COVID-19 has affected our industry less than some, but nevertheless there has been serious disruption to the supply chain. Although overall the picture has improved since the start of the outbreak, Chinese manufacturing still isn’t back to full strength. It is already very apparent, though that Coronavirus has pitilessly exposed the fragility of the supply chain in our industry.
It is already very apparent, though that Coronavirus has pitilessly exposed the fragility of the supply chain in our industry. The simple fact is that there isn’t enough inventory in the system and much of it is held too far from the UK customer. Anglia does hold high levels of stock in the UK which puts us in a good position to support demand spikes, the immediate one being the need to manufacture safe and fit for purpose ventilators at speed. Before we look at the bigger picture, let us look where we are today.
Current market conditions
COVID-19 cases peaked in China in February and are now quite low but nevertheless manufacturing there is still not back to full strength. There remain challenges with getting staff into factories: many Chinese workers are migrants who sleep in large dormitories, and are understandably cautious about returning to work. As a result, there are still massive shortages of chip capacitors and resistors. This is exacerbated by the fact that the market in 2019 was flat, so that manufacturers haven’t invested in capacity and in some cases even mothballed facilities. There isn’t a great deal of inventory in the supply chain. We are seeing great demand from Chinese distributors ourselves, but are carefully protecting our stock for our valued UK
On semiconductors, microcontrollers have now moved out and are on 30 weeks. There are now long delays on back end packaging particularly on the very popular SOT23 package. Power semiconductors, like SiC IGBTs and MOSFETS are in demand for electric vehicles and charging stations, and as a result we’re seeing some longer lead-times on these too.
COVID-19 is exceptional but truthfully it has exposed the fact that our ‘streamlined’ just-in-time supply chain from component manufacturer to customer is now too fragile. Our world is ‘predictably unpredictable’. We know that there will be not only epidemics but also earthquakes, volcanic eruptions and strikes we just don’t know exactly when and where. If such events regularly cause panic, then we have our model wrong.
Clearly holding inventory carries with it a degree of risk and element of cost. There is always the chance that you end up with stock that you can’t sell, or need to dispose of at a loss. While it’s on your shelf, stock will cost you money: in terms of the interest on the capital that’s tied up, and the cost of the facility in which it is housed. When I first came into the industry 45 years ago we often saw customers, distributors and manufacturers all holding inventory. That was indeed needless duplication, but now customers and manufacturers often have no inventory, and many distributors carry as little as possible. That’s fine in an ideal world, but not in the real world we actually live in. Truthfully, distributors are best placed to hold a level of well-managed inventory that is held within easy reach of the customer, because we have the relationships. We should be close enough to our customers to understand their demand patterns and business drivers. We should also be close enough to our suppliers to appreciate how their business works and what is driving their lead-times. Equipped with that understanding, we can set up a sustainable, balanced level of inventory, and hold it at a short, overland journey from the customer eliminating the inherently higher risks and costs of airfreight.
At Anglia, we operate with a stock turn of one and hold inventory at a level of 50% of our annual sales. This is five-six times the level of the industry norm – but we are a stronger business for it. This year, Anglia was ranked for the first time on the 21st annual Sunday Times Profit Track based on its financial performance over the last three years. We benefit from holding a larger, effectively managed inventory, not least because we can often continue supply when our competitors stock is exhausted. We can’t protect all of our customers, all of the time but we do aim to maintain a substantial buffer to insulate them against the inevitable but unpredictable disruptions and spikes that occur.
The call for ventilators is an especially critical example of just such a spike. Our established inventory and close relationships with our suppliers provided a great starting point. In view of the situation, we have taken the extra step of forming a dedicated COVID-19 task force who can direct our FAE technical support and reserve any available inventory for these projects before we even receive an order – something we normally would never do. Our inventory management is such that we are able to do this without imperilling stock allocated to other customers. We are enjoying fantastic support from our suppliers with this initiative, for which we thank them. Many are supporting the supply to medical customers on a priority basis where we don’t have inventory ourselves, helping to greatly shorten the standard lead-times. Obtaining the right parts for this application is extremely challenging: the demand spike is huge and in this kind of life-critical medical application only the correct and qualified device is acceptable – alternatives cannot be used. Nevertheless, the team at Anglia and our suppliers are working extremely hard to get as many ventilators to our hospitals and magnificent NHS staff as we possibly can.
Aside from the effect on our industry, COVID-19 been a great tragedy for many families in our country, and has and will continue to have a severe impact on our business community. Our Anglia family, and our customers, have not been exempt and have been touched by the reality of this nasty illness. Nevertheless, when the dust has fully settled, we as an industry need to look at how we operate, and seek to build supply chains that are resilient as well as financially sustainable. This is an area where, as distributors, we are in an exceptional position to add value.