Manufacturers Are Holding Inventory Again - How Much Should You Hold?

Electronic component inventories go through stages of excess and deficiencies, and we’re still living with the effects of the 2020-2022 supply chain crunch. In response to this, companies are stepping away from a reliance on a just-in-time supply chain management approach, and instead companies are realizing the value of holding certain levels of inventory on behalf of customers.

Of course this begs the question, how much inventory should manufacturers hold? There is no objectively best amount of inventory as the answer depends on part counts, production volume, and component risk. The strategy also changes by company size; OEMs will take a different strategy compared to a startup or small design firm. But as the just-in-time approach has clearly broken down, forward-thinking companies are going back to holding inventory of their most important components.

‍

Focus on Sustained Production

Although a broader supply chain management strategy might change for companies of different sizes, a common tactic among companies of all sizes has been to hold inventory of electronic components. Holding inventory boils down to one goal: sustain production throughout the lifetime of a product, but balance this against excessive costs and dead inventory. If we look across company size and their role in production, we can see some common strategies for holding inventory.

EMS Companies

The scope of electronics inventory management practices at EMS companies largely depends on the scope of client projects. Higher volume EMS need to hold more of everything to sustain operations, and they need to work with their OEM customers to ensure they can maintain inventories required for sustained production runs over a reasonable horizon. EMS companies could hold up to an entire quarter’s worth of inventory on behalf of OEM customers, or their holdings could be as low as consigned parts kits from smaller customers.

EMS companies can take a balanced-risk approach to electronics inventory management and only hold inventory of the most common parts their customers might need. This might include some of the following parts:

• Simple passives (resistors, capacitors, etc.)
• Common discrete semiconductors
• Pin headers with jumpers
• Standard connectors (RJ45, USB, SWD, JTAG)
• Some common integrated circuits, such as: Flash memories, Popular MCUs (STM32, nRF52, PIC, etc.), Simple power regulators (LDOs)

If something in a BOM can’t be procured or has excessive lead times, these parts could be offered as replacements and can help get an order back on track. Due to attrition requirements, an EMS company will probably start accruing these components over time anyways, so it makes sense to hold the most popular parts just in case of an emergency.

‍

OEMs

Although OEMs are generally operating at high volume, they do not maintain captive electronics manufacturing operations. If they do work directly on assemblies, they likely maintain a captive PCB assembly operation, often due to the sensitive nature of their products (i.e., mil-aero) or the tightly integrated testing and bring-up tasks needed for their assemblies. Their inventory needs can vary based on how much of their manufacturing operations are outsourced and the level of risk involved in various components.

In the past, OEMs would hold inventory of their most expensive components and rely on a just-in-time approach for peripherals and supporting components. Today, OEMs have to work with their sources and their manufacturing partners to implement a supply chain strategy that does not overburden the EMS/CM with excess or deficient inventory. This could also mean holding up to a quarter’s worth of the most important value-producing components for a product while still managing a broader supply chain, including raw materials and secondary/tertiary sources.

‍

Small Design Firms

For some time during the 2020-2022 era, the supply chain situation got so bad that even small design firms and their customers had to hoard components. The situation is less bad now, but with new semiconductor fab capacity not projected to come online until 2024-2025, it’s easy to see how this situation might repeat itself.

Small design firms that manage prototyping on behalf of customers can aid sustainable production by holding inventory of the highest risk components. Serious customers will likely produce multiple prototype runs without major variations in BOM or part count. Therefore, for a small design firm, it’s actually much easier for a small firm to sustain production because volumes are low.

Small design firms that will be tasked with overseeing prototyping should purchase enough critical components to cover at least 2 prototyping runs. If the firm won’t be handling procurement directly, they should advise clients to purchase and hold this inventory themselves. Small firms need maximum visibility into supply chain data, including prices and inventories, to help their clients plan out their prototyping runs.

‍

Final Thoughts

Holding inventory allows companies to react to sourcing emergencies and plan out manufacturing runs on more predictable schedules. This is an important part of a supply chain strategy for large and small firms, but it’s not a magic bullet for supply chain volatility. Finding 2nd and 3rd sources, near-sourcing, stocking critical inventory, inspection and kitting services, and even using parts brokers are all on the table as acceptable strategies for managing electronics supply chains.

In summary, don’t fall back into the old patterns of just-in-time sourcing just because inventories are returning to normal. Smart firms will continue to make electronics inventory management a priority in their supply chain management strategies.