analyst Future Horizons.

“Just as a 30:1 loan to equity ration sowed the seeds of self-destruction for Lehman Brothers, whereby just a 3-4 per cent fall in asset values triggered the company’s downfall, so the ridiculously low inventory levels in today’s ever-tightening, just-in-time, lean supply chain, equally over-leveraged manufacturing environment will trigger a supply shortage that will take several years to unravel,” writes CEO Malcolm Penn

“The fact is, the IC production cycle, from order placement to final end-product delivery to the customer is typically six months, and that is when everything works like a dream. That would mandate a global inventory level of at least three months overall.”

However, Penn acknowledges that, though necessary, proposing such a change will alarm many companies. “Today’s industry, and especially the financial community, would fret if it started to come close to half that level.”

Future Horizons notes that most companies reacted “with remarkable calm” to March’s “one-two-three knocks” of rising oil prices due to North African unrest, the Japanese disaster and military action in Libya.

“Last year, any of these events would probably have been enough to deal the industry a knockout blow,” Penn notes.

However, his company now foresees extended uncertainty in the global supply chain as companies seek alternative supplies for parts restricted during Japan’s recovery and face tightening availability in a market where many fabs were already at 90 per cent capacity before March 11.

In the ‘immediate’ future, Future Horizons believes there is sufficient inventory in the supply chain although there will be some minor disruption.

In the ‘near-term’ (one-two months), there will be shortages of parts where work was under way when the earthquake struck.

In the ‘medium-term’ (three-six months), shortages will occur because some Japanese factories will still be operating at reduced capacity – if, at all – and due to problems anticipated in sourcing raw materials (e.g., resins for printed circuit boards, 300mm wafers).

Finally, in the ‘long-term’ (six-24 months), constraints will continue due to ongoing repairs and, in some cases, the need to build entirely new manufacturing capacity.

In addition to difficulties with inventories, Penn also notes that swapping parts in response to shortages is not always that easy.

“There are issues of qualification,” he observes. “For consumer products, changing suppliers at a whim might be de rigour, but for other applications this inevitably involves a qualification and testing process, often requiring 1000 (i.e., three months) life tests.”

At this time, Future Horizons is holding to its 2011 forecast of 9 per cent growth to $325bn in sales. It had already argued that pre-Japan tightness in the supply chain would combine with recovery-based demand. "The industry's biggest problems in 2011 were always going to be supply- not demand-driven," Penn said.

He also reiterates that the true situation and impact of the Japanese disaster cannot yet be fully assessed. Information continues to emerge piecemeal and factors such as the stability of the electricity supply remain fluid.

Recent articles

Info Message

Our sites use cookies to support some functionality, and to collect anonymous user data.

Learn more about IET cookies and how to control them

Close