Roy Sakelson’s August editorial [“Double Talk,” page 9] dealt with a badly addressed problem for PCB manufacturers, that of excess inventories. He cited the disaster of 2001, when computer and telecom OEM’s wrote off a combined total of $30 billion, and raised the warning that a similar, albeit smaller, disaster could occur again. To support that warning, he cited Walt Custer’s reporting in the July CircuiTree issue: “Looking at North American PCB orders, a disturbing trend is again evident. While electronic equipment orders are up 14% on a 3-month basis, rigid printed circuit orders are up 32%. . . . Historically, when these two growth curves have diverged, a downward PCB order correction has followed.”

The root of this problem is that as OEM’s expand production to meet escalating demand, they increase order quantities, even double-order them, in anticipation of further demand escalation. This order pattern raises inventory levels throughout the OEM supply chain, having the most serious impact at the lower levels of the chain. What begins as a ripple effect, initially, at the EMS level, takes on Tsunami proportions as these cutbacks work their way through the OEM supply chain. I saw this first-hand when I consulted with a midsize component supplier to a major telecom-networking OEM. From being pressured to increase production while consumer demand was strong and growing, my client saw revenues cut in half, and surplus inventories mount into the millions. This resulted in wholesale layoffs and severe financial losses.

Could my client’s experience been avoided? Probably not! The electronic industry is not only cyclical on a multi-year basis, but in the shorter term, it fluctuates widely. Today, for example, we see a slackening of demand as a result of the less-than-robust second quarter. At the same time, we see signs of a demand buildup in the third and fourth quarters. So it’s unavoidable. What happens to consumer demand, inevitably impacts all manufacturers and suppliers in the OEM supply chain.

However, from my experience, there are steps lower-tier suppliers like PCB manufacturers can take to reduce the consequences of this fallout.

1. Recognize the difference between Marketing and Sales, and act accordingly.

Marketing provides the guidance and direction for Sales; Sales implements that guidance. Too many PCB manufacturers concentrate solely on selling, so that closing a sale becomes the all-important business activity. But making a sale to a buyer who is issuing double and even treble orders for the same requirement is a self-defeating exercise. You need to know real requirements, and that information is not necessarily reflected on an RFQ. It also is not reflected in a simple extrapolation of earlier sales. Clearly, using IT software to forecast demand can be a significant improvement. But if it simply develops a projection of the past, without relevant economic and market analysis, you’re merely getting a wrong answer faster. Marketing is the function that:

• identifies current and prospective customers
  
• relates their purchasing power to others in the same industry
  
• relates that industry future performance to market sector or broader economic indices
  
• weighs the likelihood of future sales by product, customer, and time period

2. Know what is meaningful forecast information, and who can provide it.

Some OEMs and EMSs provide their suppliers with requirement forecasts. However, they’re often derived from information provided by their customers, and may not provide a reflection of true demand. In the consulting assignment I referred to earlier, I saw time and again customer-provided forecasts “massaged” and even ignored by production planners and schedulers, because from past experience they knew the numbers were unrealistic. Again, I saw information provided by my client’s field sales personnel similarly treated. It was often overly optimistic because that’s what customer engineering or senior managers told them, or because “good” numbers had to be shown for the next quarter. To paraphrase the Greek caveat: “Beware of sales people bearing optimistic forecasts.” Sometimes your best source of forecast information can be obtained from customer personnel in production or planning.

3. Negotiate, negotiate, negotiate.

I believe that a combination of factors make PCB manufacturers intimidated by the idea of standing up to, and being assertive with current and prospective customers. Perhaps it’s due to the low ranking in the OEM supply chain. Or it may be the personal inhibitions of technically oriented personnel to engage in the confrontation of the negotiation process. But the point is that by not confronting, openly and vigorously, the issue of inventory risk and responsibility, PCB manufacturers stand to lose whatever they might gain by making a sale. It must be accepted as a fact of business life that the demand for electronic products will follow a predictable path – startup, accelerating growth, leveling off, and decline. And within these phases, there will be short-term fluctuations of varying intensity. Concentrating solely on making sales in this environment is dangerous. And ignoring the twin risks of insufficient and excess inventory is equally dangerous. These risks can only be reduced by knowledgeable and skillful negotiation. This is a process that resolves differences of interest, opinion, and point of view, and resolves them to mutual satisfaction. Clearly, identifying inventory risk and responsibility to your satisfaction is a necessary negotiation objective. So know what you want, and negotiate for it.