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Be careful, or You Will Miss Out on Normality!

What is the current situation in the semiconductor industry? Full warehouses? Normalised lead times? Weak orders? Why should you order now?

But it won't always be like this. Every exaggerated euphoria is followed by an exaggerated correction - just like now. And then everything will return to normal.

So what should you do when things start to look up again?

We asked Thomas Gerhardt, a specialist with more than 30 years' experience in the electronics sector and six allocations to his name. Thomas Gerhardt is Managing Director of GLYN GmbH & Co. KG and a member of the board of the Fachverband der Komponentenvertrieb e.V. (FBDi).

GLYN: Mr Gerhardt, full warehouses, short delivery times, few orders. A typical situation after allocations. What insights can you give our decision-makers from your 30 years of experience in the industry?

Gerhardt: For a long time, many market participants assumed that the market would continue to grow very strongly. The arguments were and are good. Digitalisation, networking, e-mobility, energy transition, to name but a few. Delivery times had shot up to over a year. Order books were full. Why should we assume that this could end abruptly? People think linearly.

But today we know better. Not all the orders we received were for real; there were also many orders that were brought forward. These in turn led to longer delivery times, which in turn led to more orders.

Much of what was delivered went into the inventories of the very long global supply chain. There was hoarding everywhere. And everyone was deeply convinced that it would flow out quickly once the 'golden screw' was delivered. Hence the good mood and the willingness to order immediately.

But then the mood changed. Orders were reduced. Stocks are now to be reduced and liquidity, which is too scarce, is to be built up again. Everything is subject to this new dictate.

GLYN: Is this strategy sustainable?

Gerhardt: Of course, inventories have to be managed sensibly. But the pressure on buyers is very high. This leads to unintentional exaggerations in the opposite direction. Which items can be reduced the fastest? The fast movers.

The slow-movers, i.e. items ordered in excess, naturally move very slowly. It takes many months, maybe even years, for them to run out. That is too long. So the fast movers are no longer reordered to reduce total inventory and increase liquidity.

At the same time, suppliers are reporting full warehouses, normalised delivery times and good manufacturing capacity. And their own order books have been better than in the past. So everyone is still holding back on orders.

But it won't last forever. Every exaggerated euphoria is followed by an exaggerated correction - just like now. And then things will return to normal.

So what if the mood brightens again soon? And it will! Most of the supply chain will be short of high runners. And their suppliers' warehouses will already be normalised or empty. Suppliers, too, will need to reduce inventories and gain liquidity.

ZVEI Chief Economist Dr Andreas Gontermann said on behalf of the association's members: Both the assessment of the current situation and the general business expectations are better than in the previous month. Export expectations also rose in May.

SPIEGEL reports: 'Improvement expected - economic researchers are more confident about the economy'. And: 'The German economy seems to be slowly picking up speed again. Several economic research institutes have raised their forecasts compared with the spring. According to economic experts, there are still no great leaps ahead, but the German economy is gradually working its way out of the crisis.

So what if the mood brightens again soon? And it will! Most of the supply chain will then be short of high runners. And their suppliers' inventories will have normalised or even disappeared. Suppliers, too, will need to reduce inventories and gain liquidity.  

GLYN: So a return to normality is likely? Does that mean that purchasing departments will have to plan their stock levels with foresight and certainty again?

Gerhardt: That would certainly be the best strategy. Speculating that there will be enough goods available within a very short period of time will prove to be another fallacy, only this time the other way round in terms of allocation. People think linearly, even in the opposite direction.

A major re-allocation is unlikely. But normal delivery times of - depending on the product 12 to 20 weeks, depending on the product. And that is almost half a year.

So it will probably soon be time to place some long-term orders for strategic items to ensure that delivery times are healthy again. For example, with a new framework agreement and logistics system. This is definitely the best option in normal times. After the euphoria and depression, it's time to get back to normal.

If you wait too long, you will have to wait for the usual delivery times and explain this to your management and customers.

GLYN: Mr Gerhardt, thank you very much for this experience SUPPORT and for taking the time to talk to us.

Gerhardt: With pleasure, and I would gladly do it again!"