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How “Safety Stock” Becomes a Liability

How “Safety Stock” Becomes a Liability

Circuit boards lined up

The last few years haven’t been easy for the global semiconductor supply chain. The shortage threw a complex ecosystem comprising of thousands of manufacturers, suppliers, and more into complete disarray. Original equipment manufacturers (OEMs) struggled to secure stock shipments, and original chip manufacturers (OCMs) struggled to maintain production during pandemic lockdowns. The global chip shortage and the numerous disruptions that prolonged it are why many OEMs and contract manufacturers (CMs), among others, are dealing with a new challenge.  

The stock they double ordered to act as a buffer to mitigate production stalls has turned into excess inventory. Excess inventory is a costly obstacle that could be just as damaging, if not more, than the production stalls OEMs and others worried about.  

Why Stockpiling Isn’t a Solution

Don’t double-order.

OCMs warned clients, even on the worst days of the chip shortage, not to double order. Double ordering is placing two of the same order to increase inventory and protect against future shortages by ensuring "safety stock". The idea is that creating this buffer of safety stock, which is a common practice in manufacturing outside of the 2020-2022 global chip shortage, will aid in continuing operations if the stock suddenly becomes unavailable. That way, manufacturers still have inventory to use in production while waiting for the stock to become available.  

This strategy isn’t inherently dangerous. An example of beneficial safety stock is neon gas stockpiles that OCMs started keeping after the annexation of Crimea by Russia. In 2014 during the annexation, neon gas prices surged by 600%. Ukraine is a crucial exporter of neon gas that supplies 45% to 54% of the global supply. Neon gas is an essential raw material used in the production of semiconductors. Once neon gas returned to a more typical price range, chipmakers ordered “buffer stocks” to circumvent a similar situation.

In 2022, when Russia invaded Ukraine, half of the world’s supply of neon gas was unavailable. Prices increased, and availability decreased, but chipmakers weren’t worried. They had buffer stocks to last until they could secure new supplies and wait for other facilities to be constructed or boost production.  

So, if neon gas stockpiling was beneficial, why isn’t stockpiling the answer to mitigating shortage challenges?  

Throwing more inventory at a problem is not a feasible solution. Unfortunately, electronic components have a “best use by” date. If a manufacturer doesn’t have the resources such as staff, specialty warehouses, and anti-electrical discharge packaging to store electronic components safely, they can quickly deteriorate. The cost of maintaining proper storage, staff to operate the facilities, and other hidden fees can quickly pile up. Eventually, that safety stock becomes far more expensive than the production stall manufacturers hoped to avoid.  

Unfortunately, in most cases increasing inventory levels to solve order fulfillment or product availability is a short-term solution with long-term adverse effects. Excess inventory increases the amount of future stock that has to be sold at a discount or entirely written off. Especially, if stockpiling occurs amid a shortage where demand is abnormally high. That kind of consumer demand is typically not long-lasting.

Which is what we’re seeing now.  

Macroeconomic pressures led to consumer demand falling off. Beginning in late 2022 and now into 2023, ravenous consumer demand prompted manufacturers to double-order stock showed signs of slowing down in early 2022. Double ordering artificially inflated chip demand left OCMs, OEMs, CMs, and others with murky market conditions as demand re-stabilized. Everyone is left with safety stock morphed into detrimental excess inventory and little time to offload.  


How To Prevent and Mitigate Excess Stock

Safety stock is only beneficial if made strategically with long-term plans. Unfortunately, the 2020-2022 global chip shortage showed how detrimental trying to build up safety stock in a period of high demand can quickly morph into costly excess inventory. To efficiently mitigate the effects of a shortage and prevent the damage of excess stock on company operations, manufacturers should consider several key factors as early as the design phase of a product.  

1. Alternate Components

Within the design phase for a product, as the bill of materials (BOM) is being created, one should assess whether a component has active alternates available. One of the easiest ways to prevent production stalls and excess inventory simultaneously is ensuring components have form-fit-function (FFF) alternates that are active and available.  

The larger the number of possible alternates, the more options OEMs have if the original component is made obsolete, facing allocation, possessing long lead times, and more. Double ordering and safety stockpiles won’t be necessary if there are plenty of active FFF alternates to replace them.  

2. No Sole Sources

Along the same line of alternate components, sole source components are hazardous to product designs. Sole source components have one manufacturer that creates the part with no alternates. These components are far more prone to shortages, price increases, and obsolescence. The more sole sources are in the design, the more likely a manufacturer will stockpile these components.  

OEMs and others should assess the percentage of how many sole sources make up a product design to avoid stockpiling. The greater the number, the more likely it will face disruptions. Manufacturers should strategize to prevent sole sources as early as the design phase. Datalynq, an intelligence tool that analyzes supply chain data, can assess a component's multi-source availability and active alternates on the market. Obtaining and planning with these data insights helps negate excess stock becoming a future problem due to stockpiling.

3. Sell Excess Inventory Through a Global Marketplace

If you end up with excess inventory from stockpiling, there is a way to mitigate its impact on your organization. Most excess inventory is still usable. The only reason it becomes “excess” is that product demand drops enough that stock outweighs demand. The only way to mitigate the costs of storing excess stock is by digesting or selling it.  

For many manufacturers, inventory digestion by utilizing excess stock in other products only works if overall demand hasn’t dropped. There could be low demand for a specific product but high demand for another where the excess component can be used as an FFF alternate.  

The easiest method of offloading excess inventory and recouping costs is selling it.  

Selling excess stock takes time and resources many OEMs don’t have. It’s better to sell through a global component marketplace where the market experts handle the sale. Sourcengine is a digital marketplace where thousands of suppliers sell their parts, making up 1 billion component offers. Sourcengine’s new sell your excess feature let's manufacturers of any size, shape, and industry sell their excess components to regain lost sales.  

The only information Sourcengine needs to start selling your excess is the component and manufacturer you want to sell. Then it’s off to the races, where an average of over 50,000 buyers frequently look to fulfill and manage their BOMs.

Stockpiling isn’t the solution to inventory shortages and high product demand challenges. Planning as early as a product’s design phase is the best way to prepare for future disruptions. When and if excess inventory does occur, it doesn’t have to be a costly problem bound to rack up more fees as demand recovers. You can sell it off and recoup some of what you lost through Sourcengine.

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