> What does recovery look like?

FROM THE TOP

What does recovery look like?

by John O’Brien, CPMR
ERA Chairman of the Board

How many of us are asked in meetings, “What do you see for recovery of the electronics industry?” Let’s face it, everyone is skeptical about when a recovery will occur, most people not venturing out more than two quarters to look for the growth we all know will return. Our industry is so cyclical that we often go through great periods of growth followed by short periods on flat or contraction. For those who have been around awhile, we can look back at the dotcom bust or the allocation periods, for example.

What I believe we are experiencing this time around are multiple forces driving our industry, but not always in the same direction. Going back to 2019/2020 and the COVID-19 era, expectations when COVID-19 first hit and everything shut down were that our industry would face a big downturn. I remember a meeting in March 2020 when we discussed how we would adjust to an anticipated drop in sales and revenue. As our people moved to work-from-home, it drove a surge in the very products we supply to support his new work model. As concerns arose over testing and treatments, our medical markets began to thrive.

Then 2021/2022 hit and the disruption in supply chain started to take hold. Customers bought usages going out a year so they could try to maintain their production. Then when they couldn’t get parts, they opened up their BOMs to cover build demands.

2023 rolled around and everyone was sitting on too much inventory. Everywhere throughout the supply chain, distributors, CEMs and OEMs all had raw materials inventory and in many cases, finished goods, that outpaced the end customer demand. So, throughout 2024, we’ve been tracking inventory work-downs. We’ve been watching end customer shipments but up until recently, design efforts were limited to sustaining engineering. Recently, we’ve started to see an increase in new product designs. These new designs are definitely taking longer and there are fewer going on at the same time.

So do these factors signal a recovery? I’ll get back to my original premise, “How do we define recovery?” If we look at recovery as a return to sales numbers equal or greater to the heights we’ve seen (for us that was 2022), then I believe we are still a ways out from there. Price pressures from the OEMs are causing lower overall sales, but, with similar volumes we’ve seen prior. Most recently, I’ve spoken to a number of folks at principals, distributors and CEMs and many are looking at 2019/2020 as a comparative time frame to 2024 and beyond. Everything I outlined previously in the article “artificially” inflated our numbers, so a comparison to a more stable time may help provide greater insight into what’s happening.

No matter how you define recovery, we all learned a valuable lesson over the past four years. We are a resilient industry that touches so many markets that help offset downturns. We are also an adaptive industry that sees these changes and can react quickly. Working together as reps, manufacturers and distributors, we will recover and be stronger than before.

> A few Fall musings

EXECUTIVE COMMENTARY

A few Fall musings

 

Walter Tobin, ERA CEO

by Walter E. Tobin, ERA CEO

So, here comes the fall and the dreaded Q4 in our sales/fiscal year cycle. It’s probably chock full of requests of, “How will you finish the year?” and ”I need your budget for 2025,”etc.

We also anticipate the change in the weather…leaves falling and breaking out the sweatshirts and sweaters. Here in Boston, we will tolerate the “leaf peepers” and another year of no baseball in October.

There is a lot going on in our world — a U.S. election approaching (no politics here!), wars/conflicts galore, famine in the Sudan continues, uncertain economic times and excess inventory galore. How do you/we allow all of these factors to “marinate” into our 2025 outlook?

Let me take a moment to reflect on some things that we face together now and in 2025:

• Year-end close. Many of us will want to say good riddance to 2024. Many of us thought it was going to be a turn-around year because the excess inventory that many of us made our customers take (due to enforcing NCNR orders) would magically “burn off ” and would be back in the land of positive book-to-bill ratios and rising backlogs. What will we do in Q4 to try to save the year? Can it even be saved? Do we just want to “take our lumps,” turn the page and start fresh in January 2025? I don’t believe we can save the year in a single quarter. Be careful as to what strategy you choose.

• 2025. What will the new year bring? What “magic” could possibly take place from Q4 to Q1 to change our sales cadence? Probably not a lot. So, look for Q1 and perhaps Q2 to be flat to 2H 2024. We always expect things to get better “in two quarters” — when probably no one really knows. Perhaps the best advice is to: Tighten your belt and continue to march.

• By the time you read this, our annual Sales Training for Electronics Professionals (STEP) training will have taken place. Thanks to our exclusive sponsor, the TTI Family of Specialists, we had approximately 350 registered attendees. What better time to train our front-line sales and marketing professionals than in a flat/down market? I applaud the companies that made the decision to invest in their people now, so as to be better positioned when the market turns back up.

• electronica in Munich on Nov. 12- 15. Are you going? ERA will have a booth once again as we have for the past 30 years! Munich is a long way to go and participation is not cheap. However, we do not look at it as an expense but as an investment in continuing to take the ERA message to EMEA. There is a huge interest by EMEA manufacturers in how to go to market in the Americas. The rep model in EMEA is still predominantly the stocking rep model, who are really distributors. It is difficult if not impossible for this model to continue as the distributors have the financial size and scope to support the marketplace. We will have many reps from the Americas in our booth (#B4, 178) to talk with EMEA manufacturers who want to penetrate the Americas market. There are many manufacturers in the Americas who want to penetrate the EMEA market. We have a growing EMEA ERA chapter who will be at our booth to help plan strategies to help in EMEA. The world is so small and getting smaller thanks to the different technologies that we all use every day.

• ERA Conference – February 23-25, 2025. This is an unabashed plug for our annual conference. It will be sold out once again so register now and book your hotel room. Why come to our conference? To listen and to learn new ways to run your organization better, use new tools, get a peek into the economy and see old friends. The two-plus days are jam-packed with both general sessions and breakout sessions. No golf or boondoggles. (Shucks!) It is an educational conference held on the campus of the University of Texas. (Go Longhorns!) Come and prepare to be amazed!

• Your ERA team. We will end 2024 with some new faces in new roles. We lost our beloved Erin Collins but were blessed to find Kate Van Hise and Natalie Zullo. These two new faces are joining our “veterans” — Karin Derkacz, Clare Kluck, Ama Derringer and Susan Bannwart — to take us into 2025 and beyond. We are all working hard to continue to provide new and exciting benefits to our members. Stay tuned!

• ERA Rep Value Video. As a part of ERA trying to “skate where the puck is going,” we recently posted our first of many videos on the value of the rep model. This three-minute video was a collaboration with Jeff Boos of ANRO Associates and the keen eye of Clare Kluck. Look for videos in the near future.

Whew! So many things to look at. Every month and quarter, we are given ten targets to hit and only given seven arrows, thus missing three targets. And, these are usually the ones that get talked about or scrutinized. What about the seven targets we hit? They almost never get talked about.

Someone told me years ago to focus on getting and keeping the confidence of the customer, versus booking an order. If you keep the customer as your true north, you will book your unfair share of orders over the long haul. So many of us may have given into the pressure of taking the order off the street only then to not be able to fulfill the promises we made to the customer. We end up losing our status as a trusted advisor and lose the customer — perhaps forever.

We all know what to do: make our sales calls, follow up, be open and honest and remain committed to sales excellence.

Things will get better — they always do!

> Our prices come with parts

EXECUTIVE COMMENTARY

Our prices come with parts

 

Walter Tobin, ERA CEO

by Walter E. Tobin, ERA CEO

At EDS, there were a lot of questions around the state of the union of our industry. When are things going to turn around? When is business going to get better? When is the excess inventory in the channel going to get burned off so we can get back to booking new orders? When will things get back to “normal’?

Defining words like “things,” “getting better,” “excess inventory” and “normal” depends on the lens that you are looking through: a manufacturer, a rep and a distributor may define these words very differently. What about our customer? How would they define them? I think very differently.

And what about Wall Street and the financial investment community? What do they think about the times we are in today? Do they even understand the challenges of our industry? Do they even care about anything other than the stock price of the publicly traded companies? Do they look at anything other than return on working capital, gross profit margins, net gross profit margins, total days of inventory, inventory levels and turns and days sales outstanding and days of collections? Inventory is a dirty word on Wall Street — yet, somewhere along any supply chain there has to be inventory. But everyone wants someone else to carry the inventory on their P&L and “not on mine!”

Our industry has grown up over the years by relying on manufacturers to continue to develop and manufacture highly complex electronic components and make them available to a broad range of customers who have varied levels of sophistication in their ability to forecast demand and then manage their supply chain. On what do they base their demand forecasts? Certainly, the inputs of their manufacturing teams who have to plan out their build cycles based on what? The forecasts that they are receiving from their own customers and sales force. How accurate are these forecasts? How often are they changed? How do they manage the forecasts that come in from their manufacturing teams, who need product inside of a manufacturer’s lead time?

Their first call may be to their manufacturer partners: “Can you manage this unforecasted demand for us? We need the product in four weeks versus the manufacturing lead time of 12 weeks!” This “unforecasted demand inside of manufacturer’s lead time” is placed at the feet of the distribution community. After all, isn’t that the role of distribution?

The typical distributor services anywhere from 20,000-40,000 customers, all with supply chains that get set at the beginning of a month or quarter, only to have them blown up by these unforecasted demands right after they are transmitted to their suppliers. Can you imagine the challenge of the distributor who is aggregating the forecasts of thousands of customers whose forecasts are +/-25 percent wrong? How does the distributor accurately forecast its own demand on their manufacturers and even come close to being correct?

When the pandemic hit, many of us panicked — we rushed out to get product and we double- and triple-ordered parts. You could not get masks or ventilators; remember those days? However, throughout the first 18 months of the pandemic, with product on allocation and in a shortage mode, when you asked any company, “How’s business?” the answer usually was, “I am having a record year.” How could this have been true? Someone was ordering, shipping and billing something to someone.

Many of us were experiencing book-to-bill ratios of over 10:1. Then, as things eased up a bit, we were waiting for “the golden screw” — that final part on the bill of materials (BOM) that we were waiting for to release the BOM to the manufacturing floor. Once the golden screw came in, we rushed to cancel the overages that we bought on the other devices and begged our suppliers (distribution or the manufacturer direct) to let us both cancel or backlog and/or return the overages that we bought.

We were then faced with both the manufacturers and distributors enforcing NCNR orders that we willingly agreed to a year prior simply to get parts: after all, no one had ever enforced these NCNR orders! Well guess what? They did.

Now here we are in 2024, finally almost recovered from the excess inventory up-anddown of the supply chain. We went from a sellers’ market to a buyers’ market in 18 months. What do you think the next cycle will be — a sellers’ market again? The only thing we do not know is when.

So, here we are, trying to manage a very complicated supply chain that consists of sophisticated state-of-the-art electronic components, selling to manufacturers who will incorporate these parts into their own products. They have outsourced manufacturing to the world of EMS which usually relies on the distributors to their supply chain – often due to their supply chain expertise and/or discounted/extended payment terms.

In most cases, the demand from the OEM customer, either direct or via EMS, is inaccurate. The demand forecast is based on manufacturers’ lead times which are often inaccurate or not in line with lead times.

So, in many cases, with all of our supply chain automation, adoption of APIs, etc., we are simply transmitting bad information faster! Yet, Wall Street thinks we are managing commodity items, parts that are easy to set lead times for and easy to forecast demand. Not so! So, what is a customer to do? How can any OEM or EMS company reward great performance and punish bad performance? Simple! Change the archaic ways of measuring the supply chain teams on purchase price variance (PPV) and go back to looking at the total cost of ownership (TCOO) that was introduced by economist W. Edwards Deming years ago. What good is a low price when the quality is not there? When the product is not there?

Any supply chain executive will usually lose their job when they do one of two things: 1) Buy too much – They buy extra quantities to get a lower price to satisfy their PPV goal and they end up with excess inventory that may take the company another 12-18 months to burn off. Yet, the buyer hits his/her PPV goal and gets additional incentives. The CFO has the buyer terminated. 2) Buy too little – The buyer may reward an order to a supplier that gives them a low price but then cannot meet the expected lead time to the manufacturing floor — the manufacturing line stops. The buyer may be asked, “Where are the parts?” They may respond that they bought from the lowest price solution to hit their PPV goal. The line gets shut down; the buyer is terminated.

Buyers generally do not get terminated for paying a few pennies more. After all, the cost of an individual part represents .000001 percent of the total COGS in any BOM and the line hums and there is no excess inventory on the company’s P&L. Suppliers need to be measured on their total cost of ownership. Do customers even look at this today? When was the last time you told your customer about your on-time delivery and quality ratings? Have them ask the competition what their ratings are. Start this today at your own customer base.

It is up to us to change the game here — to take away the price discussion and take it back to TCOO.

Any good supplier should be able to say, “Our prices come with parts.” Nothing else matters.