Minding the gap

The harsh reality gripping the channel is the CPU supply shortages hitting the market.

The shortage may be a problem, but it can also be an opportunity

“Supply is undoubtedly tight, particularly at the entry level of the PC market.” – Bob Swan, Intel Corporation CFO and interim CEO. This is part of a letter published on 28 September 2018 on the Intel website directly addressing the concerns of the industry around the supply challenges dogging the company and its inability to meet demand. Intel has, however, put plans in place to address the issues around 14nm and 10nm CPU shortages. The situation, though, is likely to continue well into 2019 and this isn’t the only one to have affected the channel over the years. 

In 2011, floods in Thailand significantly affected the global hard drive supply. In 2017, Dell suffered from component supply issues thanks to a rising demand in the server market. The same year saw savvy cryptocurrency miners purchase around three million GPUs to build mining rigs, creating yet another component shortage that fell into 2018. This year, Intel’s shortage made world news while other companies reported that the electronic component shortage outlook was neither rosy nor likely to end any time soon. It seems shortages are now part and parcel of the channel landscape, with both vendors and distributors having to find ways of dealing with them in both the short and long term.

Forward planning

"Distributors acknowledge they need to order extra stock in advance to manage the gap-out caused by delays in shipment due to the shortages,” says Fouad Charakla, senior research manager, IDC. “Some large local distributors usually carry two to three months' worth of stock. In general, local distributors acknowledge the impact the shortage will have and are taking the necessary precautionary measures to meet demand.”

The shortages mean most distributors are aware there will be extended lead times on specific models that have shifted from the traditional ETA of 17 days to around 25 days. That said, understanding there will be a delay doesn’t mitigate the impact of that delay, nor does it necessarily consider the many complexities that have to be taken into account. These range from currency volatility, to customer requirements, to managing the accessibility of stock on site versus the just-intime methodology.

Holding stock

It’s critical the channel builds resilience. The market creates a demand that the distributors need to cater for and it’s essential they understand what their fast-moving items are and factor in an element of resilience around them. Some distributors hold stock for about two to three months so they have the right stock at the right time and at the right price. This strategy allows them to have stock on hand rather than risk shortages. That said, the rising costs of operation attributed to rising fuel prices and a weakening currency are putting the channel under pressure, often forcing them to operate with the just-in-time approach.

“Distribution sends forecasts to vendors, but vendors need to allocate stock across all players in the market, usually prioritising stock for confirmed orders, and focusing on the larger players,” says Matthew Hall, product director at Rectron.

“We try to work closely with our vendors to offset some of the negative effects and, as part of our role in distribution, we try to hold a healthy stock reserve for the normal dayto-day business. However, in times of severe shortages, resellers try to stock up on their own reserves.”

Vendors tend to communicate with the distributors in advance, especially when a product is transitioning. This provides an opportunity to wind down the current units and prepare for the new ones. By the same token, factories are expected to communicate to distributors if they can’t fulfil orders of certain specifications. This information is then communicated to the retailers in order to manage expectations.

“Distributors will liaise with their clients, explaining the delays due to shortages and ask them for guidance on order plans,” says Charakla. “This will enable distributors to cater for those needs proactively, or to cross-sell to another unit of which there is no CPU shortage.”

Other options

The shortage may be a problem, but it can also be an opportunity. If a particular component is experiencing limited availability and long lead times, there’s nothing stopping the channel from sourcing alternative solutions to meet client requirements. It’s a chance to take a problem and turn it into a financial benefit by circumventing the time frames and delays with entirely new offerings.

“From a go-to-market and opportunity point of view, there are two very different considerations when it comes to supply and demand,” says Brad Pulford, channel and distribution lead, Dell EMC South Africa.

“From a distribution perspective, we look at the line-up and what’s available from a variety of different angles and look at what the competition is doing. The 14nmu, for example, is the eighth generation platform so we look at the value of stocking the seventh generation so we can still provide a considerable line-up that gives customers what they need.

"Without being too detail-orientated around the specific components required to map back to customer demand, there’s nothing stopping the channel from getting some cost benefit out of a bad situation,” he adds.

A savvy sourcing and procurement department should collaborate closely with suppliers to ensure an understanding of how their strategies and manufacturing capacities are developing and what impact those will have on its own growth plans. It would be difficult for a distributor, but they do have the option to compare publicly available data and use social listening to gain an understanding of market trends and dynamics.

Mapping it together

“By combining data about Intel’s enduse shipments and information about its manufacturing capacity investments, with projects about global cloud trends and datacentre growth, this would help the distributor to understand the dynamics of the personal computer market supply,” says Simon Carpenter, chief technology advisor at SAP.

“Using these insights, they can achieve the right balance between available inventory and contracted service levels across the supply chain to optimise supply and fulfilment plans in the face of demand changes and supply disruption.”

Riaan Bekker, Salesforce solutions manager at Thryve, agrees: “The relationship between supply and demand has grown more complex with legislation and governance along with the traditional problems of overstock and warehousing. However, the changes are also positive as companies are now better able to reach into the activities and information from their supply chain partners to create new ways of planning and administering this conduit to their operations. New approaches to risk management increase visibility of the supply chain, enabling improved strategising around value chain improvements.”

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