$250 billion backlog! How does the US electronics industry destock?

1, according to research firm Kearney, the U.S. electronics (including components) inventory backlog has reached $250 billion.

The news about the electronics supply chain isn’t what it used to be. In the past, there was a general discussion of “supply shortage” and “supply disruption”, but now there is more discussion of “excess inventory” and “how to consume inventory”. Electronics manufacturers and component suppliers had just come out of the “core shortage” and then suffered a rebound after panic buying. According to Kearney, a research firm, the U.S. electronics inventory backlog, including components, has reached $250 billion.


In fact, the volatility began during the COVID-19 pandemic, when parts were delivered far beyond control. At the same time, unpredictable external factors have heavily influenced consumers’ purchasing decisions. For example, the need for telecommuting is driving investment in working from home, and consumers are trying to make lockdown more acceptable by buying consumer electronics such as TVS, small kitchen appliances, fitness products, smartphones, and tablets. These changes, combined with the bullwhip effect, have a long-term impact on electronics inventories in the coming years.

The electronics industry is no stranger to boom-bust cycles, but the coronavirus pandemic is an unprecedented event, and even with good forecasting techniques and inventory management methods, the industry is ill-prepared for supply disruptions and major core shortages. In the view of PS Subramaniam, a partner in Kearney’s Strategic Operations and Performance Practice, the continued demand for electric vehicle batteries and AI chips could lead to a similar “boom-bust” cycle.

2. How should the electronics industry overcome industry volatility?

· Prioritize forecasting

The ordering behavior in the supply chain is to meet future demand, and its accuracy usually depends on the accuracy of the forecast. Today, “data sharing” in the electronics supply chain has progressed, and tools such as artificial intelligence (AI) and machine learning (ML) are excellent data mining resources. The wrong prediction of demand can lead to poor order placement and unreasonable pricing. In fact, early signs of excess inventory, such as customers overordering, can help the supply chain to plan (when there is an overorder in a certain part of the supply chain, early warning can be taken and appropriate measures can be taken to avoid possible future shortages or inventory overhangs and other problems. This early warning allows the supply chain to better plan future production and distribution to meet customer demand and avoid unnecessary losses).

With consistent forecasting, the electronics supply chain can spend money on “cutting edge” things, such as higher quality products, trained workers, and improved ordering accuracy by analyzing data trends, rather than simply building, managing, and sorting inventory.

· Embrace automation

Many supply chains are now undergoing digital transformation. You might think that the electronics industry is at the forefront of digital transformation, but practitioners are still driving the seamless integration of workforce assistance tools and data collection tools. These technologies enable supply chain participants to be more aware of what is or will become obsolete.

Electronics supply chains need to sort through overstocked inventory, and “planned obsoletions” in industrial production can take components and finished products off the market, even if they are brand new. With automation and smart technology stacks, managers can get faster information on which components and products are going out of life, helping players throughout the supply chain maintain consistent visibility. Of course, the use of robots to scan and classify inventory in warehouses will further accumulate inventory holding costs.

· Focus on customer priorities

Supply chains must think about “how they can accurately predict demand with additional forecasting and customer insight.” Whether purchasing staff or managers, players in the supply chain need to analyze more trends and figure out the connections between different trends.

For example, inflation is changing the way modern people shop. People are less willing to buy expensive items, and electronic products tend to be priced higher. How can we anticipate this change in advance? Of these, the national economic health forecast may be a good reference, and other considerations are based on value trends.

Old Navy, for example, realized it was overstocking when it started making more inclusive sizes with customer priorities outside the industry in mind – diversity, equity, and inclusion – but without the sales data associated with the new sizes to back it up. While the move was well-intentioned, it ended up making clothes unmarketable and creating a lot of waste.

The electronics industry can learn from the above examples to consider whether customers are willing to pay more for sustainable products in the context of a global focus on sustainability. Is there any data available to inform top leadership decisions?

· Overcome inventory overhang

In addition, Kearney also listed a series of short-term and long-term actions that companies can take to curb inventory growth and adjust inventory levels:

Recent Actions:

Establish an inventory “war room”;

Improved inventory visibility (internal and external);

Reduce incoming materials (cancel/cancel orders);

Clearing excess and obsolete inventory (returning to suppliers, selling to middlemen);

Negotiate with customers to transfer excess inventory/obtain cash advances.

Long-term action:

Strengthening operating models, including working capital incentives;

Reset the planning parameters;

Improve forecasting ability;

Drive sales growth;

Modification of supply, manufacturing and distribution networks.

In summary, supply chain excess inventory can reduce the price of parts and equipment, which is not conducive to the continuing business of component suppliers and product manufacturers, and improved data sharing and rationalization of demand signals can benefit the entire electronic ecosystem.

Post time: Dec-26-2023