Jama Software is always on the lookout for news and content to benefit and inform our industry partners. As such, we’ve curated a series of articles that we found insightful. In this blog post, we share content sourced from Supply Chain Dive which was originally published on February 10, 2022 by Colin Campbell.
Buyer Beware: 3 Semiconductor Procurement Pitfalls To Avoid
Demand for semiconductors is skyrocketing as companies increasingly incorporate them into autos, appliances and more.
With near-term relief from shortages appearing unlikely, companies looking to buy semiconductors need to shop smart, experts say.
Here are three problems challenging procurement teams, and some suggestions on how to avoid them.
Problem: Fraud and counterfeits
Fraud has emerged as a serious issue in the market, especially amid the heightened demand, said Renato Souza, vice president of business development for Smith, a Houston-based chip distributor.
When desperate customers place orders with unvetted vendors, they risk losing the money and not receiving the promised parts.
“There’s a lot of people taking risks out there just buying from people and hoping that the parts coming into their sites and the manufacturing lines don’t fail,” Souza said.
Solution: Purchase through trusted suppliers and distributors.
Smith and other distributors rate semiconductor vendors, and the company has put its 37 years in the market to use by creating a list of no-trade suppliers who have sold fake or faulty chips.
“We’re kind of that filter on the market,” Souza said.
Customers can also verify a supplier’s legitimacy by checking it against those listed on the original component manufacturer’s website, according to a 2013 report on counterfeiting by the Semiconductor Industry Association.
“If a distributor makes a general statement that they are authorized, be sure to check that they are authorized by the specific OCM of interest to sell that OCM’s components,” the report said.
Problem: Inflated demand and prices
Semiconductor suppliers sometimes face a similar conundrum to ocean carriers’ problem of “ghost bookings,” in which customers purchase space on more than one vessel for the same cargo to ensure it arrives. Such strategies help buffer against disruption, but not without a side effect: falsely inflating demand – and prices.
While procurement teams are tasked with finding the best deals in the market, some are causing demand to falsely inflate by sending their semiconductor order lists to too many brokers, Souza said.
“If you’re sending the requirements to 10 different brokers or independent distributors, everybody’s looking for the same parts in the market,” Souza said. “Suppliers know that there’s huge demand for those parts, and the prices just go up, and up, and up, and up.”
Solution: Don’t unnecessarily ‘heat up’ the market
Avoid looking for parts from too many companies at once, as that practice can affect pricing.
“Share [order lists] with a couple of suppliers for 24 hours, 48 hours, and then switch around to different suppliers,” Souza said.
Customers can track chip makers’ progress in producing and selling more chips. The Semiconductor Industry Association launched a Semiconductor Monthly Unit Sales Dashboard on Tuesday that provides a 3-month moving average of unit sales from before the pandemic to the most currently available data.
Improving data visibility in the industry will be critical to correctly gauging demand, said Vanessa Miller, a litigation partner at Foley and Lardner who focuses on cases related to supply chain disputes.
“There systemically needs to be better transparency into what [order] volumes are real and which ones aren’t,” Miller said.
Problem: Lack of supply
It’s the biggest issue facing the industry. Buyers’ median semiconductor product inventory has fallen to less than 5 days’ worth from 40 days in 2019, with inventories even lower in key industries, according to the U.S. Department of Commerce.
Solution: Volume commitments
A lack of volume commitments from semiconductor buyers was among the major causes of the shortage, Miller said. Automakers, for instance, slowed their spot orders at the start of the pandemic, only to watch chip suppliers take their business elsewhere.
“Having those volume commitments is going to be critical,” Miller said. “We’ve heard from chip suppliers, ‘We were happy to make chips for you. You just weren’t ordering them.'”
Solution: Joint ventures, buying suppliers
Some original equipment manufacturers are either signing long-term contracts with their semiconductor suppliers, co-investing in joint ventures to add capacity for lower-tier suppliers, or acquiring vendors outright to improve their visibility and control over their supply chains.
“Almost all the OEMs are exploring options for investment and joint ventures, and having more control over the supply of the flow of chip supply,” Miller said.
Directed-buy agreements allow companies to require suppliers to use preferred vendors, providing a way for companies to protect their investments, Miller said.
“It ensures that there’s a continuity of supply and the chips without the OEM having to contract directly with its joint venture or subsidiary,” Miller said.
Solution: Increase inventory, warehouse investments
Investments in adding warehousing capacity and keeping more safety stock often pale in comparison to the cascading costs of air freight, line downs, payments under protest and other struggles customers are encountering in semiconductor supply chains, Miller said.
“Suddenly, the cost savings is no longer there,” Miller said.