Last week Cisco systems reported record sales and earnings, which made us all feel confident that the growth in the technology industry is continuing. But Cisco management also stated that this growth would probably slow down next quarter, as the ability to obtain components is becoming increasingly difficult.

After Cisco announced this, I met with Walter, who runs a multi-national power supply company. Walter's customers include companies like Cisco, IBM and Motorola. So, I asked Walter if he is having a problem obtaining components. He said "I have never seen it so bad." Walter told me that in the past there have been problems with certain semiconductors such as diodes or mosfets, but now he is having problems obtaining things like SMD resistors and capacitors. Walter also said that the manufacturers are not ramping up to supply the demand. He said that the growth of cell phones and other telecommunications products are sucking up all the components we usually assume to be commodity items. Walter told me of tantalum capacitors growing in price from ten cents to thirty cents and then to one dollar.

"It's happening again," I thought. I had been there and done that. So had the manufacturers of components. The problem has to do with the industry and its purchasing agents. When a purchasing agent is asked to buy ten thousand tantalum capacitors, which are required in sixteen weeks, he goes to one of his normal sources and places the order. The source, however, tells him that delivery is 30 weeks ARO (After Receipt of Order). Does the purchasing agent cancel the order? No, he doesn't. What he does do is double or triple order the same parts with his next best sources. This means that instead of ordering ten thousand pieces, he orders thirty thousand pieces. His intention is to cancel two of the orders as soon as one of them delivers.

If you take this scenario and multiply it by one thousand purchasing agents, you can easily see where thirty million capacitors are on order and only ten million are required. The manufacturers also have seen this happen before and are not willing to increase capacity; however, they cannot discount the possibility that the orders are real and so lead times quoted are pushed out further and further. This in turn starts more purchasing agents to place double and triple orders. The cycle continues until production starts to catch up with demand. Once this happens, we find that orders are being cancelled in record numbers. Component manufacturers feel justified for not building that new plant, as they are soon able to supply the actual demands of the industry. This has happened many times.

Generally, it happens due to problems other than demand. Typically, the sources of tantalum have problems due to politics in the nation where it is mined. Sometimes it is because a manufacturer has yield problems and cannot supply the components in the quantities promised. What Walter was talking about was different. He was talking about an industry growth outstripping the capabilities of the manufacturers. SMD components such as resistors and capacitors are getting hard to get. This is like saying eggs and milk are in such demand that they must be placed on an allocation basis. I have always been aware that in order to produce a product that has about one thousand components, you cannot ship it if you only have nine hundred and ninety nine on hand. When you fail to be able to ship due to lack of parts (or one part), you soon find your profits declining as unfinished products start piling up waiting for that one component that is missing.

Is it possible that manufacturers are assuming that the demand they are seeing is from double ordering and does not require increased capacity, when it really does. It might just happen that our entire industry might be caught in a parts shortage that will cripple the growth rate and reduce earnings in the field.

We are witnessing a spectacular growth in the Internet, cell phones, storage and computers. All these industries use the same basic components. If the manufacturers of these components do not have the faith in the industry's growth, it will stunt it. As we head into the new millennium, lets hope that we can grow to our maximum potential without being held back because we can't buy a common resistor or capacitor in quantity.

Frank Greenhalgh
May 14th , 2000

Comments Frank's column hit a nerve and the responses we are receiving are proof of that. Read the comments as well as Frank's response

About the Author

Frank Greenhalgh has been working in power supplies and systems for 38 years. He has many impressive accomplishments and patents. Over the years he has made significant contributions to Trio Laboratories where he held the position of Chief Design Engineer and was then promoted to Vice President.

He co-founded CEAG Electric Corporation (now ABB CEAG) and developed the first mainframe power system using the droop paralleling concept. He has written numerous articles and columns, presented papers at the milestone PowerCon convention and consulted for ABB CEAG and other companies. Recently his accomplishments include the development of two Web sites, www.fgl.com with the Power Corner and www.amityville.com. Frank is presently functioning as "Director of Technical Sales" for Toritsu Tsushin Kogoyo Corp.

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