One important question that arises from the global chip shortage is whether the crisis will lead to huge overstock situations in the next few months.
The growing semiconductor scarcity has had a profound impact on many sectors, with the automotive industry being one of the worst-hit. Industry forecasts suggest that the automotive OEMs will lose $110 billion in revenue in 2021 due to the chip crisis.
But component shortages have escalated well beyond semiconductors and extend into far and wide-reaching issues with the electronics supply chain. The concern is that the same forces that snarled up supply for computer chips could simultaneously create excess inventory problems for electronic component manufacturers. Few companies realize the magnitude of the challenges that are about to hit them.
The bullwhip effect. That’s what happened to the supply chain for semiconductors in 2020. Chipmakers came under the pressure of unprecedented demand for consumer electronics, largely exacerbated by the Covid-19 pandemic and the sudden demand for cars that depend on microchips. But foundries are currently unable to produce chips fast enough to cope with the surge in demand. This has led to global shortages that have now trickled down to most industries with wait times for new chip orders stretching to mid-2022.
Simultaneously, the risk of overstocks is increasing due to limited visibility and slow supply chains, especially in the electronic components sector. Inevitably when the demand falls, it will generate considerable stocks that will take OEMs several months or even several years to liquidate.
Excess inventory presents a significant issue for manufacturers. Beyond the balance sheet and the impact of having working capital tied up in excess stock, there are significant other challenges and costs associated with managing surplus stock; from warehousing, insuring, and managing storage damages.
OEMs can’t avoid the looming overstock crisis. But you can ensure that the business is less affected by employing various strategies to help manage surplus or obsolete inventory.
The obvious approach among OEMs and EMS is to hold excess electronic components for months or even years in the hope that there will be another surge in demand. But such occasions are few and far between due to the fast-evolving nature of the electronics industry. So you end up accumulating a huge surplus of electronic components whose resale value and quality may have depreciated, leading to tremendous losses. The amount of components discarded each year due to difficulties in selling excess inventory is estimated at $5 billion.
Offloading excess inventory as scrap or waste also poses a huge threat to the environment. Statistics from the European Environment Agency (EEA) show that the amount of electronic component waste (e-waste) in Europe alone is over 10 million tonnes per year. Of that only 40% is formally collected and recycled. For electronic components manufacturers, the increased focus on reducing the environmental impact of your operations means reviewing how you deal with excess electronics stock.
Independent distributors or brokers will provide a ready market for excess inventory but brokerage comes at a cost. First, brokers purchase unused inventories at a very low price, so you likely won’t see any profits with this method. Secondly, OEMs have no visibility into the broker’s supply chain which increases the risk of your components being counterfeited and sold in the secondary market. Given that these are legitimate components manufactured and packed at the legitimate facility, the actions of brokers can pose a special risk to your brand.
The components grey market is built on a foundation of no transparency, and is estimated to be worth $10 billion. No traceability exists in the secondary market where brokers and independent suppliers are only able to make their profits by exploiting the information asymmetries between buyers and sellers. As such, it is impossible to see where your components are going (some end up in scrap yards). Creating traceability to ensure that every component is accounted for or certified as destroyed is simply not feasible in the grey market.
Electronics component manufacturers should also consider responsible and ethical disposal practices such as reintegrating excess or obsolete components into the manufacturing process. The ISO14001: 2015 is probably the most widely regarded standard for recycling electronics components. Some manufacturers even require their suppliers to be ISO 14001 certified.
It provides a framework for the creation of an environmental management system (EMS) which is a set of policies, practices, and action points that helps companies determine how they interact with, and impact, the environment.
The standard can help OEMs and EMSs better manage waste from unused inventory and protect the environment. For instance, OEMs could ensure greater collaboration with components suppliers and consumers to create a 'circular economy' for electronics where components can be resold, recycled, or refurbished instead of extracting new materials. This could also involve making modular designs to reduce fast obsolescence of components (or green manufacturing).
Alternatively, online marketplaces and auction websites provide great opportunities to help you move surplus stock, slow-moving inventory as well as discontinued product ranges. Unfortunately, this requires staff time and can be a slow and tedious process. Plus, not everything will sell.
Launching a vertical-specific marketplace is also an option for components manufacturers to sell overstocks and open up new revenue streams. However, setting up these marketplaces can be tough given their complexity. It would also require substantial investment upfront in terms of technology, customer activation and marketing, while industry knowledge will help simplify the buyer journey and ensure customer satisfaction and the platform’s longevity.
AIRENC is a peer-to-peer transaction platform that allows OEMs and EMSs to sell excess electronic components at competitive prices by leveraging the power of the supply chain community. We offer a unique platform for OEMs and EMSs with surplus electronic components to sell directly to buyers and significantly reduce the costs associated with excess inventory.
Our company vision is to become the global sustainable community-oriented transaction platform for electronic components, solving the environmental and economic challenges presented by the overstocks and electronics waste. The AIRENC platform facilitates the circular economy and unlocks business value by connecting buyers and sellers to facilitate the discovery and sale of the best quality excess stock. For OEMs, that means you can drive sustainable manufacturing through a circular economy that promotes waste reduction and focuses on optimization of the value chain.
For more information on how we can help your sell overstock, contact us right now.
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