Reduce Electronic Component Leadtime: 6 Proven Strategies

How to overcome the endless wait for long component lead time?

Component Lead Time for electronics is a major factor in Time to Market. We give our 6 strategies to sharply reduce the impact on manufacturing schedules.

Companies new to electronic manufacturing are often shocked to find that upon the order they have to wait 9 months before the factory can even start assembly.[/vc_column_text][/vc_column]

There are still certain strategies you can employ at that point, but these will increase the unit costs or lock-up your capital.

6 STRATEGIES TO REDUCE LEAD TIMES FOR ELECTRONIC COMPONENTS

1- STOCKPILE COMPONENTS

A possible way to prevent a production delay is to buy all components as soon as the design is ready, or perhaps even as soon as you have the BOM of a working prototype.

You can first buy all the 12-week components, and the “smarties”: resistors and transistors which often cost only $ 0.001/pcs.

Four weeks later the 8-week lead time components are bought and so on, this is what we call stockpiling in tranches.

A problem with this is that components generally need to be 100% or 50% paid in cash: having the entire value of your production BOM sleeping on the shelf for 18 weeks is a big hit on your working capital.

You probably also want to monitor the supply situation on your BOM once a week to see how the lead times develop.

A risk with this strategy is that the world’s entire supply of a certain component can suddenly completely disappear because some large project has bought everything with every distributor.

There are also other types of risks.

We’ve seen manufacturing partners -in an attempt to deal with long lead times- buying loads of parts after the PoC was done, but then, after more extensive testing, they found out the parts they chose were not suitable for the product.

Also, we’ve seen partners buying perfect components, but then, when they reached certification tests, they found out the specs were not good enough to pass.

Hundreds of thousands of dollars can be lost if you’re not careful, and you might end up with components that are useless for your project.

If you keep the parts longer than you cannot return for a refund, they might be hard to sell online. You could try and sell these components – at a discount- to brokers: distributors which specialize in the trade of second-hand components.

We asked Hein Van der Merwe, our TITOMA manufacturing manager: what is your recommendation when it comes to buying components early in the manufacturing process?

His answer was: “I would say you only buy the MP parts after the prototypes have been tested extensively AND you’ve completed your initial engineering scans for certifications”

2- WORK CLOSELY WITH YOUR DISTRIBUTORS

Go for Steady Small Orders

If possible, and if it makes sense for your company, make steady smaller monthly purchases that will keep you in top of mind of your supplier as a predictable recurring customer, so when times of tight inventory come, your supplier will be more likely to keep your small share available.

Share Your Sales Forecast

Talk to your supplier, build a relationship with them, and share your sales forecasts. If the numbers are interesting to them, then they’ll most likely help you make sure you get your orders on time.

If you notice that your sales forecasts are of no interest to them, then this might be a sign that they have some big customers that already have their full attention, this might be a signal for you to try looking for other distributors.

Offer More Money

Money does not always solve all problems but there’s nothing wrong with trying.

If you were just quoted 20 weeks for a certain component, try giving your supplier a monetary incentive, maybe they’ll bring it down to 17 weeks, yes this will increase your costs, but it’s been proven many times that those who make it to the market first always make more money.

Time to market is really important.

Consolidate Suppliers

Go and take a look at each one of your suppliers, see if there are components you’re currently getting from more than 1 supplier but that you could actually get from just one.

By consolidating your components orders from fewer suppliers you will increase your purchasing and negotiation power, which, in times of shortages, might give you a better position in the line when allocation processes start being implemented.

It’s worth mentioning that this is not always possible, especially for critical electronic components. For these, you’ll need a specialized supplier that can often give you a better (more importantly) faster and more technical feedback.

3- RESORT TO SECOND HAND COMPONENT DISTRIBUTORS AKA COCKROACHES

Brokers can be found in what’s known as the gray market.

They currently make up for 6 to 8% of the total electronic components market and makeup as much as $60 billion dollars’ worth.

Let’s make something very clear now, brokers are not manufacturers nor authorized distributors.

They “specialize” in getting obsolete or hard to get parts, so, during times of shortages and long lead times you can resort to them, and maybe they’ll be able to get you some of the components you need. This comes at a risk.

There’s a risk of sub-standard or counterfeit parts entering your operation.

Unless you make an extensive inspection before buying the components from them, it would be difficult for you to verify the authenticity and functionality of each item.

This doesn’t mean that every component they sell is bound to be defective or buggy either.

Not all brokers are the same, while some are guilty of selling fake or defective second-hand components, some sell genuine electronic parts. The secret to working with brokers is to do your research and find reliable ones.

The advantage of sourcing components from brokers is that they often deliver shorter lead times than authorized distributors or manufacturers, but expect no after-sales support from them as they only focus on getting and selling components.

If you decide to go down the broker road make sure to consult with people that have a lot of experience buying electronic components, they will be able to tell you if a deal is too good to be true.

You don’t want to end up like one of our ODM partners.

They ordered components, they received them, and it wasn’t until the components had solder paste on them that they realized the components were apparently ripped from printed circuit boards and sold as new.

Also, be aware of scams.

We ourselves have been victims of scams. Some time ago, we were in need of a hard to get component, before deciding to go for the second component option we had already planned for in case we couldn’t get our first option, we decided to reach out to some brokers.

We got in touch with I-components, they have a very professional looking website and had a very professional representative too, everything seemed normal. As we always do when we deal with brokers, we requested two things

• Company registration
• Online authenticity proof such as indexing in a government website

They were able to provide both and they were in the clear, or so we thought.

After we made the payment for the order, we never heard back from them again.

When you’re in this situation there’s not much you can do, we did report it to the police and the bank in Hong Kong- as that’s where their address and bank account were stated to be.

Eventually, we just moved on to using the backup component we already had in mind and were able to finish our project on time.

4-WORK DIRECTLY WITH YOUR FACTORY

If you generally order only, say 5,000 units per batch, it could work to ask your factory to piggyback your small orders on top of bigger ones.

But you have to consider that timelines for both orders will most likely be out of sync.

If a factory agrees to piggyback your small order on top of another client’s big one, this will mean that the delivery time for you will depend on the delivery time for the biggest order.

Because of their scales and established relations, factories may get better allocations in times of scarcity of raw materials for electronic components.

For the small generic resistors, a larger factory normally will keep a house stock, but every component which is unique to your design carries the risk that the component may never be used.

So, in most cases the factory will not finance your components, if you ask them to stockpile on your behalf you will be asked to pay for that investment.

5-OPTIMIZE YOUR DESIGN FOR LONG LEAD TIME COMPONENTS

This is a very important step to consider.

Do your research and find out which components currently have a long lead time, and the ones that are at risk too, and design your product around it.

Don’t forget to also involve your manufacturing partners early in the process to make sure the proposed design, with its components, is something that makes sense from a manufacturing perspective.

Check with manufacturing a manufacturing house/plant for possible substitutes and equivalence for electronic components.

You can build your first working prototype using parts from Digikey, but as soon as you have the working prototype, discuss with an assembly house/plan what are the possible electronic components substitutes and/or equivalence they can suggest and design around that.

6-CREATE FLEXIBILITY IN YOUR ELECTRONIC DESIGN

Design flexibility, that’s how we like to call it here at Titoma.

If there’s a risk a certain component may be out of stock, check weekly on pricing and lead times.

Delay your component choice to the last possible moment. Consider having a PCB design that allows for 2 or more alternatives for “dangerous” positions.

For key cost drivers, you can even make 2 different PCB layouts, and use one or the other based on pricing and availability of that key component.

This solution is your best bet at meeting your time to market and cost targets without being delayed by lead time issues.

LLT COMPONENTS, TIPS FROM OUR MANUFACTURING MANAGER

• Keep an eye out for EOL (end of life) parts or LT (lead time) warnings from your suppliers.
• The first time your supplier warns you about the longer-than-expected LT for a certain part, make sure to investigate alternatives ASAP, or stockpile IF your orders are secure and IF you have capital.
• If possible, design your PCBA with alternative footprints for risky parts, so you can use the plan-B parts if needed.
• Equivalence or substitutes can be great, but make sure the critical parts you buy have RoHS documentation, UL, VDE and other necessary documents to comply with your product certifications.
• Take note about the LT your supplier promises and what they actually deliver. On  99% of the time you will need to add a 1~2 week buffer.
• Keep in constant communication with your supplier (especially during the first few runs). Follow up weekly to make sure promised LTs are still on schedule.
• The earlier you find out of a possible extended LT, the better,

WHY DO LONG LEAD TIMES HAPPEN?

Lead times of electronic components can take up to 50% of your time to market if you don’t optimize for it.

In this second part of the article, we explore why long lead times happen.

In 2018, ceramic capacitor manufacturers such as AVX, Taiyo Yuden, KEMET, and TDK were all quoting long lead times and going into allocation procedures.

Murata Manufacturing, a leader in ceramic capacitors, was no exception.

At the time, Murata reported a shortage of supply for smaller 0201 and 0402 case sizes as well as larger sizes for low and high capacitance-voltage CV values.

HERE ARE SOME OF THE MOST COMMON REASONS FOR LONG LEAD TIMES.

1- SHARPLY INCREASED DEMAND DUE TO EV’S AND IOT

New electronic products categories are growing exponentially, requiring a lot of components, causing shortages

The automotive industry is a good example of how technological advances are fueling shortages of components.

Take Tesla for example or any other electric car for that matter. A Tesla car requires thousands of ceramic capacitors for advanced electronic features, something that traditional gasoline-fueled car doesn’t need.

The IoT market is also growing. Forbes predicts the combined markets for IoT will grow to about $520B in 2021, more than double the $235B spent in 2017.

The expansion of the electronics market has put factories in an internal constraint situation, their existing scale and machinery for the production process is not enough to meet demand.

Increasing factory capacity requires a lot of investment. Factories are not willing to expand operations to increase the output of components such as resistors and capacitors, which are in very high demand but offer a low margin of earnings for the company, then again, ROI comes into play.

Factories are also reluctant to expand capacity fearing the current increasing demand is nothing but a temporary upswing caused by companies stockpiling.

Fearing that the current high demand may taper off and they will be stuck with underutilized capacity They take a wait-and-see attitude.

As you can see, the expansion of the electronics market is creating a higher demand for electronic components. Such demand is too high for manufacturers to cover with their current capacities, this translates into long lead times for certain components.

On the good side, the number of  electronics design engineer jobs is on the rise; companies need exceptional engineers for  problem solving.

READ MORE: MEET YOUR TIME TO MARKET

2- ALLOCATION: SMALLER CUSTOMERS GET SERVED LAST

The thing is you’re not the only one who wants THAT component. Let’s assume the factory only has the capacity to produce 2 million a month of the thermistor mosfets you want, and right now there are 5 different customers wanting 1 million each.

Needless to say, some customers will have to wait a couple of months before the factory can make a batch for them. The factory, under what they call “allocation”, will supply their largest or best clients first.

Factories will always prioritize long term customers that buy large quantities every month. This means that a customer with a higher purchasing power and /or importance will most likely get his orders before you.

Allocation means that during times of shortages, the factory will decide which client gets his total or partial order first, they make the decision based on their best interests.

This doesn’t mean that the factory will forget about you and your purchase order, this just means that it will take them a couple more weeks to get the order out.

You might be thinking, why can’t the factory simply make more? It’s not that simple.

3- ROI FOR THE FACTORY

Let’s assume the factory has all the raw materials necessary and the equipment to produce 5 times more of the thermistor mosfets many clients want, why don’t they just go ahead and make more, they’re losing money!!! You might think.

The thing is that even if the factory has all the resources necessary to produce more of the thermistor mosfets you want; they are also working on many other types of components, and there are some that are more profitable than the one you need, so will they stop everything else they’re doing just to focus on one component? Most likely not.

They tend to focus on the new components with higher margins, rather than the mature ones where competition has eroded prices.

4- POLITICS: TRADE WAR INDUCES STOCKPILING

Electronic components and the raw materials necessary to build them are part of a large global supply chain, and any supply chain professional knows that things like sanctions, tariffs, and new trade agreements can cause major disruptions in product manufacturing.

In section 301 of the USA tariff act, components such as

• Capacitors
• Resistors

• PCB assembles
• LED’s
• Transistors
• Fuses
• Relays
• Connectors
• Thyristors

Are hit by the 25% import tax for Chinese goods imposed by the White House, this move affects over $50 billion worth of industrially significant technologies.

Many firms start to stockpile say a year’s supply of certain components they need to import from China in anticipation of the latest round of tariffs.

This sudden spike in demand causes shortages which leave those who can’t invest that kind of working capital in the cold.

Chinese components, especially customized ones, are essential to be competitive; building an electronic product without them is really out of the question.

Your best chance at surviving this trade war – President Trump is threatening with increasing tariffs to 30% New York Times– is talking to experts in the China manufacturing field; people that know the industry very well, and know-how to design for manufacturability taking into consideration all components which are currently under long lead time status.

Learn more about DFM in our DFM Hub

The Chinese economy is based on export-oriented growth, this means Chinese manufacturers import a lot of raw materials from around the world, turn them into finished goods and export them to countries like the U.S. and Europe.

All of this exporting and importing of different electronic components over the past years has created a big international supply chain.

If you’re in the USA and you’re asking your local distributor, for certain components made in China, it might take longer than usual for them to get the product to you, as everyone in the supply chain is dealing with the new tariffs- behind every electronic component, there are up to 5 tiers of suppliers.

And of course, the cost may well be higher.

• Who pays what and for how long?
• Will the electronic brand absorb the cost of tariffs, or pass it along to consumers by increasing the cost of their  goods?
• Does the importer or contract manufacturer absorb any of the costs?
• Are there more tariffs coming and if so, how do we prepare for them?

All of these questions create a lot of uncertainty, which is always bad for business as it makes decision making more time-consuming.

From a company management perspective, the uncertainty around the trade war and therefore tariffs — cost, products covered, duration — makes annual budgeting and planning of cost structures and operations difficult.

All this political trade war does is slow down the supply chain for electronic components as different management units across the supply chain are taking the time to sort out the new implications that come along with tariffs, and doing their best to protect their bottom lines.

5- PRICE FLUCTUATION OF RAW MATERIALS

Raw materials are the most expensive variable costs linked to the production of passive electronic components.

Any fluctuation in price or availability for these key feedstocks can have a negative impact on profit margins for the component manufacturing plants, making them slow down the production for certain components.

These 3 raw materials are currently -2019- causing much concern.

• Ruthenium: The ruthenium price has increased by 275% since 2017 and has not come back down as of yet. The high cost is having a direct influence on the price of resistors and their costs to produce.
• Palladium: The price of palladium has been skyrocketing. Palladium is consumed in MLCC electrodes for specialty electronics applications in high voltage, high frequency, and high-temperature MLCC; this is where the shortage of parts is most prevalent. The rising palladium price is due to financial speculation, coupled with increases in real demand from the autocatalyst industry.
• Tantalum: In the past, tantalum has been a difficult material due to its “conflict mineral” status established by the United Nations. Tantalum is a key dielectric material consumed in capacitors for decades. In 2000, Australia produced around 45% of the world’s tantalum concentrates, but by 2014 this dropped to just 4%. The substantial decrease was a result of high extraction costs, which meant that mining tantalum was no longer viable in Australia. Ming has moved to the DRC and Rwanda.

The electronic component market, which needs these metals to manufacture electronic components

LONG LEADTIMES FREQUENTLY ASKED QUESTIONS