GLYN Reveals How You Can Get Through Allocations Better in the Future +++ Share Your Opinion and Win Exclusive Rewards!

Manufacturer, Distributor or Customer - Who do You Think is to Blame?
Or is there a Completely Different Root Cause?

Four allocations in 20 years of FBDi!

With nice regularity we experience allocations. Some of them are more severe and more products worldwide are affected, some are a bit milder. Sometimes they end halfway acceptable, sometimes they leave immense damage. Some of us have experienced several and have therefore recognized a pattern. Each time, however, there are new players in the market who are caught completely off guard by them - just as I was in 1995 - so many don't know why they actually occur. Yet the phenomenon has been well researched for many decades. For all those who are interested in it and want to know how they can get through allocations better, here is a field report.

By Thomas Gerhardt, Managing Director at GLYN and board member of Fachverband Bauelemente Distribution e.V. (FBDi)

In the 20 years since FBDi was founded, there have been four allocations. Since I started my career in 1995 as a sales engineer in distribution, there have even been six. At that time, one allocation was about to expire and I had no idea what was happening to me. The prices of the components were plummeting. The warehouses were full. Hardly anyone wanted to order anything. A few years after that, at the following, very bad allocation in 2000, I thought, "What now? This again?"

A book on the shelf

In 2003, after that too was over, I found a book in our home library that my wife had been recommended by a professor while she was in college. I was interested in the thick, blue work in hardcover with the interesting name "The Fifth Discipline - Art and Practice of the Learning Organization."

So, by chance, I opened it to page 36 and saw graphs of stock and labels such as "retailer," "wholesaler," and "factory." This aroused my curiosity, as I hoped to learn something for the company, and I immediately started reading the book.

Es stellte sich heraus, dass gerade dieses eine, zufällig aufgeschlagene Kapitel eine Pflichtlektüre für alle Beteiligten in der Elektronik-Branche darstellt.

Der Autor Peter M. Senge beschreibt unter der Überschrift „Gefangene des Systems oder Gefangene unseres eigenen Denkens?" ein Spiel, welches um 1960 am Massachusetts Institute of Technology (MIT) – einer der weltweit führenden Spitzenuniversitäten – entwickelt wurde. Das sogenannte „Bierspiel" („MIT Beer Distribution Game").

Es handelt sich um ein experimentelles Rollenspiel, in dem die Beteiligten verschiedene Positionen in einer Verteilungskette einnehmen (z. B. Bauteilhersteller, Distributor, Schaltungsproduzent oder – wie im Buch – Brauerei, Großhändler und Getränkeladen). Ziel dabei ist es, die Kosten der Gesamtkette möglichst gering zu halten. Da die einzelnen Parteien jedoch nur über schriftliche Bestellungen miteinander kommunizieren, wird die Aufmerksamkeit in der Regel ausschließlich auf die eigene Situation konzentriert. Die Folge ist, dass sich das System sehr schnell aufschaukelt, wie es beim Peitscheneffekt (Bullwhip Effect) bekannt ist.

Bis heute wird dieses Spiel in der Management-Ausbildung angewendet, in unserer Branche allerdings viel zu wenig. Im oben angesprochenen Buch wird die Elektronik-Lieferkette sogar explizit erwähnt, weil sie durch ihre komplexen Prozesse, vergleichbar hohen Standardlieferzeiten und nur schwer steigerbaren Produktionskapazitäten sehr anfällig für ein Aufschaukeln ist.

Das jährliche Wachstum der Distribution beträgt seit 2008, als der FBDi begann, seine wertvollen Notarzahlen zu veröffentlichen, 5,6 % (Compound Annual Growth Rate = CAGR, rote gestrichelte Linie im Diagramm). Ohne das außergewöhnliche letzte Jahr 2022 waren es sogar nur 3,1 %.

In fact, however, the growth of the promising electronics industry of the future did not take place in a linear fashion, but in waves. The two usual phases can be described casually and very roughly as follows:

Allocations last about 18-24 months. They are characterized by long delivery times, rising prices, empty warehouses, high sales increases, good profits, friendly customers, confident suppliers.

In the periods in between, about 3-5 years, it's the other way around: short lead times, low prices, full warehouses, sales declines, depreciation losses, confident customers, and friendly manufacturers.

The author explains why this is so back in 1990 in his highly acclaimed management classic, which has been translated into 20 languages and printed more than 1 million times.

Yes, you read correctly. In 1990, one of the most influential management thinkers of the last 75 years describes a principle that was discovered by an elite university in 1960. In other words, the theoretical systems knowledge of why the electronics market regularly piles up has been known for decades. But we keep rubbing our eyes and discussing why it happened this time, how long it will last, whether it will start again soon, or whether now really was the last time.

The triggers are not alone

The many possible triggers of allocations are gleefully enumerated and discussed through. 2020-2022 were the optional or aggregate Ever Given container ship stuck in the Suez Canal, snowstorms in America, the Corona pandemic, the Ukraine war, the energy crisis, supply chains disrupted as a result, etc. pp. In 1999-2001, it was the Y2K problem of the software (millennium bug), the introduction of the euro, the conversion of all vending machines, etc. pp.

There are triggers for every allocation. They are manifold and hardly predictable. But now it becomes provocative. They are certainly part of the phenomenon, but hardly decisive. Much more dominant is the reaction of all market participants to these triggers. The behavior of each individual extremely increases the impact of the triggers. Only this amplification leads - measured against the triggers - to a completely exaggerated build-up of the overall system.

If a Martian came to Earth during an allocation, he would think: "What are they doing? After all, there is no shortage of goods. There isn't even that much demand. But everybody orders just what he can get, and therefore it is lacking for another. Earth people merely have a distribution problem."

We all saw what hoarding purchases can do in the toilet paper pandemic. I don't think anyone can claim in all seriousness that consumption of this product actually soared back then. Rather, during that time of collective hysteria, some at home had their basements full and their neighbors may have had a real problem for it.

Just think that maybe a year's supply of your "golden screw", which is missing today, is in another warehouse, or that it could only not be produced because other components had to be brought forward in the factory for someone, who then merely put them into storage.

Order and demand

Unfortunately, we often confuse ordering with demand. The temporal component is completely forgotten. If an actor orders a product today for immediate delivery for his own justified security considerations, which he will actually only need later, the demand in the market does not increase (which, however, almost everyone is only too happy to believe). If, moreover, he orders for a longer period, then even then only the incoming orders and the order horizons increase, but not the actual demand. At least not much more than the long-term average.

The often significantly higher sales that follow the high order intake actually flow to a large extent into the inventories of the many supply chain links. The blanket statement "inventories are empty" was never correct. It was always just more or less many individual compartments that were empty. In part, the immense increase in sales can still be explained by price increases. However, a general unit number-based leap in market growth by such high values is not at all possible across the board. Where should the many additional factory buildings, employees, machines, etc. for an ad hoc 40% larger market come from? Was the capacity utilization of the industry really so low before the allocation? Hardly!

If, on the other hand, you take into account that everyone in the chain orders a little more during the euphoria - because the market is growing so fantastically right now - it becomes clear that the manufacturer can quickly double the allegedly required quantity from an actual demand over a few stages of the supply chain.

An example

Let's assume that a normally growing sawmill orders perhaps eight new fully automatic woodworking machines per year. Each one contains, say, 1,000 electronic components - for a total of 8,000 units. However, because they have heard that delivery times will be significantly longer, they order ten machines immediately to be on the safe side. It is better to store and be able to deliver than to wait. So the machine manufacturer has a "need" for 10,000 components. Because he too has been watching the news, he prefers to buy 20% more from his contract manufacturer. Maybe his customer will even want twelve machines next year. The EMS now sees a "need" for 12,000 components. However, with foresight, he orders something in addition, for example 14,000 pieces. If the distributor also adds something, 16,000 pieces arrive at the manufacturer - twice the actual demand and for immediately. However, since he cannot ramp up his production capacity that quickly, he communicates new longer delivery times to the system. These then automatically lead to further orders.

My dear, also very experienced colleague in FBDi, Dietmar Jäger, then always says: "Incoming orders are a function of delivery time and vice versa." How right he is.

The system gets out of whack

This is exactly what happens in every allocation. There is a trigger of any kind that creates a panic. This feeds on itself and boils up until all stocks are full, i.e. the alleged "demand" decreases or the manufacturer can produce more. Most of the time, both even come together. This is also where the typical duration of allocations comes from. It always takes about 18-24 months for these two conditions to be met in our industry.

However, instead of this dominantly causal system-immanent psychology and the latency periods in the system, other reasons are rather discussed. People ponder whether legacy capacity will be increased at all, whether the Chinese government's Corona policy will prolong allocation, whether precursors will remain in short supply, whether the energy transition will lead to exponential overall growth, whether war will permanently disrupt supply chains, whether there are enough freight containers, to name a few. I respond to this in the inimitable manner of a Peter Ustinov as master detective Hercule Poirot in the movie "Death on the Nile", after Dr. Ludwig Bessner had presented him with some arguments against his solution theory: "That may be all, ... but it is ... irrelevant!" The trigger for the beginning is arbitrary and the one for the end as well. In between, a well-researched mass-psychological process takes place, and it is mainly this process that is decisive.

Is it possible to do anything at all then?

At the end of almost every allocation, sales go down again. The alleged market growth turns out to be an "advance". About 75% of the role players drive the system completely to the wall and create the greatest possible damage. 15% do a little better and 10% a lot better than the others - so success is still quite possible!

What is happening right now, however, is not an attempt to do better. Rather, you now read about blame everywhere. The distributors are supposedly to blame because they couldn't deliver. The manufacturers are to blame because they didn't produce enough and couldn't give any deadlines. The customers are to blame because they didn't order early enough. The brokers are to blame because they earned a golden nose from the misery. All wrong! No one is to blame alone. If at all, then all together. But rather still the system.

Also, everyone now imagines themselves squeezed into a "sandwich position". This is logical, because in a long supply chain from the end consumer to the retailer, the product manufacturer, the machine producer, the production service provider, the distributor, the component manufacturer, the pre-product supplier, and all the way to the mining company, everyone without exception is in a sandwich position. And everyone is pointing left and right to find someone to blame. Not really helpful and, considering one's own contribution, not fair either.

So what is to be done?

The better players follow three rules that sound easy, but in practice are unfortunately difficult to implement against human nature. The emphasis here is on difficult, not impossible. Something can actually be done.

The rules are:

• Don't panic.
  
  It takes discipline to resist the overwhelming urge to place larger orders when backorders are growing and your customers are screaming loudly for merchandise or salespeople are scaring you even more (which, by the way, you shouldn't do with your customers either).
  
  If you don't have this discipline, it will have unpleasant consequences for you and everyone else.

• Always think about the goods they have already ordered for right away that just haven't arrived yet.
  
  It's like a headache pill. If you have taken an aspirin, you do not take another one every five minutes until the pain is gone. Wait for the effect! So think about your residuals.
  
  Not the "Delinquencies" ("Overdue"), because with these the confirmation date is also already in the past. Not even the entire "backlog", because the "backlog" contains both items that are desired for immediately and those that are desired for later. Because there is no separate term in our industry for goods ordered with desired date "immediately" but confirmed for later, I suggest "backorders" for them ("order backlogs").
  
  So, keep an eye on your backorders. Do you really want the goods you've asked for right now? Imagine it arriving tomorrow. Will your customer really take your entire year's supply immediately when the golden screw finally arrives?
  
  Always be sure that your suppliers try to fulfill your old wishes as soon as they can. After all, it is not for nothing that you have put enormous pressure on them in many escalation meetings, and so you must take it off.
  
  Always remember: Everyone is responsible for their own desired deadlines.

• Never order more from your supplier than your customer orders from you.
  
  Remember that the chain ahead of you has probably already ordered a markup in every link for immediately and that it is longer than you think. Also, assume that your upstream supply chain neighbor is not quite telling you the truth. He will shout to them with great verve that he needs 1,000 pieces for immediately, hoping then to get allocated by you perhaps at least 100 that he really needs in four weeks. He feels he has to do this because otherwise he fears he will get nothing at all from you.
  
  So at least don't make it worse even with your suppliers.

Incidentally, the purely electronic data exchange that is repeatedly proposed and also pushed in this context is not one of the effective measures. It is an efficiency boon in normal times, but it does not prevent shortages. The idea, after all, is that if the entire supply chain passes its data 1:1, there will be no allocation. That's true even in theory. But unfortunately, in any man-made panic, many actors intervene in the automatic mechanisms and override them. These interventions are then reinforced by the systems. Overwrite a delivery time of 12 weeks with 52 weeks in your system and observe which order proposals it then spits out. That generates a lot of incoming orders for your supplier. So supposed market growth? Also consider that it is better to share true information around the data. No system can tell if the 16,000 pieces is the real demand at the very beginning of the chain or if the actual 8,000 pieces have been inflated a bit by all the stations on the way to you.

So who has the most damage?

According to research, the damage in the chain is worst for the manufacturer. The manufacturer receives reports of accumulated supposed demand that it cannot meet. Because he is strongly criticized for this and also sees great opportunities for himself, he decides after some time to expand production capacities. Today, this costs an extremely large amount of money. When he has installed it after 18 months, everyone realizes that they have ordered too much at once and their warehouses are overflowing. Then they reduce their orders. So the manufacturer is left sitting on his empty production halls. The wholesalers have huge inventories that no one wants to take anymore, and the customers have them too. However, in this order, with values descending in the chain.

It's like the famous whip. At the end of the strap, it cracks particularly hard on the back. As a distribution rep in the middle of the supply chain, I'd also love to whine and say that distributors are hit the hardest. Everyone will feel that way in their place. But it really is the last in the chain.

After allocations, this also regularly leads to concentration processes at all levels, because the strong companies then buy up those that have overstretched themselves. Not necessarily good, but the logical consequence.

Also typical at the end of almost every allocation is the panic in the other direction. How do you reduce your too-high stock when the controllers take over again with the club of "return-of-working-capital"? By throwing it on the market like sour beer at devalued prices - and thus once again driving the diabolical downward spiral.

Oh yes, and this at the end

A confirmed delivery time of even 30, 40, 50 or 60 weeks is never the right serious delivery time in a swelling allocation, but merely a synonym for: "We're inundated with orders right now and can't make it. So for the life of me, I don't know right now." No customer in the chain, i.e. none of us, wants to hear that and you can't enter it into the system. That's why you save yourself with blanket values that you think you can create. Motto: at the latest in one year we will probably have delivered it.

Conclusion

Peter M. Senge ends the chapter with the following words, which could not be said better: "When the participants in the beer game see through the structures that cause the behavior, they also realize that they have the power to change this behavior and apply an ordering policy that works in the larger system. They discover something of the timeless truth that comic book writer Walt Kelly expressed many years ago with his famous line in 'Pogo' [an anthropomorphic opossum].

"We have met the enemy, and he is us."

In this sense: After such a cycle, there are first again enough capacity reserves for a few normal growth years. At some point, however, these are filled and any new trigger comes along. So be sure that there will be an allocation again. Your own Xth, the fifth for today's 20-year-old FBDi and my personal seventh.

But now we all know what to do. Good luck with it!