Supply constraints in electronics may be easing in 2023, but whether to wait to buy parts just-in-time or stockpile them just-in-case remains a constant question for every hardware team or manufacturer. Pre-pandemic, the trend was to buy everything just-in-time to help reduce inventory costs and improve cash flow. When that strategy led to major disruptions, the pendulum swung fully in the other direction for many teams, who chose to stockpile enough parts for months or years of production just-in-case. This approach reduces the risk of disruptions but can lead to many challenges of its own. There is no one-size-fits-all solution but, in this article, I break down the key factors that manufacturers should consider when building a just-in-time vs just-in-case strategy for their electronic components.
Pros & Cons of Just-In-Time Purchasing
Just-in-time (JIT) purchasing is a supply chain strategy that involves buying materials from suppliers as needed, rather than stocking up on inventory. This approach can reduce the amount of money a manufacturer spends on inventory, as well as the amount of space used to store it. JIT purchasing has major benefits for cash flow since manufacturers aren’t paying for inventory that they won’t use for months or years. Other key benefits include:
- Increased engineering flexibility. It’s easier to redesign your product to capitalize on new learnings or changing customer demand if you don’t already have lots of capital invested in inventory that might not be needed for the new design.
- Increased sales flexibility. Building accurate sales forecasts is challenging for almost every business. If customer demand is higher or lower than forecast, a JIT strategy allows for more flexibility to increase or decrease part orders based on changing requirements.
A fully just-in-time strategy is hardly perfect though. With these benefits come a significantly increased risk of supply chain disruption. A typical electronic design contained over one hundred unique parts, and if a single part isn’t at the production line on the right day, the whole product can’t be made. A purely JIT strategy across hundreds of components inevitably leads to production delays some of the time.
Pros & Cons of Just-In-Case Purchasing
Stockpiling materials just-in-case (JIC) can help a manufacturer maintain a steady flow of production despite supply chain disruptions, but a JIC comes with it’s own challenges relating to cash flow and supply chain agility. Key benefits include:
- Lower part prices. Electronic component prices typically drop significantly at higher unit quantities. Buying in full-reel or batch quantities can provide much lower unit prices than purchasing smaller quantities for each production run separately.
- Production scheduling flexibility. It can be easier to keep up with unexpected customer demand if the parts you need for production are already on the shelf and ready to go.
- Supply chain resiliency. The last few years have highlighted the benefits of a JIC strategy. Frequent and unpredictable electronic part supply chain disruptions led to multi-month production delays and high costs related to sourcing parts from grey-market brokers for manufacturers who didn’t have stockpiles of their own.
Despite the increased peace of mind, a fully JIC strategy is unlikely to be the right approach either. The cash flow challenges associated with stockpiling months or years’ worth of inventory can’t be practically managed by most manufacturers.
Building a Hybrid Strategy
Most manufacturers will find an approach that combines strategic stockpiling with JIT deliveries provides the best of both worlds, but, like most things in life, this is easier said than done. I recommend that hardware teams analyze their BOMs line by line and group their parts into 3 buckets:
- Buy Now: These parts are critical to your design and have a high risk of being unavailable under a JIT approach. Buy Now parts should be purchased ASAP in large enough quantities to support a reasonable production forecast.
- Wait & See: These parts are critical to your design but are currently readily available so there is no need to stockpile them yet. Wait & See parts should be monitored and purchased as soon as their availability starts trending towards becoming unavailable in sufficient quantities.
- Just In Time: These parts are multiple possible alternatives and/or are readily available in large quantities from multiple sources. These can be safely purchased just in time before production begins.
The factors that I recommend considering when grouping parts into these categories are:
- Shelf life. We don’t typically think of electronic components as perishable items but, while they won’t go sour like milk, they do have a limited shelf life. The metallic surfaces will oxidize over time, which can lead to soldering defects during the assembly process and long term reliability issues. Additionally, for parts stored in cut tape or tape and reel, the adhesives in the packaging can break down. Parts can be re-reeled prior to assembly when this happens but doing so can be costly or impractical depending on the parts. We always want to avoid over-stockpiling parts that might need to sit on the shelf for more than a few years, especially if the parts are already more than a couple of years old at the time of purchase.
- Re-engineering likelihood. Most products are re-engineered from time to time, and the parts that they use might change. Consider the likelihood of each part in your design being changed down the road when deciding whether to stockpile them and how many to stockpile.
- Relationship to other parts. Analyze whether a change to a different part might require a change to this part. For example, if an inductor is used in a battery charging circuit, it’s important to consider whether the charge controller IC might be changed in a future board spin and whether the new IC would require a different inductor.
- Resale potential. The financial risk of over-stockpiling can be reduced if excess parts can be resold later. Some parts like passives or special-order application-specific connectors have essentially no resale value. Other parts such as microcontrollers may be able to be sold for a portion of their new price via resale marketplaces or brokers. Under normal market conditions, the resale value of a part might be 20-40% of the new price, although parts that are in demand can fetch much higher prices. Keep in mind that the manner in which the stockpiled parts are stored and managed can also have a big impact on the resale price.
- Price breaks. All else being equal, it’s a more efficient use of inventory dollars to stockpile parts that drop in price more aggressively at higher quantities.
- Sourcing optionality. If a part is only available from one or two distributors, that will significantly increase the risk of all of those parts disappearing off the market with little warning. When a part is available in large quantities from several distributors, its much more likely that you will be able to get that part when you need it.
- Alternatives. Parts for which you have multiple alternative options are always safer for a JIT strategy than parts for which there is only a single acceptable MPN. For some parts like passives, commoditized connectors such as pin headers, or simple optoelectronics, it can be easy to identify many possible alternate parts once the BOM is complete. Other parts like ICs might require some forethought during the design process. For example, we have seen engineers include multiple footprints for the same IC in their circuit board designs so that one PCB can be used with 2 or 3 different package variants of the same chip depending on which package is available on the market at the time. These techniques can significantly increase the safety of a JIT strategy.
- Cost of delays. Some manufacturers can financially withstand production delays more than others. If you are making a product with low margins, perhaps it is better to ship later than it would be to spend more money de-risking every aspect of your supply chain. Conversely, if you are building a satellite and absolutely need that satellite to be completed and loaded on a rocket on a certain date, production delays due to a missing chip could be catastrophic and more up-front investment in stockpiling critical components would likely be warranted.
That all sounds complicated…
If managing hundreds of parts, analyzing BOMs throughout the engineering process, and monitoring parts in the Wait & See category sounds like a lot of work, the good news is that there are tools out there that can help make this process a whole lot easier and more automatic. Whether you have a dedicated supply chain team or this responsibility is falling to engineers, ops people, or startup founders, there is a solution out there for you.
- Octopart: Octopart is a free, ad-supported tool from Altium. If your electrical engineers already use Altium Designer, they have the same supply chain data that you will find on Octopart at their fingertips during the design process. If you’re not concerned about ITAR compliance, Octopart provides a free BOM tool that can be handy for getting a quick view of current stock levels from major authorized distributors. Octopart also provides a Watch feature that you can use to get email alerts for a specific part, which is helpful for a Wait & See strategy.
- Distributor Websites: Some major distributors such as Digi-Key have powerful search and filtering tools built into their websites, which can be invaluable in helping identify possible alternative parts.
- Part Intelligence Platforms: Legacy parts intelligence platforms such as Silicon Expert, Z2, and Supply Frame can be valuable tools to help you identify which parts should have a Buy Now, Wait & See, or JIT strategy though they come in at an enterprise-only price point.
Cofactr: The Cofactr platform provides solutions for teams of all sizes to analyze BOMs for supply chain risk, securely store stockpiled parts, monitor and receive alerts for Wait & See parts, and automate just-in-time purchasing so manufacturers can build resilient, flexible supply chains while focusing on their core strategic decisions, not juggling spreadsheets and distributor websites.