The Component Shortage Part 1—When Will Issues From 2020 Normalize?

This is a conversation between Andre Neumann-Loreck, Founder and Managing Partner of On Tap Consulting, and Brian Tu, Chief Revenue Officer at DCL Logistics. They discuss how the pandemic has impacted hardware supply, how hardware companies have adapted, and tips on how to mitigate supply risks moving forward.

• Andre was VP of Engineering and Operations at Cisco and with his consulting firm On Tap Consulting has guided numerous startups, including eero and Whisper. 
• Brian is Chief Revenue Officer, DCL Logistics, formerly Head of Revenue at Medium, and DEFY Media. 

The TL;DR on Part 1: When Will Issues From 2020 Normalize?  

• Simplified supply chains are trending. 
• 2020 component shortages, are they getting better? Not yet. 
• 2021 holidays will be affected.

Who is Affected by the Component Shortages?

Brian:  

Let’s start by drawing some lines around the framework of this conversation. I think the topic we want to cover is how 2020 impacted companies whose products are manufactured overseas, more specifically products in the electronics space. I guess I should say, those products that have historically been manufactured overseas. But maybe that’s changing. And then we can talk about how last year really impacted these companies and shaped their plans for 2021. 

Andre:

Sounds good.

2021 Supply Chain Constraints

Brian:

First, let’s talk about what everyone’s talking about. How is business in 2021 different from the height of the pandemic? 

For DCL Logistics clients, we saw direct-to-consumer business get to an all time high and then stay there. 

We’ve seen an interesting shift for some hardware companies: they are having some supply constraints, so they’ve simplified their supply chain. For example, going from two facilities back down to one, in order to consolidate their inventory and become more nimble. Most of these companies are bringing their hardware in from overseas, But they just think that they want to simplify consolidating inventory into one central location. We saw the shift starting towards the middle of last year, but it’s continued into this year. 

Andre:  

Yes, that’s very interesting. It makes sense to me that these companies would simplify with all of the uncertainty in moving freight today. Whether you’re doing sea or air, simplifying, warehousing, and reducing inventory nodes will increase responsiveness and allow companies to deal with that uncertainty and with those fluctuations better.

Brian: 

Yep. Something I’ve noticed is quality control has been much harder. A lot of US based companies can’t spend as much time with the manufacturers overseas. I don’t know that quality has necessarily gone down, but I think that they’ve shifted their resources further downstream. Mostly because they can’t fly to China anymore to do the quality control checks there. 

Andre: 

Yes, I think getting quality products from China requires a lot of hand holding. Unfortunately, it also involves inspection. As people haven’t been able to travel to China to do those tasks it’s definitely putting more strain on quality and on the supply chain. And I think what you’re feeling is the brunt of that as people are now inspecting finished goods when they arrive at your facility rather than doing it in the factory in China before the goods are shipped. It’s better to find ways to build in and verify quality further upstream.

2020 Component Shortages are Creating Issues in 2021

Brian:

So what are the common supply chain shortages that your clients are really facing right now? And what regions are most impacted? 

Andre:

In terms of regions, I would say that customers around the world are affected by the shortages. The shortages that have been widely reported in the press are the chip shortages, semiconductor chips, and LCDs. But there’s also steel, stainless steel, as well. So that’s a newer one for us in this mix. We’ve been chasing these for our clients and we’re working on projects to help alleviate shortages.

Brian: 

I’ve read a lot about these shortages, is it getting better? Do you feel like post 2021 and post Chinese New Year it’s going to resolve? And if so, how close do you think it’s going to get to pre-COVID levels? 

Andre: 

Yeah, I don’t think it’s getting better. We did an exercise recently for a client who asked us to do a deep dive on one of these types of components. We took a look at what the industry analysts have to say, what new capacity is coming online, and what the demand picture looks like. We concluded that the shortages are not going to get better before the end of the year. You know, I think it’s going to be tight and I think that the shortages will affect the 2021 holiday season. 

Brian:

Wow, and that’s kind of the thing that we’re trying to do in the US is read the tea leaves for our customers, and take in what we see in the news. That confirms what I think people are concerned about, that things won’t get back to any kind of normal until way past 2022. 

Andre:

Yes, that’s because a lot of investment is required to build a new chip factory or even just bring up a new line within an existing chip factory. At the same time demand continues to be extraordinarily high. 

Now, some of that demand is the result of double bookings that happen in this kind of environment. When purchasing managers can’t find parts they’ll start placing orders with multiple suppliers hoping that somebody can come through with something. Some of the orders will surely turn out to be double bookings, and once the supply picture gets better those double bookings disappear. But even accounting for that, demand is just continuing to be extraordinary especially for products like home office equipment, printers, computers, laptops, and also home exercise equipment.

Brian: 

What I’ve realized is it’s affecting everyone. You mentioned steel, which we felt too. We’re trying to get new racking for all our facilities, especially the ones we’ve expanded recently, and the lead time to get access to racks is tripled because of steel shortages. It never crossed my mind that these very common, core components, like steel really affect everyone. Of course they do, it’s just easy to take them for granted.

This is part one of a three part series. Read part two and three to complete the conversation.

Tags: Expert Advice & Tips, International