Digitalization is the Future of Electronic Components Distribution
Digitalization is the future of the global supply chain. This is especially true for the electronic components industry. How could it not be when the industry is prone to unpredictable market instabilities, geopolitical crises, and a manufacturing process that takes hundreds of steps to produce one viable component? Digitalization is the logical next step in business evolution, and with digital transformation comes growth opportunities.
To be frank, digitalization, applying a digital strategy, digital tools, and the direct benefits of digitalization would take hours to comprehend fully. The impact digitalization has on businesses is astounding. Should one take the smallest steps in creating a more digital environment by simply transforming all data from analog to digital–known as digitization–an organization will see a massive boost in several key areas.
In a 2023 report by CNBC, researchers discovered companies that engaged in digitization saw:
- 75% Maintenance Cost Optimization
- 50% Increase in Productivity
- 50% Carbon Footprint Optimization
- 85% Energy Consumption Savings
- 80% Engineering Costs and Time Optimization
The reporting team concluded that if companies were to branch out beyond digitization and into digital transformation through “integrated and connected technologies such as sensors, app-based controls, analytics, edge computing, and smart machinery,” there would have been higher results in efficiency and performance. In today’s age, the world is growing more and more interconnected thanks to digital technology and its popularity.
People want smarter phones, homes, vehicles, and watches. The use of electronic components within products is rising, and with that increased use comes data. Proverbial oceans of data are produced daily due to the information collected via sensors and other components within any given product. Within these oceans are crucial insights that aid manufacturers in designing a better product.
Digital tools are the only way to access such data. It’s one of the reasons, as early as 2019, Microsoft’s study around tech intensity, or “the rate of adoption of new technologies and the capability to fully integrate them into the organization,” found that organizations need to digitalize. Like CNBC’s article, the 2019 study found that among 700 executives, 75% believed harnessing tech intensity, the rate of tech adoption, and capability is the most effective way to build a competitive advantage today. CNBC’s study four years later has only continued to prove the effectiveness of this strategy.
Forrester reported in 2022 that digitalization has the potential to save on operation costs by 90%. That’s a significant boon to manufacturers, where operational costs net an average of 30% to 40% of a company’s annual spending. The more inefficient the operating process, the further drain in both price and production efficiency. Digitalization in automation through artificial intelligence or machine learning lowers the risk of human error during production, operates 24 hours daily, and can learn processes that prevent future product design errors.
Microsoft’s study presupposed that organizations had already completed some level of digitalization ahead of time, whereas CNBC interviewed organizations taking the first steps. Both worked to prove that digital transformation, primarily in organizations as widespread and traditional as the electronic component industry, stands a lot to gain by embracing digital strategies.
One can begin to digitally transform their company in dozens of ways and tools. Unfortunately, the wide variety of available digital tools can complicate digitalization for those kicking it off. One of the biggest detractions toward initiating digitalization is the rate of failure.
In a 2022 McKinsey and Company report, researchers discovered that over 70% of digitalization strategies fail. Why? Is digitalization so complicated it terrifies organizations away before they even begin? Not necessarily.
Most digitalization strategies fail because of their broad approach to integrating digital technology. As stated, the data produced daily could fill the Earth’s deepest oceanic trenches several times over. Without precisely defined goals and needs, it would be far too easy for many to become awash in pointless data that delivers no insightful prospects. The same way slapping a new coat of paint on a broken car won’t make it run smoother.
The benefits of digitalization are extensive and give manufacturers a competitive edge among those who insist on remaining traditional. However, one must follow three rules before implementing any kind of strategy to obtain such success.
- You must establish a digital strategy that defines the measurable goals your organization will achieve.
- You must fix the current dysfunctions your organization struggles with before you implement a new process.
- You must create a strategy for proper data management and analysis to obtain valuable insights to determine obtainable opportunities.
To aid those within the electronic components industry in coordinating their digital transformation strategy with tools and methods that align with the specific goals of electronic component distribution, Sourceability will illuminate how manual processes can be improved through digitalization in this three-part series.
Manual Processes vs. Digitalized Benefits in Procurement
Purchasing in the electronic components industry is one area that is still rife with manual processes. Most procurement teams utilize only one digital tool, Excel. While Excel is proficient at organizing and marking data sufficiently, with the amount of information purchasing teams are required to track Excel is not the most ideal tool.
In simple terms, electronic component purchasing is primarily based on comparison. Comparing availability, prices, lead times, vendor safety, and more between electronic component suppliers to see who can provide the best deal for necessary stock. For many buyers, that equates to hours spent calling sales representatives to discover this information or searching for it on a distributor’s e-commerce site. All for one single purchase for one type of component.
Once the information is obtained, it is uploaded into the corresponding Excel sheet for future reference. Due to the electronic component supply chain's susceptibility to unpredictable market shifts and other disruptions, this information is often in constant flux. Data must be updated regularly, further adding to buyers' time performing this tedious but necessary task. Likewise, because data is manually entered most of the time, it is prone to outdated or inaccurate information, further complicating the purchasing process.
Another traditional process within purchasing on the manufacturers’ end is production capacity determination. Traditionally, production capacity is determined by the previous year's demand with some market forecasts for the following year. If, over the year, there is less demand for 7nm chips, then the next year, an original component manufacturer (OCM) will lower the production for 7nm chips. Likewise, if demand increases and the market shows a likelihood of demand rising, OCMs will increase production capacity.
However, like with procurement in an industry prone to unpredictable market shifts, demand can rapidly change over a few months. The 2020-2022 semiconductor shortage is a perfect example of how this traditional process contributed to undersupply of chips and, as of 2023, an oversupply.
This is complicated by just-in-time (JIT) delivery, which is creating goods in a ready state or completing their production so that a minimal inventory can satisfy demand, and delivery can occur when the customer needs and wants it. The electronic component supply chain heavily relies on JIT deliveries as it costs less in the short term. However, the risks of relying on JIT deliveries are immense.
The overuse of JIT scheduling contributed to the ongoing automotive chip shortage from the wave of cancellations during the initial market forecast at the pandemic's start. When demand picked back up, lead times for most components were months long, making JIT deliveries impossible. Automotive OEMs had to wait months for stock which resulted in billions lost from production stalls.
Digital tools and workflows mitigate these problems while providing key benefits on top of improved processes.
In 2017, McKinsey & Company reported that only 8% of respondents believed their current business model would remain economically viable if their industry kept digitizing at its present course. 92% of businesses recognized that the ability to change and be flexible is critical to keeping up with the competition through a digital transformation. We can only imagine how much this has changed in the six years since the original report.
How These Benefits Upgrade Electronic Components Distribution
Managing data becomes simple when an organization digitalizes its procurement process through automation via digital tools. Many digital tools usually present information in an easy-to-view window focusing on specific data-driven insights for quick decision making. Another important aspect of digitalization versus manual data entry in electronic component procurement is the almost total absence of inaccurate or outdated information.
Since data is collected via algorithms and not inputted manually, there is an infinitely small chance it will be updated incorrectly. This means information such as MPNs, part details, lead times, or pricing trends are both current–as most tools update information consistently–and accurate. Artificial intelligence can easily prevent such misinformation from impacting key business decisions.
By digitizing, it prevents important insights from getting lost in lengthy Excel sheets. Digital tools often present information in a much friendlier digital format for users to quickly identify solutions for better decision making.
In 2019, those that digitalized business processes, such as procurement, saw 43% lower costs, 40% reduced corporate waste, 33% better worker safety, and more. Digital innovation contributed to lowering operational costs and, more importantly, improved time optimization.
For purchasing teams in the electronic component industry, time is always scarce. With digital procurement tools automating the buying process, human staff has far more time for larger projects, such as exploring new supplier relationships with other distributors. Hours dedicated to calling sales representatives for information on component stock availability now take minutes.
One of the best digital tools that can transform the electronic component purchasing process is a bill-of-materials (BOM) management tool. Most BOMs can range from several dozens to several thousands of components. A BOM is one of the essential pieces of manufacturing as it is both a guide and a comprehensive, documented list of every electronic component needed to produce a working product.
BOMs are also notoriously complex as the average BOM requires purchasing teams to commit hours upon hours to compare price, availability, logistics, and lead time for every component. After all, for OEMs, CMs, and EMS providers to obtain the most beneficial purchase for all the above, one must compare several suppliers to uncover the most cost-efficient transaction.
This tedious process is simple to digitalize as numerous digital BOM tools are available. However, it is crucial to find one that provides extensive information quickly with the added benefit of being able to purchase offers for needed components.
Quotengine, as an example, is a digital BOM tool that allows users to upload up to 4,000 line items for a single BOM. When a user uploads their BOM, users can quickly sort through a component’s available offers with the additional benefit of sorting via filter options. Quotengine has price-benchmarking capabilities so users can quickly compare and determine the most beneficial offer.
When a buyer finds an offer for a component, they can add it to a shopping cart for a streamlined check-out process. Users can add all offers they find to their cart, even if their BOM is 4,000 line items long.
Similarly, rather than being dependent on the JIT scheduling process and its faults, Quotengine allows buyers to schedule their deliveries up to 12 months in advance. This strategic purchasing process can help buyers avoid shortages as stock is assured. Due to Quotengine being integrated with the world’s leading e-commerce sites for electronic components with over 1 billion part listings from +3,500 suppliers, buyers don’t have to look anywhere else.
For manufacturers, utilizing Quotengine in your digitalization process will streamline order purchases, saving both cost and time. With sharing capabilities, buyers can quickly share their carts, and component offers with key decision-makers, increasing organizational visibility. Even better, it’s free.
Sourceability’s Steps to Digitalize
Quotengine is just one piece in Sourceability’s comprehensive suite of digital tools. As a digital company, Sourceability aims to help those within the electronic component supply chain evolve into a more resilient and innovative industry. The global pandemic, subsequent chip shortage, and now chip glut came about from a lack of transparency in a traditional industry.
Digital tools, like Quotengine, make the vast amounts of data produced by the electronic component supply chain more visible to all levels. As Microsoft’s study showed, it will become impossible to maintain a competitive edge without taking steps to digitalize, especially in areas like procurement. These tools help leadership build a stronger foundation upon which most operations can improve.
Innovation within the digital sphere is happening at a breakneck pace. We are witnessing a new evolution within artificial intelligence thanks to OpenAI's ChatGPT. The possibilities of generative AI are only beginning, and the outlook is exceptionally bright. As a result, data and the insights one can gain from it, such as the ability to predict and mitigate the effects of future disruptions, will only become more accurate.
In this digitalization series, we at Sourceability plan to continue to explore the possibilities of digitalization and how our comprehensive suite of digital tools can propel you forward.
