Viewing the Semiconductor Supply Chain Through the Distributor’s Eyes

This article appeared in Electronic Design and has been published here with permission.

What you’ll learn:

• How different industries are being affected by the semiconductor supply/demand imbalance and what businesses/consumers can expect in the coming months.
• Insights into the semiconductor supply chain and the difference between brokers and distributors.
• How the supply/demand imbalance has increased desperation for chips and thus companies are willing to take bigger risks and opening themselves up to counterfeit chips.
• How Smith is helping customers navigate the supply chain and simultaneously fighting counterfeit chips.

The pandemic dramatically increased the demand for semiconductors in a way that companies were not adequately prepared to handle. In this interview, we discuss how the supply/demand imbalance has impacted companies and best practices to deal with the cyclical nature of the semiconductor supply chain—including avoiding the risk of counterfeit chips.

I spoke with Todd Burke, President of Smith, about how the supply chain is changing.

How are different industries being affected by the supply/demand imbalance? What can businesses/consumers in those industries expect in the coming months?

The semiconductor supply and demand imbalance has had a ripple effect across industries, from automotive to gaming, PCs, mobile phones, and beyond. In the auto industry, specifically, the shortage has severely impacted manufacturing capacity. While balance will eventually be restored, manufacturers are expecting supply to be tight into 2022 or, by some estimates, 2023.

Take the electric-vehicle sector, for example. Manufacturers are doing everything they can to combat the chip shortage and keep plants running. Many manufacturers are expanding their vendor bases, getting more directly involved in sourcing, and assisting their subcontractors in the sourcing process. Some are redesigning boards using alternative chips and some, when feasible, are producing cars without certain features that key semiconductors would otherwise support.

The need is there and boils down to simple supply-and-demand economics, and the end customer will see the effects of the shortage in price and availability of electric vehicles. It takes a long time to build new factories and, depending on how the pandemic continues to impact supply chains, the road could be a bumpy one for the foreseeable future.

One thing is for certain—with the continued growth of the electric-vehicle market and technology in general, there will be an ever-growing need for more semiconductors, not fewer.

What does the semiconductor supply chain look like in terms of how chips are bought and sold?

Chips are increasingly being incorporated into products across more and more industries, with specific components often being used in hundreds of different applications. The result is that chips are bought and sold across industries and geographies under different legal, regulatory, and time pressures. This complexity within the semiconductor supply chain and its wide array of vendors can make it challenging for companies to navigate when their usual suppliers run out of stock.

Procurement teams must search the market to secure the right parts in the right quantity at the right price, and they must get them delivered on tight deadlines. Layered on top of this are additional factors to consider, including product quality and authenticity. In this current shortage situation, we’re seeing a difference between customers who regularly and strategically use the open market compared to those that are entering it for the first time out of necessity.

For newcomers, the key to purchasing semiconductors on the open market is selecting a knowledgeable and trustworthy supplier. But what should you look for?

First, you should know their background. Determine how long they’ve been around, how well they understand the current market conditions, and how they have navigated shortages in the past. You should also investigate their financials and ensure they have the capital needed to secure parts in a shortage market. And, finally, dig into their quality program to make sure they have the resources needed to verify component authenticity and functionality.

What’s the difference between brokers and distributors? Can you describe a few of the pitfalls to avoid and best practices that you recommend for companies sourcing components on the open market for the first time?

The open market distribution channel has seen quite an evolution over the last 30+ years. Small brokers with no real quality control, vendor management system, or value-added services are still out there. But a narrowing number of open-market players—independent distributors—have really distanced themselves by all measures, whether it’s gross revenue, financial stability, longevity in the market, global footprint, variety of services provided, or quality-assurance capabilities.

The most important differentiator is that an independent distributor, such as Smith, has the extensive quality-control protocols and certifications in place to ensure that customers receive reliable, high-quality products.

Our best advice to companies looking to source components on the open market for the first time is to do your research. Just because a part was found on Google doesn’t mean that its authenticity can be trusted. Look at what kind of certifications the supply partner has.

For example, suppliers who hold aerospace & defense or medical certifications—such as AS6081, AS9120, and ISO 13485—are more likely to have the necessary quality-assurance processes in place because they have to meet the extremely high standards of these industries where safety and reliability can be life-or-death concerns. Additionally, examine the supply partner’s testing capabilities. Smith, for example, has in-house counterfeit detection testing labs that are ISO/IEC 17025-certified and provisioned with the most advanced in-house tools to verify component authenticity, so that the integrity of parts is never in question.

What are the long-term implications of the current supply/demand imbalance, and how can businesses best navigate them?

At the moment, as companies deal with the supply shortages, it may be difficult to look beyond the issues that are right in front of them—primarily, obtaining the components that they need. Therefore, it’s crucial to have a relationship with a trusted partner that can help them navigate the ebbs and flows of the semiconductor supply chain. The first reason, reiterating what was said previously, is to ensure quality.

The second reason is inventory management. Under the current market conditions, companies are most concerned with increasing supply. However, there’s also a longer-term concern which is the potential for inventory hangovers.

A practice of Smith’s has always been inventory management as a tool to minimize disruptions to business from both lack of supply and oversupply. Many of our long-time customers are coming to Smith with plans for hubbing or inventory management on parts that they know have long lead times. They’re taking a proactive stance to source them and have them on the shelf for when they’re needed.

On the other end of the spectrum, Smith is also able to assist customers when they’re ready to offload excess inventory. Smith has decades of experience matching buyers and sellers, which helps customers to maximize their returns while filling a need for another customer in search of that product.

How has the supply/demand imbalance increased the risk of counterfeit chips?

As a result of the chip shortage, buyers are sometimes desperate for certain parts, and nefarious parties take advantage of that with counterfeit components. Buyers can develop tunnel vision in this type of scenario, and they may miss some major red flags around the components’ authenticity.

To explain further: In this context, companies have found that their regular suppliers are unable to keep up with demand. Desperate and in a hurry to obtain components, a company may turn to alternative markets; the internet, at first glance, may seem like the ideal place to find a part that has been impacted by the chip shortage.

However, without a trusted arbitrator and partner who vets suppliers, this can be dangerous and cause long-term damage to the company’s reputation if the parts end up being damaged, counterfeit, or otherwise flawed. Turning to an experienced middleman is equivalent to having a filter and safety net—ensuring that what you order is what you receive.

How does Smith protect customers from counterfeit chips while helping them navigate the current supply-chain challenges and plan for the post shortage future?

At Smith, we have a comprehensive systems-based approach to quality, which brings everything together from our sourcing and traceability to our packaging and logistics. This helps us to ensure that the product is correct, authentic, and of the highest quality.

As a frontrunner in the development of industry standards for digital imaging and inspection, Smith has both experience and expertise to help customers navigate the current challenges. Additionally, we’re accredited through numerous third-party certifications, and we confirm our procedures with our documented third-party auditing and certification processes. All of the systems and checks we have in place give customers peace of mind while addressing their supply needs.

Looking beyond the current shortage, Smith assists customers with inventory management in the case of surplus supply. The longer parts sit untouched on warehouse shelves, the greater the potential for loss as they grow obsolete and lose resale value. Smith’s excess inventory services can recover value by turning surplus electronic components into a revenue stream.

Shortages are an inherent part of the semiconductor supply chain. Arming customers with knowledge, resources, and support, we help companies strengthen their ability to navigate the market’s cyclical nature successfully.

Todd Burke is President, Americas, at Smith. He supports Smith’s five Americas-based trading offices in developing their focus on growing relationships and supply-chain strategies with Smith’s key accounts in the region, while working closely with his EMEA and APAC counterparts.

Prior to his role of President, Americas, Todd served as Smith’s Vice President of Business Development and was instrumental in engaging executives and growing business with Smith’s strategic accounts. He has held a variety of sales and management roles during his 23-year career with Smith. Todd received his Bachelor of Science in industrial distribution from Texas A&M and his MBA in marketing from Christian Brothers University.