How Much Inventory Should Electronics Manufacturers Hold in 2023?

The next electronic component shortage is somewhere on the horizon, but for now companies are doing what they can to prevent supply chain swings in the current environment. Companies had so much trouble with last-minute procurement from 2020 to 2022, now they are holding more inventory so that they can maintain production on the order of weeks or months. These trends started at top-tier EMS companies and OEMs, but recently it filtered down to smaller design firms.

It then becomes a fair question to ask: how much inventory should OEMs, EMS companies, contract manufacturers, and engineering firms hold to ensure they can produce repeatedly? The electronics supply chain moves quickly, and it’s still common to see large batches of components get bought up by overseas brokers. So, instead of taking a just-in-time approach to procurement, think about what components are most essential in your designs.

How Much Parts Inventory Should You Hold?

OEMs, EMS companies, and mid-size design firms have a responsibility to help their customers stay agile and be ready to respond to parts shortages. Holding inventory has re-emerged as a useful strategy for navigating the supply chain and ensuring production can be sustained over the near term. Supply chain professionals are calling this the “just-in-case” approach to supply chain management.

There is no objectively “best” amount of inventory to hold to ensure ongoing production. For sustained production over time, where product is being delivered on monthly orders, it’s impossible to hold all possible components that would be needed for sustained production. We can look to how differently sized companies are managing their production needs, both for their own products and on behalf of customers.

The points in the above table are common trends found in the market at the moment. EMS companies need to balance the needs of specific customers with the general needs they have for all of their clients, both for low and high volumes. OEMs should take a different approach and focus on the riskiest components, while their EMS or CM handles procurement and stocking of more common components. Mid-size engineering firms should take the same strategy, but the difference is one of scale, focusing on prototyping instead of volume production.

The good news is that inventories have started to accumulate in Q1 2023, particularly with distributors and in warehouses of manufacturers. According to Fitch Ratings, this is becoming a bit of a profit drag on the semiconductor sector, and it is being driven by a shift in consumer demand from goods to services. However, everyone in the industry knows that surpluses will eventually become shortages again, and companies will have to be ready with strategies to ensure they can produce sustainably.

Can’t Procure? Be Ready With Substitutes

Manufacturers should continue to be agile, even if the current set of supply chain challenges begin to alleviate. Some of these strategies include qualifying multiple sources, managing substitute parts, and being ready with design variants that address the highest-risk components. The easiest way to respond quickly and extend the life of your designs is be ready with suitable substitutes in the BOM, in the design data, and even in inventory.

1. Make sure to prioritize parts that have available footprint-compatible substitutes
2. Prioritize parts that have functionally equivalent parts within the same product family

For passives, implementing #1 is quite simple and it only involves selecting a suitable package size. Other parameters like power rating and tolerance may be important on select parts. For other parts, this is not always so simple, but there is a list of common ICs that have compatible pinouts and packages across different semiconductor vendors. These include:

• Flash memories (NAND and NOR)
• Basic power regulators, such as LDOs and simple buck/boost controllers
• Buffer ICs and interface converters
• Multi-channel Op-amp ICs
• Gate drivers, line drivers, etc.
• Discrete semiconductors, like MOSFETs, BJTs, diode arrays, etc.
• Connectors, such as pin headers and many standardized connectors

The easiest way to do this is to add a functionally equivalent, footprint-compatible substitute part number to your risky components. To do this, add a parameter to your part labeled “Substitute PN” (or something similar). This will carry the substitute PN data with your parts into the PCB layout and into the BOM. Once sent to an assembler and to procurement, everyone will be able to see the suitable substitute immediately, and they can manage ordering and inventory for that placement.

No matter which components you plan to use in your designs, you can use the industry’s best CAD tools in OrCAD from Cadence to create your PCB design and layout. OrCAD is the industry’s best PCB design and analysis software with utilities covering schematic capture, PCB layout and routing, and manufacturing. OrCAD users can access a complete set of schematic capture features, mixed-signal simulations in PSpice, and powerful CAD features, and much more.

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